How years of Coalition interference left AGL with no option but to split in two

The proposed split of AGL Energy into separate businesses may finally deliver what the Coalition government has always really wanted – a fossil fuel energy company focused on riding with coal and gas until the very end.

A report in The Saturday Paper over the weekend, alleging that then energy minister Josh Frydenberg had urged AGL to sack one time CEO Andy Vesey, confirms how years of active government interference eventually forced AGL into an emergency demerger to save its business.

The Coalition government’s antagonism towards AGL was first sparked by Vesey’s decision to close one of Australia’s oldest coal-fired power stations – the 1,680MW Liddell coal-fired generator in the NSW Hunter Valley.

Liddell is still destined to shut in 2023, but AGL has now decided to split the company into two, leaving one of the business units as one of Australia’s largest emitter, dedicated to the remaining coal and gas units, while the other retail-focused brand seeks to negotiate the transition to clean energy.

The Saturday Paper reported on the weekend that Frydenberg had actively lobbied the board of AGL Energy to depose its then CEO Andy Vesey, following the company’s decision announced in 2016 to close the Liddell power station, with more than seven years notice.

The paper cited a member of the AGL executive who observed that Frydenberg had lobbied individual members of AGL’s board of directors, to push for the board to oust Vesey as CEO.

During his time at the head of AGL, Vesey had spoken frankly about the long term prospects of coal-fired generation, openly acknowledging that the future lay with a mix of renewables and storage.

Following the concerted campaign to depose him, and despite AGL affirming the decision to close Liddell, Vesey made a sudden departure from AGL Energy, announcing that he would immediately step down from the CEO role.

The then Turnbull government put pressure on AGL to back down and keep the power station open.It made various threats to split up the company or to even compulsory acquire Liddell.

Turnbull even argued that the power station might need to remain open until 2025, when he hoped his proposed Snowy 2.0 pumped hydro project would commence operation, and it even talked competitor Alinta Energy into making a low-ball offer to purchase Liddell.

RenewEconomy understands that behind the scenes, senior management at AGL Energy were furious about the Alinta offer, which was ultimately rejected, as it had impacted AGL’s ability to build stakeholder and investor confidence in its transition plan for the Liddell site.

AGL had pitched to investors an ambitious transition strategy for the Liddell site, including new investments in wind farms, big batteries and gas generators – but because of the threats of federal government interference, found it difficult to get investor buy-in to deliver the vision.

AGL argued that cost of keeping the Liddell power station operating – which will have clocked more than 50 years of operation by the time of its well flagged closure – was too high.

It said it would be cheaper in the long-term to replace the power station with a mix of solar, wind, and gas generation along with battery storage.

A government-commissioned review of the future of the Liddell power station ultimately reached the same conclusion, finding that using public funds to keep the plant operational for longer would be one of the worst options for maintaining reliable supplies of power in New South Wales.

But the antagonism towards the clean energy transition that exists within the Coalition clearly runs much deeper than concerns about the reliability of electricity supplies.

The Coalition government ultimately implemented what is known as the “big stick” package of energy market reforms. The ‘big stick’ grants the federal government new powers to intervene in the energy market, including to split up companies that are using dominant market positions to their advantage.

The powers include the ability for the Federal Court to issue “divestiture orders”, requiring large energy companies to offload parts of their business to reduce their market power.

The federal government had threatened to use such powers against AGL Energy, claiming that decisions to close Liddell were motivated by potential profits from higher wholesale electricity prices that would follow its exit.

Vesey was replaced at AGL by Brett Redman, who continued with the company’s plans to close the Liddell power station, but agreed to delay the complete closure by 12 months.

Redman, however, then put together plan to split the AGL business in two – after recognising that the company had failed to respond to the accelerating pace of transition underway in the energy market, before unexpectedly announcing his own decision to stand down from the role in April.

The company says that the pace of change is now occurring faster than they had anticipated – with the company now stuck with a number of increasingly unprofitable fossil fuel assets. A situation that is at least in part the result of federal government interference.

AGL’s emergency act is to create a new entity – to be called Accel Energy – that will own all of AGL’s fossil fuel assets. The spin-off will look like the kind of energy company the Coalition government has always wanted, uncomplicated by the thoughts of a clean energy transition.