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AGL Energy reveals A$1.9bn impairment on wind PPAs

AGL Energy has been forced to write down a series of PPAs with windfarms it developed and sold between 2006 and 2012, as wholesale prices continue to fall.

Australian energy giant AGL Energy has announced A$1.9 billion ($1.4 billion; €1.2 billion) of write-downs related to legacy windfarm offtake agreements signed between 2006 and 2012.

In a statement to shareholders, the ASX-listed firm said that the charges would be reflected in the financial period ending 31 December 2020, as part of a wider A$2.7 billion impairment that also included increased environmental restoration provisions and reductions in the carrying value of property, plant and equipment in its coal and natural gas generation fleet.

The firm said that the PPA-related impairments follow an “accelerated deterioration” in long-term wholesale electricity prices in recent months that reflect policy measures to underwrite new-build generation and reduce technology costs, leading to market expectations of increased supply.

As a result, AGL said, the long-term outlook indicated a “sustained and material reduction” in wholesale prices.

The average wholesale electricity price across the NEM in 2020 was just over A$63 per MWh, while in 2021 so far, the average price has been just over A$42 per MWh.

PPAs past

According to its 2020 annual report, AGL contracted output from five windfarms that were owned by third parties, with PPAs signed between 2006 and 2012 understood to be for an average price of more than A$100 per MWh.

One of the contracted assets is the 420MW Macarthur Wind Farm in Victoria, the equity of which is split 50/50 between AMP Capital and Morrison & Co. That asset was developed by AGL in a 50/50 joint venture with Meridian Energy, with AGL selling its stake to Morrison & Co in 2015 for A$532 million.

AGL agreed a fixed-price PPA with Macarthur Wind Farm that lasts until 2038, with the offtake price sitting at A$78 per MWh at the time of the sale in 2015 (based upon the value of the Australian dollar in December 2014).

Another contract subject to the impairments is the Hallett Wind Farm, which was developed and sold in four stages by AGL between 2008 and 2012. For each stage, AGL agreed to purchase all the electricity and large-scale generation certificates on long-term contracts, as well as operating and maintaining the facilities.

At the time of the sale of Hallett 5 in 2012, AGL said that the effective value of the offtake agreement would be A$93 per MWh between July 2012 and June 2014, rising to A$110 per MWh in July 2014 (based upon the value of the Australian dollar in December 2011). Agreements for the other stages of Hallett were signed at similar values.

Hallett 1 is 100 percent owned by funds managed by Palisade Investment PartnersRenewable Energy Fund, while Hallett 2 is 100 percent owned by the Energy Infrastructure Trust managed by Infrastructure Capital Group. The ownership of Hallett 4 is split between ICG’s Australian Renewables Income Fund (39.9 percent), Osaka Gas Co (39.9 percent) and APA Group (20.2 percent). Hallett 5 is 100 percent owned by Japanese investor Eurus Energy. Hallett 3 was never built.

AGL also signed a long-term offtake agreement with the 91MW Wattle Point Wind Farm in South Australia when it was acquired by Alinta in 2006 as part of an asset merger between AGL and Alinta. It was subsequently acquired by the ICG-managed Energy Infrastructure Trust in 2007.

The final affected contract is a PPA for energy from the 63MW Oaklands Hill Wind Farm in Victoria, which AGL developed and sold in 2011 to Australian insurer Challenger.

AGL also has an offtake agreement with the 440MW Coopers Gap Wind Farm in Queensland, owned by the Powering Australia Renewables Fund, which purchased it from AGL prior to the start of construction in 2017. The sale included AGL writing a PPA at an offtake price of less than $60 per MWh for an initial five years.

PARF is a A$1 billion vehicle managed by QIC, for which AGL itself provided a A$200 million cornerstone investment. Other investors in the fund include Future Fund and QIC’s Global Infrastructure Fund.

AGL managing director and chief executive Brett Redman said in a statement: “We continue to see material opportunities for AGL to participate in the energy transition as customer needs, community expectations and technology evolves. Notwithstanding these charges, our broad and diverse portfolio of energy generation assets will continue to have a vital role to play in enabling the transition of the energy system.”