The power crisis of recent months has sent the prices of oil, coal and gas to multi-year record levels. It’s also given deep-pocketed energy transition advocates an opportunity that they haven’t had in years: to put their money where their mouths are.
That’s the thinking driving the A$7.9 billion ($5.7 billion) takeover offer for AGL Energy Ltd. by Brookfield Asset Management Inc. and the family office of Mike Cannon-Brookes, billionaire co-founder of software company Atlassian Corp. The generator and power retailer accounts for about 8% of Australia’s domestic carbon emissions. Both Cannon-Brookes and Brookfield’s vice chair, Mark Carney, the former governor of the Bank of England, have been vocal in their support of action on climate change and the role of finance in accelerating it.
The woes of AGL are symptomatic of what much of the world’s power-generation sector has been facing. Rising volumes of wind and, in particular, solar entering the grid are pushing down the value of the wholesale electricity on which they make most of their money. Low or even negative prices in the middle of the day when the sun is shining and wind blowing are a nuisance for renewable generators — but for coal-fired operators like AGL, they’re a disaster, forcing them to spend more on fuel to feed their boilers than they earn from supplying power.
The rise in gas and coal prices in recent months makes a bad situation worse. Utilities tend to sell much of their electricity at regulated and long-term tariffs, making it hard for them to lift their prices just because fuel expenditures are up. Profits end up being squeezed between rising costs and inflexible revenues, and market valuations suffer as a result.
That explains why so many utility assets are available on the cheap right now. An industry that can achieve equity-style returns from infrastructure that’s almost as stable as government spending ought to be attractive in a time of zero-level interest rates. Even so, 15 of the world’s 20 top electricity companies by market capitalization — a group that doesn’t include AGL these days — are trading at a discount to their five-year average price-earnings ratio, according to data compiled by Bloomberg.
AGL is in a uniquely deep hole, with the country’s largest generator losing more than 80% of its market value from a high in 2017 to a low point in November. Investors remain unconvinced by plans announced last March to demerge its coal generation from its retail assets, with the stock down about 27% on the eve of the takeover bid announcement.
Cannon-Brookes, who’s said he founded Atlassian with a university friend so he’d never have to wear a suit to work, has pledged to give A$1.5 billion to climate causes. He’s Australia’s fourth-richest man with a net worth of $17.8 billion, according to the Bloomberg Billionaires index.
The consortium’s plan to spend A$20 billion accelerating the closure of AGL’s coal fleet to 2030 instead of the current 2045 plan sounds radical, given that some 83% of AGL’s electricity sold last year came from coal plants. In truth, though, it’s not. Once you factor in the roughly A$1 billion a year AGL spends on fuel, spending A$20 billion over 10 years could if anything lead to an increase in the free cash the business is spitting out for its owners.
Meanwhile, even Australia’s coal-loving government projects the renewable share of generation in the country’s southeastern grid will rise from 23% in 2019 to 79% in 2030, levels pretty much in line with the consortium’s plans.
The trouble is, every move to turn these forecasts into reality generates a political battle that public companies are keen to avoid. AGL’s former Chief Executive Officer Andy Vesey quit suddenly in 2018 after a bruising fight with Canberra about his proposal to close an aging coal generator. His successor, Brett Redman, resigned equally abruptly last year after releasing plans to demerge its fossil fuel business. AGL recently criticized the country’s main electricity regulator, saying its core forecasts for the future of the power sector, developed in consultation with the industry, were too bullish about the pace of energy transition.
With an election just months away, Prime Minister Scott Morrison will be spoiling for a fight that can pit him as the defender of coal mining and generation jobs — a formula that served him well in the 2019 poll. The success or failure of the bidders’ plans will ultimately depend on whether the policy mess that’s been driven by nearly a decade of governments trying to reverse the tide on energy transition will finally get unpicked.
That means that it’s not enough for the bidders to get the technology and the finance right. They also need to hone their political skills. The lack of a detailed and credible transition plan in the current proposal is an own goal that Canberra will work hard to exploit. Australia’s politics has thwarted multiple attempts to build a cheaper, cleaner power sector over the past decade. If Brookfield and Cannon-Brookes want to avoid a repeat of that history, they’re going to need to lift their game.