Author Gilles Walgenwitz
Date February 2022
Over the past five years or so, Energetics has seen burgeoning interest in the Australian energy markets from both private equity and institutional investors. The bid by Mike Cannon-Brookes and Canadian investor Brookfield for energy giant AGL, is but the latest attempt to disrupt the market, fast-track its decarbonisation, and capitalise on the opportunities in Australia’s transition from coal-fired power to renewables.
Energetics' General Manager – Energy and Carbon Markets, Gilles Walgenwitz, appeared on ABC's The Business on Monday 21 February to discuss the implications of the bid for AGL. Watch the full interview.
What are the opportunities that are attracting investors?
While Energetics is engaged on both the buy and sell side of Australia’s renewable energy market, we have been commercial advisers to ASX100 on a significant percentage of large-scale renewable energy transactions across the National Electricity Market. Many, if not all, have ambitious net zero or other emissions reduction targets and want to secure long term renewable electricity supply or enter into long term virtual power purchase agreements.
About two thirds of coal-fired generation capacity is expected to close over the coming decade as it is economically displaced from the increasing penetration of low margin cost variable renewable energy generation. Under such conditions, the physical and financial markets will remain extremely volatile. With the decreasing price of energy from renewable energy generators, the steep cost curve experienced in storage technologies, and the digitisation of market interface platforms, new, disruptive business models are emerging. It’s therefore no surprise that Mike Cannon-Brookes is seeking to invest in energy. When moving to a more decentralised power system, with more value in distributed generation and flexible demand, there is significant digitisation across new energy business models - and his is a software company.
For market participants with a strong position in thermal generation, these technology and market changes are extremely disruptive. One approach is to adapt quickly to the new paradigm and address the sense of urgency expressed by shareholders and the wider community in a fast decarbonisation pathway and by doing so, attract a lower cost of capital. The other approach is to spin off the new energy business and, separately, gradually adjust the legacy portfolio to changing market conditions by bringing more operational flexibility and renewable energy investments. This second approach aims to capture possible opportunities of being part of the last thermal generators providing firm capacity.
What role should governments play?
With this disruption, and in order to capitalise on the opportunities, governments will either be:
- Enablers. Governments can smooth the transition to firmed renewable energy supply and support the market through actions such as accelerating the build of transmission lines to carry the power from new Renewable Energy Zones to customers, and enable the market to develop the dispatchable capacity needed to mitigate the intermittency of wind and solar power (additional fast response dispatchable capacity in the form of batteries, pumped-hydro energy storage, gas powered plants or businesses entering into demand response agreements in which they can power down operations and so alleviate pressure on the grid in times of high demand and power up to benefit to low spot market prices). Such support can be provided by underwriting new investment in storage assets or through market rule changes that allow capture of more benefits from a two-sided market.
- Interventionists. Typically taking the form of taxpayer-funded power generation investments or regulatory changes (e.g. strategic reserve mechanism), such actions present significant uncertainty and can jeopardise the ability to secure long term debt and equity financing.
Australia can lead the world in renewable energy resources
Australia has the world’s best renewable energy resources. You could liken the top half of Australia to having the solar resources of the middle east and the bottom half as having the wind resources of the northern Europe. A cohesive/consistent approach is needed across stakeholders if Australia is to unlock its renewable energy opportunity over the next decade. In turn, our federal and state governments need to take steps to enable investors and support the energy transition. This is needed now as earlier closure of thermal generation assets will continue over the coming years and we are already operating with a lean reserve margin capacity.