The share price of AGL – Australia’s biggest power generator and the country’s biggest emitter – took a tumble on Thursday after it revealed a massive $2.7 billion in write downs, including a $1.9 billion pre-tax loss from legacy investments in wind farms.
How did this happen?
AGL was one of the first big investors in wind farms in Australia, becoming the biggest investor in renewable energy before deciding to change tack nearly a decade ago and buying the Bayswater, Liddell and Loy Yang A coal plants to become the biggest coal generator and emitter. See: AGL Energy fades from green to black
It’s the way it went about those wind investments that led to this write-down, and could be a foretaste of what is to come when it faces up to reality of its remaining coal and gas assets.
The first thing that should be said about the huge AGL wind write downs is that they do not come as a surprise to the market, because it has been well known that current wholesale prices are just a fraction of the price that AGL agreed to pay for the output of the wind farms it built more than a decade ago.
The “legacy” assets cited by AGL are not named but are presumed to include the 420MW Macarthur wind farm in Victoria (until recently the biggest, but also one of the poorest performing wind assets in the country), and the suite of five wind farms that came under the Hallett name in South Australia.
AGL’s strategy after building the assets was to sell them off – at a profit which it claimed as a “development fee” to various infrastructure and energy investors.
The attraction to these investors was the guarantee of a long term power purchase agreement – possibly 20 years or more – at what now seem to be highly inflated prices.
AGL offered to buy the output – both wholesale electricity and renewable energy certificates – for more than $100/MWh (in 2010 dollars). That probably equates to more than $130/MWh in today’s money, and compares to contract prices of around $50/MWh, and sometimes less, for wind farms being built today.
The problem for AGL is that it is contracted to pay this money for the output of the Hallett and Macarthur wind farms until the end of the contracts, but the wholesale energy prices are now at their lowest levels in nearly a decade, and at levels that AGL obviously did not imagine at the time.
The irony is that while AGL has taken a massive hit, the owners of the wind farms are laughing all the way to the bank. The 50 per cent equity slices of Macarthur have changed hands on several occasions, and each time the price has risen because the gauranteed return looks even juicier in a low interest environment.
As the newest buyer of Macarthur, AMP Capital Infrastructure Fund, noted last year of its first investment in the renewable energy sector: “It has an attractive risk profile that provides fixed revenues that are not exposed to price or volume risk.”
In other words, AGL was locked in. And a transaction designed to make management look very clever a decade or so ago is now looking not quite so flash.
It will be interesting to see if this write down needs to be repeated in the next generation of renewable energy assets, that have mostly been parked in the Powering Australia Renewables Fund, a venture with the Queensland-based QIC.
These assets include the Nyngan and Broken Hill solar farms, and the Silverton wind farm in NSW, and the newly built (and not quite fully commissioned) Cooper’s Gap wind farm in Queensland, which is now the country’s largest.
It is not known what the off take agreements for these assets amount to. Nyngan and Broken Hill were both generously supported by the Australian Renewable Energy Agency when constructed, although both Broken Hill and the nearby Silverton have been heavily impacted by grid constraints and congestion, and Cooper’s Gap has also been having technical issues.
Most renewable energy assets now secure long term PPAs for five, ten, or 15 years at maximum, and at a much lower price, reflecting the more than 50 per cent reduction in wind energy costs in the last decade, which in turn has led to falling power prices.
AGL is not the only company swimming in losses from renewable energy investments in Australia, with a whole range of investors burned by changes to grid connection rules, transmission losses, and construction problems and delays, as well as the falling power prices that have hit all generators – green and fossil fuels.
AGL also took a major hit on its remediation costs for the impending closure of some of its coal and gas assets, as well as its other generation facilities. Part of the reason is the fall in interest rates, which has caused it to re-assess its “discount rate”. That has effectively trebled its liabilities.
More will follow as it tries to manage the survival, and then the exit, of its remaining fossil fuel assets – a challenge shared by every other generator in the country. Some, like ITK’s David Leitch, suggest companies like AGL might have to split into two to isolate the problem assets, as many international companies have done, or are doing.
One thing is for sure. The energy transition is here, but for some companies, and investors, it’s going to bd very messy.