Energy Spectrum Australia

Energy Spectrum Australia | Issue 17

Welcome to the seventeenth edition of Energy Spectrum Australia.

The below extract has been taken from our seventeenth edition, and if you have enjoyed reading this article and want to read more about the latest developments in the Australian energy market, please contact Ben Cerini, b.cerini@cornwall-insight.com.au for more information.

AGL CEO indicates new direction for company announces large loss

AGL CEO and Managing Director Brett Redman, in the presentation for the company’s poor FY21 half-year results, has indicated the company is considering a rethink as he praises home batteries, electric vehicles and remote generation and storage for “really starting to take off”.

The results, published on 11 February, showed AGL making a significant statutory loss of $2.29bn for the first half of financial year 2020-21, compared to the $323mn statutory profit reported for the same period a year earlier. Redman said: “The results we’re announcing today reflect the sharp decline in wholesale prices for electricity and renewable energy certificates, lower gross margins in Wholesale Gas, and costs to support our operational and customer response to the COVID-19 pandemic.”

The company announced, a week earlier, that it intends to recognise charges of $2,686mn, reflecting $1,920mn in provisions for “onerous contracts” related primarily to legacy windfarm offtake agreements, increases to environmental restoration provisions of $1,112mn, and further impairments of $532mn across its generation fleet and natural gas assets. AGL cited the “onerous contracts” for long-term wind offtake agreements it entered between 2006 and 2012 when prices were “significantly higher than spot” and much higher than they are today. AGL said the charges follow falls in forecasted wholesale prices in recent months, reflecting policy measures to underwrite new build of electricity generation and lower technology costs, leading to expectations of increased supply. Prices recently have fallen due to lower demand as a result of the COVID-19 lockdowns and milder weather.

Redman also said the acceleration of technological change and the renewables transition has been “beyond what we anticipated”, with customer uptake of AGL’s multi-product offerings being surprising. Additionally, policies to underwrite new generation to deliver faster renewables build have brought down wholesale prices, coinciding with rapidly falling costs for renewables and batteries. Redman said this is all pushing AGL’s retail business towards a future in which it “provides customers’ access to essential energy, data, electric vehicle, battery and other services on a carbon neutral basis”.

Redman said AGL is assessing its business model and capital structure and will announce more at an investor day it expects to hold around the end of March.

“Wholesale electricity cost in the NEM is expected to remain suppressed for years to come due to the combined effect of reduction in renewable capital cost and direct government subsidies that will see tens of GWs of new renewable capacity entering the NEM. As evidenced by AGL’s announcement, the flip side of the story is that businesses with significant legacy assets in baseload coal and gas generation are now feeling the pain as the value of these assets have been written down and their inevitable early retirement also brings forward the significant decommission and environmental restoration costs. However, the large lumpy size of those assets (typically several hundred or thousand MW at station level) means that it will only take one or two announced retirement in each region to uplift the future pool prices and provide the long-needed relief to the rest of the market. The only question now is who will blink first.”