How Zen Energy – developed by Ross Garnaut – got caught by a wind drought

The loss-making renewable energy company developed by the high-profile economist is precariously placed after its trading position was damaged by a wind drought.

Zen Energy founder Ross Garnaut.

The loss-making renewable energy company developed by high-profile economist Ross Garnaut is precariously placed after its trading position was damaged by a wind drought.

Zen Energy’s position has been exposed by a bumpy transition to renewables, a wind drought and to some extent ideology, according to nine sources who are directly familiar with the details or have been briefed on the matter.

The company is not alone in its predicament. The Australian understands Spanish global giant Iberdrola adopted a similar local strategy, but market sources insist Zen is significantly more exposed.

Both Zen and Iberdrola were last year relying heavily on wind generation to meet their retail exposures, and were forced to purchase capacity from the spot market at a time when prices exceeded $150/MWh.

“Both took an absolute bath as a result,” said a source.

Zen’s chief executive Anthony Garnaut, son of founder Professor Ross Garnaut, acknowledged the company has had to make changes.

“Zen has never shied away from the fact that the energy transition is hard,” he said. “We were, as other energy retailers both renewable and traditional were, underprepared for the extent of the wind, solar and water drought of May 2024.

“We have refreshed our business strategy as we evolve from a retailer reliant on derivative contracts to a retailer that operates storage assets.”

A lack of sufficient wind hit renewable player Zen hard in 2024. Picture: Christophe Archambault/AFP

In a move seen by some as an attempt to improve its financial wellbeing, Zen late last year sold a near 10 per cent stake to HD Renewable Energy Co for $43m.

The capital injection will allow Zen to develop two large-scale batteries which will provide much-needed firming capacity to supplement its wind and solar portfolio.

But, sources said there remained ongoing concerns about the long-term viability of Zen — especially as it will have to manage the remnants of long-term deals.

The performance of Zen and Iberdrola over recent years reflects Australia’s struggle to transition away from fossil fuels. Both companies moved aggressively into the Australian renewables market.

Iberdrola, the largest electricity utility in Europe and one of the top five in the world, entered the Australian market via a $841m deal for then ASX-listed Infigen Energy in 2020. Zen emerged in 2017 when it secured a retail licence. In 2021 it split from Sanjeev Gupta’s SIMEC group and pushed ahead with its own expansion plans.

Both moved to capture the market through long-term deals with the likes of BHP, CSIRO, SBS and a spate of councils across Sydney in 2021 and 2022.

The two had slightly different asset pools. Iberdrola is a major developer of renewable energy in Australia, while Zen purchased power from zero-emission developers via so-called power purchase agreements, and reselling it to retail clients.

“They were effectively offering baseload power with renewables,” one source familiar with the details told The Australian.

Zen’s aggressive expansion was no surprise given public comments over the years from Professor Garnaut, who has pushed to fast-track the country’s move away from fossil fuels. He was also an architect of the Gillard government’s carbon pricing scheme.

“I have no doubt that intermittent renewables could meet 100 per cent of Australia’s electricity requirements by the 2030s, with high degrees of security and reliability, and at wholesale prices much lower than experienced in Australia over the past half dozen years,” he said in 2019.

Tim Nelson left Iberdrola late last year.

Last year he and former ACCC chair Rod Sims urged Prime Minister Anthony Albanese and Opposition Leader Peter Dutton to impose a carbon tax on fossil fuels.

Zen’s aggressive hunt for market share included some unusual strategies, according to three sources. They say Zen once secured a deal to provide electricity for street lighting to one council using pricing linked to solar power, which is the cheapest form of electricity but not produced when the sun sets and when streetlights turn on.

Rivals would have used pricing linked to coal or gas, which does produce electricity during the evening hours.

While Iberdrola and Zen were comfortable with their risk profile by 2022, things soured when Russia invaded Ukraine, triggering an energy crisis.

Europe, then a major buyer of Russian gas, scrambled for alternative supplies to meet demand during winter, and the price of energy soared. The disruption of the market in Australia as a result meant Zen and Iberdrola were carrying out-of-the money positions.

Iberdrola has not publicly revealed the toll from the downturn, though sources insist the Australian arm remained profitable in 2024, albeit well below previous years. In contrast, Zen reported a $51.9m loss last year.

There has been a quiet exodus of senior and mid-level traders from Zen and Iberdrola, The Australian understands.

Tim Nelson, former head of Iberdrola’s energy markets, was the highest profile departure. He left in December 2024 to head a government review of Australia’s National Electricity Market post-2030, when current market rules are set to be replaced.

Zen Energy founder Ross Garnaut. Picture: NCA NewsWire / Martin Ollman

Sources insist the departures were not related to poor financial returns.

Although both are making substantial changes, it is not clear whether the positions remain open.

Industry sources said the positions would be difficult to close out even if both were willing to lock in losses.

“I’m not sure it is even possible to close out the entire position. These are long contracts and there really isn’t any liquidity beyond three years,” said a source familiar with the details who spoke on condition of anonymity.

The risk profile might be worsening, industry sources said. Long-term solar contracts are worth much less than what was being paid in 2021 and 2022.

Wholesale electricity prices also continue to be elevated, which heightens the risk of holding the long-term positions.

“The events of 2022 sent many out of business straight away; it sent others out of business but they didn’t know it,” said one source familiar with the details of the situation. “Energy in Australia is a big money business. There was some misalignment and they will have to take some responsibility, but we are three years into this issue and the market can stay wrong for longer than you can stay solvent. This is existential stuff.”

Iberdrola, one of the world’s largest companies, will have sufficient capital to ride out the issue, but sources said it also faced difficulties.

Iberdrola says it remains committed to its strategy.

Iberdrola Australia chairman and chief executive Ross Rolfe told The Australian the wind drought was problematic but its firming assets softened the ­impact.

“The best way for all market participants to manage the risks inherent in energy supply is via a strong balance sheet, a long-term investment horizon, and an unwavering focus on customer-centric power products. We remain fully committed to this strategy as evidenced by the significant additional investments we made into renewables and storage throughout 2024,” Mr Rolfe told The Australian.

Australia’s energy transition cannot afford to lose participants like Iberdrola. It is a leading energy retailer to Australian corporates, giving them access to electricity sourced from renewables.

It is also a major developer of renewable energy generation assets, and any hint it may withdraw would be a blow to Australia’s energy transition.

In 2022, during a visit to Australia, Iberdrola’s chairman Ignacio Galan pledged to more than double the company’s investment to some $4.4bn by 2025 — a much needed commitment as the federal government tries to deliver its ambitious energy transition plan.

Labor has set the aggressive target of having renewable energy generate 82 per cent of the country’s electricity by 2030. To meet its target, Labor requires substantially higher investment in renewables.

Originally published as How Zen Energy – developed by Ross Garnaut – got caught by a wind drought