The transition from fossil-fuel generation to renewable energy is one of the biggest opportunities for investors – but it isn’t without its challenges and uncertainties, as recent events in Australia have shown.
In December, the Australian Energy Market Operator published the latest draft of its Integrated System Plan, a document that provides a roadmap for development of the country’s National Electricity Market over the next 20 years.
In it, AEMO declared that the most likely scenario for the development of the NEM is now what it calls the ‘step change’ scenario which, among other things, will see coal-fired generation retired two to three times faster than was anticipated.
With that in mind, this month saw two bombshells hit the sector. First, one of Australia’s largest generator-retailers, Origin Energy, announced that it would close its 2,880MW Eraring coal-fired power station in 2025, seven years earlier than planned. This seemed to take the federal government by surprise, with energy minister Angus Taylor not appearing to have been told in advance that such a significant amount of baseload generation would be exiting the system in a little over three years from now.
Then, a bigger shock: Brookfield Asset Management and tech billionaire Mike Cannon-Brookes’ investment company partnered in an A$8 billion ($5.8 billion; €5.1 billion) bid to acquire AGL Energy, a rival of Origin Energy’s and the largest and oldest energy generation company in Australia.
Central to this audacious take-private bid was a pledge from the consortium that it would invest a further A$10 billion to close all AGL’s coal-fired generation by 2030, accounting for far more capacity than Origin’s plant, and much earlier than the company is currently planning.
If anyone was in doubt that the ‘step change’ scenario for the energy transition in Australia was here, they won’t be any more.
Question marks remain, though. AGL swiftly rejected the Brookfield-led bid, saying it “materially undervalued” the company. And while Cannon-Brookes gave a robust series of interviews this week defending the offer and arguing it would help lead to lower electricity prices for Australians, opinion varies on whether that will actually prove to be the case, in the short term at least.
For one, replacing such a large amount of coal-fired baseload capacity with a mix of renewable generation and storage would require further investment in the grid, and consumers would ultimately have to shoulder some of that cost.
Which leads us to the other major concern: Australia’s competition watchdog, the Australian Competition and Consumer Commission, which is certain to examine the deal very carefully should it move closer to reality.
If successful, in the state of Victoria it would leave interests managed by Brookfield in control of the largest generator, the largest distribution network, the only transmission network, and the largest retailer – vertical integration of a kind not seen in Australia where the government itself doesn’t control these assets. It remains to be seen whether allowing all four of those elements to fall under the control of one private entity will be tolerated.
All of this is to say that things could be about to get even more complicated in Australia when it comes to the transition to renewables – messier than it already has been, with investors still raising concerns that AEMO’s recent plan doesn’t go far enough in encouraging their continued presence in the market.
The Brookfield-led offer could have one somewhat unintended benefit for the current Australian government, though: it could be the ultimate vindication of its hands-off, market-led approach to decarbonisation, with the departure of coal swiftly accelerated thanks to state government policies that fly in the face of a federal climate change plan widely denounced as derisory at COP26.
Beyond the Australian context, the AGL offer is a sign of things to come, and could become an important test case for similar fossil-fuel heavy energy companies the world over.