AGL: its not me, it’s you

Rumours are rife that Australia’s largest electricity company AGL is about to break up with itself. Next Tuesday AGL CEO Brett Redman is expected to announce a green re-invention of the company, selling off or de-merging some of its highest emissions coal generators to re-focus the company on the rapid decarbonisation anticipated over the next decades.

AGL has three coal generators: Liddell (1680MW) and Bayswater ¬†(2640MW) in NSW that run on black coal and share a cooling lake and the gigantic brown coal Loy Yang A power station (2,210MW) in Victoria’s La Trobe Valley. Liddell will close in 2023, while Loy Yang A is not scheduled to close until 2047 and Bayswater in 2035.

The three power stations have anchored AGL’s generation revenues since they acquired them in 2012 (Loy Yang A) and 2014 (Macquarie Generation). In the absence of a carbon price, coal generators are relatively cheap to run and contract their generation in futures contracts to retailers and large industrial customers.

This makes coal generators both stable sources of revenue and providers of a natural hedge against any price volatility in the electricity market. As AGL has around 4 million retail customers, its important to cover this demand with enough firm electricity generation so they are not forced to buy large quantities of power at high spot prices in the event of an unforeseen price spike.

Those revenues have nevertheless been crimped since 2018 as more than 18GW of new renewable generation was installed over three years in the largest and most sustained renewables boom in Australia’s history.

That has had the effect of reducing both volume of demand from customers and wholesale prices as the National Electricity Market rolled into a cycle of major oversupply. AGL’s revenues have been seriously impacted. The market capitalisation of the business has fallen by 63 per cent since its peak four years ago.

Separating out some or even all of the coal generators won’t materially change those conditions, but AGL has another problem: brand. While a genuine supporter of emissions trading and renewables policy, it is easily Australia’s biggest greenhouse emitter and is regularly accused by governments and activists of trying to preserve revenues from its three big coal fired generators.

AGL has found itself in conflict with the Federal Government over its plans to close Liddell on the one hand, and then with the NSW Government after it paused new investments in gas and batteries after that government effectively re-assumed the role of central planner and underwriter of the state’s electricity system.

In an increasingly government-managed ¬†electricity “market”, AGL has been looking for a circuit breaker to change its image and its relationships with governments and shareholders so it can re-build and re-finance the business for the 21st century.

Loy Yang A is the most polluting and most likely asset to be separated. Like all brown coal generators it carries additional closure risks as the mine site adjacent to the power station will need to be remediated, at a cost of tens of millions of dollars.

European electricity giant E.On separated its coal fired generators away from its retail books, renewables and regulated networks in 2016. A big difference with Australia is that regulated assets like networks are owned separately from market facing generators and retailers (except for a couple of government owned businesses). This means that the “clean” AGL will be more asset-light than “clean” E.On, which may have implications for balance sheet management and earnings stability. German power company RWE followed suit, only for the two split off entities to swap assets a couple of years later.

Whatever shape it takes, an AGL restructure won’t stop the democratisation of electricity in Australia, with most new capacity, large and small, being installed or underwritten by customers or governments, not traditional power companies. and that is the biggest cause of the decline in AGL’s market value.