Australian gas giant says it can ride through Covid-19, but can it survive decarbonisation?

One of Australia’s largest investors in gas infrastructure is slowly coming to grips with what decarbonisation of the energy sector may mean for its business, as it faces the prospects of more than $20 billion in assets becoming stranded.

Reporting its earnings for the 2019-20 financial year, the listed APA Group says it was well placed to ride through the short term disruptions caused by Covid-19, and any falls in energy use would have only a small impact on company earnings. But it is clear from its presentation that a much bigger threat is looming for the company, the global commitments to achieve zero emissions.

APA told investors it will soon deliver an assessment of what the company – which has a $22 billion portfolio of gas pipelines and distribution infrastructure – may look like under a rapid decarbonisation scenario. But the scenarios it is contemplating look more promising for competing technologies such as battery storage than it does for gas.

Modelling undertaken by the IEA, the intergovernmental panel on climate change and other research institutions generally suggest that to limit global warming to below 1.5 degrees will require a significant reduction in global gas use; in the order of at least a 75 per cent reduction on current levels, if not a complete phase-out.

With the company holding such a substantial portfolio of gas pipeline infrastructure, APA must be crucially aware of the looming risk of these assets becoming stranded as the global economy pushes towards decarbonisation.

Under a net zero emissions by 2050 scenario, the company sees substantial growth opportunities, including further investment in renewable energy projects, supporting surging uptake in electric vehicles and a switch to zero emission fuels, including green hydrogen.

But a question remains around the company’s ability to shift the value of more than $20 billion in existing gas assets that the company either owns or operates into these new technologies, and how much of a risk stranded assets represents to the company. It will publish the results of the review in October.

“We are in the middle of a dynamic shift in the energy landscape in Australia and across most developed economies,” it says, adding that it is confident of the outlook for the short to medium term.

“In particular, the drive towards decarbonisation is creating a structural shift in energy policy, composition and investment. In this context, our business is benefiting from the shift away from high carbon intensive coal fired power generation, but it also has optionality through the expected significant growth in variable renewable energy.

“The future of energy will not be defined by any one solution but will be a combination of energy sources and technologies to balance the demands of reliability, sustainability and affordability.

“APA considers that natural gas plays an essential role in providing secure and reliable electricity by supporting the integration of variable renewable energy with flexible, peaking power, which will be increasingly required as coal-fired generation is retired and removed from Australia’s energy mix over the next 30 years.”

Over the last few years, APA has expanded its investments into the renewable energy space, including the development of the combined 100MW Emu Downs solar and wind farm farm, the 150MW Badgingarra wind and solar  project, and the 100MW Darling Downs solar farm.

It is a portfolio that amounts to almost 500MW of wind and solar capacity, but with a combined value of $750 million, it still represents a small proportion of the company’s overall asset base.

And the difficulties of investing in new gas generation is highlighted by the ongoing delays in its 220MW Dandenong gas generator. Despite a clear push by the Morrison government for a ‘gas led’ recovery, and the promise of government help under the Underwriting New Generation Investments (UNGI) program, it is still yet to arrange finance.

The status of the UNGI program remains in limbo almost 18 months after the initial shortlist was announced, as the Morrison government has been unable to pass necessary legislative amendments through the federal parliament to establish the $1 billion Grid Reliability Fund which would pay of the government’s commitments to underwrite new gas projects.

The company told investors it still assessing plans for the 220MW Dandenong power station project, eight months after it was identified as one of two projects that were invited to enter talks with the government. There is still a question mark over whether the plant is financially viable, and whether there is sufficient demand for the added gas generation capacity.

In its latest earnings update, the company said that it had finally overcome commissioning difficulties at the Orbost Gas Processing Plant, which came online in May, and is to deliver gas to the East-Coast Gas market from the Cooper’s Sole gas field off the Victorian coast.

The project had been impacted by bushfires that impacted large parts of Victoria over the last summer, which had been fuelled by the impacts of climate change.

The company reported gross earnings of $1.653 billion for the 2020 financial year, a slight increase on the previous year, and expects to deliver a similar level of earnings for the 2021 financial year, despite the difficult economic environment triggered by Covid-19.