AGL chaos highlights the size of the energy reform task - Grattan Institute

The AGL board’s monumental own goal, coming so soon after the election of a new Labor federal government, raises questions about Australia’s energy transition that go beyond the travails of an individual company.

In mid-2021, AGL announced its intention to split its fossil-fuel power stations from the rest of the business. The concept was not new – similar demergers had been implemented by German energy companies E.ON and RWE, not without debate and partly pushed by activist shareholders.

However, in AGL’s case, the financial market’s response to the proposal was muted at best, the board struggled to create support, and the 12-month period before a final decision did not improve that position. Rather, it created the opportunity for the approach from Brookfield and Mike Cannon-Brookes to make a bid for the company in early 2022. The rest played out as it has.

The AGL board and Cannon-Brookes had different views on how quickly the coal-fired plants should or could be closed, although most observers believe the current timetable of Bayswater (Hunter Valley) in 2033 and Loy Yang A (Latrobe Valley) in 2045 will come forward.

Whoever owns these power stations will be faced with a market in which the economics of coal will be declining, and the likelihood of earlier closure will be increasing. While the eventual owner may make an earlier decision, the financial viability will be driven by the policy decisions of governments, both state and federal.

The record of electricity market reform delivering a low-emissions future is all bad. From Kevin Rudd’s CPRS and Julia Gillard’s “carbon tax” to Malcolm Turnbull’s NEG, policies with varying, sometimes broad support, failure is the singular outcome.

On the morning after the 2022 election, Liberal frontbencher Simon Birmingham reflected that the Coalition’s failure to implement the NEG, a genuine attempt to connect energy and climate change policy, will be on the review list for the now federal Opposition.

The failure of the NEG led to the demise of Malcolm Turnbull’s prime ministership and Josh Frydenberg’s promotion to Treasurer. The market reform process went into extended paralysis, from where it has still to recover.

The energy reform agenda is not long, but it is challenging, and it is urgent.

As the Labor government takes the reins, four issues are important to frame the way forward. First, it is the states that are driving investment in renewables, with policies complemented by direct financial support.

Second, the processes and regulations that determine the development of the transmission grid to align with the states’ policies, Labor’s target of 82 per cent renewables by 2030, or with the Australian Energy Market Operator’s Integrated System Plan, is a mess.

Third, ensuring that the market is providing clear signals for investment in capacity that meets lower emissions, and maintains reliability and affordability, has been work-in-progress for about five years, and has only recently shown signs of life through the efforts of the Energy Security Board.

Fourth, Labor comes to government with targets for net-zero by 2050 and 82 per cent renewables by 2030, and a $20 billion proposal to help finance the expansion of the transmission grid to unlock investment in renewables and storage. These are necessary initiatives but will not be enough to get the job done.

AGL, the broader energy market, and Australian consumers need a clear policy direction that connects the transition to low emissions with maintaining affordability and reliability of supply. This must be Chris Bowen’s priority, one to which he has already publicly committed.

Minister Bowen’s first task must be to engage with the Energy National Cabinet Reform Committee to get agreement to move forward on three key policy agenda issues.

First, invigorate the process to unlock investment in transmission to build renewable energy zones and increase interstate connections. This must go beyond low-cost finance. It must address planning priorities, who pays for what, and a governance review focus on managing the costs of an unprecedented infrastructure investment program.

Second, drive agreement on a capacity mechanism to ensure dispatchable generation capacity is in place as it’s needed. This has been a contentious reform across industry and governments; a compromise must be reached.

Third, seek a common approach to renewables investment that is heading in the same direction across the states and the ACT, even if a single policy is beyond reach.

The energy reform agenda is not long, but it is challenging, and it is urgent. Saving AGL from itself is not the objective, but that outcome could be partly achieved alongside finally creating momentum towards a low-emissions power system that is affordable and reliable.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

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