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Biggest coal generator AGL to split business in two to focus on renewables transition

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Nearly a decade after AGL changed the colour coding of its business strategy from green to black as it bought three of the country’s biggest coal generators, Australia’s largest emitter has announced it will split its business into two so it can better deal with the accelerating clean energy transition.

In a long awaited investor day event, AGL said on Tuesday the split would create two new businesses. One, dubbed “New AGL”, would become Australia’s largest multi-product energy retailer “leading the transition to a low carbon future.”

The second, dubbed “PrimeCo”, would hold its biggest generation assets, mostly coal, but also wind, and would use these massive energy hubs as a centre for switching to renewables “as the energy market evolves.”

But it has also warned that some coal units may be mothballed to manage the solar “duck curve”, and in an interview with RenewEconomy, CEO Brett Redman did not rule out early closures as the market continues to evolve.

The split into two businesses was widely expected, and follows a similar path with utilities in Europe who found it impossible to turn their businesses towards zero emissions without splitting them in two, new and old, green and black or clean versus dirty.

ITK analyst and RenewEconomy contributor and Energy Insiders podcast co-host David Leitch forecast this scenario for AGL in detail in this piece last November: AGL profits may be weak for years, and it might be time to split it in two.

But such suggestions have been around for more than six years. See AGL eyes the future, crunches numbers on fossil fuel split. Some in the company realised back in 2015 that the rivers of gold (or black) from the newly acquired coal generation assets would not last forever, and change was inevitable.

This has now become abundantly clear to the current management, particularly after its poor results announced in February, and after the dramatic and ongoing fall in wholesale prices prompted an “urgent re-think”.

It has now accepted that splitting its business in two is the only way it can juggle the competing claims of its switch to new energy technologies, particularly solar, battery storage and electric vehicles and smart software, and the big generation assets.

It says its “new AGL” will be “lean and green” and will not be weighed down by the problems facing its legacy baseload coal assets.

“The accelerating market forces of customer, community and technology are driving the imperative to create this new path and separate AGL into two distinct organisations,” CEO Brett Redman said in a statement.

“The proposed structural separation would give each business the freedom, focus and clarity to execute their own respective strategies and growth agendas, while playing an equally important, but different, role in Australia’s energy transition.

AGL has been laying the groundwork for the transition in recent months, with numerous announcements on new battery storage installations, electric vehicle incentives, deals with mobile and internet providers, the purchase of solar companies Solgen and Epho, the proposed $2.7 billion purchase of Tilt Renewables by its partly owned PowAR fund, and alliances with the likes of the UK-based Ovo Energy.

Redman says the goal of “new AGL” will be to deliver electricity, gas, internet and mobile services to more than 30 per cent of Australian households, backed bya 2.1 GW portfolio of flexible generation and storage assets to manage peak demand events.

“And, importantly, New AGL would be carbon neutral for scope one and two emissions on day one, with a clear pathway to full carbon neutrality,” he said.

PrimeCo will feature the coal assets – Loy Yang A, Bayswater and Liddell (due to close in 2023). Redman describes this as “the low-cost backbone of the NEM”, but insists it will be in a position to evolve these centres into the “energy hubs of the future”. It will also focus on its 1,600 MW wind development pipeline.

Some key assets – including the relatively new Newcastle Gas Storage Facility and the Silver Springs gas project, will be sold, raising around $400 million.

“An accelerating desire for action on climate change, shifts in government policy and rapidly falling technology costs, have changed our market,” Redman said in prepared notes for the presentation.

“This means an acceleration of multi-product and low-carbon opportunities for our retail business, a reduced need for retail and baseload supply positions to balance each other and diverging expectations relating to risk and return.

“Separation would give New AGL and PrimeCo the freedom, focus and clarity to face the opportunities and challenges presented by this new world.

“They would each be able to set and execute their own strategies and growth agendas. They would each be able to address market forces in their own way and advocate for their own role in the energy transition.”

The two businesses would both have investments in large wind assets. PrimeCo would operate the wind farms at Macarthur, Hallet, Oaklands Hill and Wattle Point – and b

New AGL, which would hold the 20 per cent equity position in PowAR, would focus on shorter-term offtakes, consistent with the flexibility and optionality to manage a shorter energy position. New AGL – which would develop its previously announced 850MW battery storage portfolio – could also lease battery storage assets located at PrimeCo sites such as the Torrens battery in South Australia.

The company is also looking at waste to energy developments as well as a pilot plant using electrothermal energy storage technology. At Loy Yang, it will include the Hydrogen Energy Supply Chain project.

A lot remains to be done, however. Final names for the new companies have yet to be chosen, and the mechanics and the timing of the split have not yet been decided.

Still, the idea did not win much applause from environmental groups, who suggested that AGL was simply hand balling the problem around coal closures to a new entity,

Dan Gocher, from the Australasian Centre for Corporate Responsibility (ACCR) said AGL is walking away from managing their closure, by spinning them off into PrimeCo, which any responsible investor will surely avoid.

“Following a halving in AGL’s share price over the last year, CEO Brett Redman is attempting to sell the demerger as a win for shareholders, claiming it would give both companies the ‘freedom’ to pursue their own ‘growth agendas’. This is optimistic at best, and delusional at worst.

“The demerger does nothing to reduce emissions. AGL has chosen the easy way out, leaving the hard decisions around coal closure to whoever is chosen to run PrimeCo.”

In his interview with RenewEconomy, Redman insisted that the split would “sharpen the focus” of AGL on the energy transition by creating a “carbon neutral” entity (new AGL), and another entity that would manage the exit from fossil fuels.

See also: AGL may mothball some remaining coal units to manage solar duck curve

And: AGL mulls floating solar farm at Loy Yang, and electrothermal solar storage pilot

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