This is a lightly edited transcript from the latest Energy Insiders podcast, featuring an interview with AGL CEO Brett Redman. Redman dicusses the reasons behind the utility’s proposed split, the pace of change with new technologies, and what’s next.
Giles Parkinson 00:03
Brett Redman, thanks very much for joining the Energy Insiders podcast again.
Brett Redman 00:07
Giles Parkinson 00:09
It’s been a busy time. You’ve just announced the intended split of AGL, into I guess, well, New AGL and PrimeCo, or good and bad or green and whatever. Although it’s a bit more complicated than that. Can you just explain the timing of it now? Because there seems to be so many details which are not revealed yet. And I guess the biggest question for everybody is, does this mean an accelerated exit from coal or not?
Brett Redman 00:35
So yesterday, we announced that we were separating, we plan to separate the business into two strong businesses. So they were New AGL, which will become Australia’s largest multi product energy retailer, and PrimeCo, which will become Australia’s largest electricity generator. So deliberately creating two big strong businesses, which, as I’m sure will go through a little bit of detail, means that under the hood there’s quite a lot going on to set them up for success for our customers and for our communities.
From a timing point of view, one of the things I’ve talked about a lot over the last 12 months is how, why the trends in in the energy market aren’t a surprise in their own right, what we’ve seen is a big acceleration of those trends. And so we had the choice to sort of keep going at the pace that we were going, or accelerate our own response to it. So what you’re seeing in yesterday’s announcement is us moving at pace now, to make sure that we keep pace with the market and create two big businesses that recognise they will have different roles to play in energy transition going forward. The first New AGL, I think, quite excitingly is carbon neutral on day one.
Now, that’s carbon neutral by scope 1 and 2 emissions, which is your typical big corporate test. But let me absolutely own that, from a scope 3 point of view, they will have plenty of products that it’s selling like electricity and gas, that will still have carbon in there. But again, by the end of this financial year, by 30, June, every single product that AGL sells will have a carbon neutral offset option. And then from there, you’ve created the systems and the processes to first engage with customer where they want to do it, you’re looking at the how you’re sourcing your energy so you’re starting to shift your sources of supply into low carbon and low carbon sources, and you’re well and truly on that journey to carbon neutrality. From a prime code point of view, they have a different role to play in energy transition.
There’s no shying away from they’ll close, we restated the backstop dates again yesterday. And we’ve talked about the forces of change that may change their path and timing, anchored around customer community and technology. But the role that PrimeCo has to play first and foremost is to put that big baseload backbone of energy and electricity into the system as everything is changing around it. So as we’re building new technologies, as we’re investing in batteries, as we’re putting other renewables into the system, the market is going to need the generation capacity in PrimeCo to be the reliable steady source there while things are being built around it, even as it’s preparing for eventual closure, and thinking about how it repurposes its sites for that future.
And again, yesterday, we talked a lot about seeing sites like Loy Yang and Macquarie become energy hubs of the future. And we started to lay out a vision of all the different types of energy linked projects that we’re starting to put onto those sites.
David Leitch 03:42
Brett, yesterday’s announcement seems very preliminary compared to other demerger propositions that have been put to investors that I’ve looked at. There was no financial data, not even as I understand it, a certainty of a separate listing. And you know, you’ve announced right up front, you’re looking for feedback and, you know, almost like flying a kite. I just wondered why you’ve done it in such a preliminary fashion? You know, won’t that actually just create uncertainty and make it harder for investors right now?
Brett Redman 04:15
I think David, it’s a lot more anchored than flying a kite. I think there’s a lot of rich detail there. The challenge that we’ve got is most demergers, most things like this where you have a very distinct business unit or division that you’re looking to spin out, recent classic example Coles Meyer, and Wesfarmers.
So very clear business that you’re talking about. So it’s actually very easy to put numbers around it and to be really straight up and down as to what it might mean financially as well as in concept. Here what we’re talking about is separating the two businesses that are currently very intertwined. So big, long, complex process, first of all. The second thing therefore is there are two parts of the conversation. Part one is landing properly the strategic rationale both for separation and for what these individual businesses are there to do. Step two is then getting into more the nit and grit of how will you value them, how will you finance them, what capital structure will you put in place? And I should say in answering questions, you know, we’ve been pretty clear that we’ve presented an internal separation but outright demerger is a very live option that we’ll have in discussion over the next few months.
We need to then go to, at the next stage we’ll publish that next detail with all numbers around it, but I think what we needed to do first was not effectively wait for another three months to finish all the detailed modelling, but to get out there with the core concept. And I’m actually really encouraged that all the conversation really is going to debating things like how to value them and how will they be financed, as opposed to, I’m not seeing any particular pushback or rejection to the idea that separating into two businesses makes sense. So from my point of view on communicating to the market that’s success. You know we’ve landed the big concepts and we’re only three months away maybe from coming back with going okay, now here’s what the spreadsheet looks like. Let’s have that conversation.
David Leitch 06:16
So again traditionally the idea behind the gentailer is that there’s integration value. One of the questions that comes back is: will the value to the parts be greater than the value of the whole? I guess I’ve got a lot of ideas about that, but how do you how to use it yourself?
Brett Redman 06:35
I think what we’re seeing is the traditional gentailer model is breaking down. That kind of classic strategy and classic linkage which is all about managing risk, you know, in a highly volatile and somewhat pure market made a lot of sense, you know, for AGL and others globally. It was the classic model that everybody followed for the last couple of decades or more. But more and more what we’re seeing is new generation particularly being built in response to government demand in one sort or another, whether it’s direct agreements, offtakes, in some cases government building it directly, as well as corporates more and more entering into direct relationships and offtakes that will underpin the generation part of the business. So in that world the clear and absolute linkage between the two businesses is not what it used to be.
So then what you start to look at is a generation business that is, and I’ll use loose terms knowing that talking to people like yourself you’ll pull me apart on them, but you’re in the nature of baseload without getting too technical and that will have a role to play to just pump bulk energy into the market. But the retail business increasingly is looking to manage risks through capacity management, so that’s your batteries, your pumped hydro, your gas peaking.
AGL has been talking about that for the last couple of years as well leaning into wanting capacity management rather than just baseload. So in some ways you see the evolution of that starting to appear now and baseload will be able to sell to, you know, a variety of longer term off takers. Retail will look for how does it manage risk better and better, but managing risk will be more through the management of capacity as opposed to the management of just basic energy cost.
David Leitch 08:32
So I think that’s very interesting. One more quick, there’s about a million things I’d like to ask but I want to hand back to Giles shortly, the thing that strikes me is the relationship with power, which is the renewable supply that AGL has only a 20% interest in, but which is now 1.3 gigawatts with a, you know, I think a very ambitious agenda. In some ways it’s going to be competing with the New AGL and you know, I’m just wondering how you see that relationship evolving over time as power itself grows stronger? I mean, you know, that’s just yet another thing to be thought through.
Brett Redman 09:12
So I think the setup of power in this relationship with New AGL, I think people will, their understanding of it will deepen as we see projects come out. I think it’s a great cornerstone of what the New AGL business will be. Because if you think about it New AGL increasingly will want to source bulk renewable energy along with its capacity management. Having a very big seat at the table with what is now once again the biggest developer of renewables in the country, AGL has always been the biggest private backer of renewables. We continue that role now more through power than anything.
With 20% of the equity which is not a bad investment but I recognise it’s not a natural investment from returns point of view for AGL shareholders, it’s an infrastructure style investment, that directly is equity. But but it’s not a bad investment in its own right. But it gives us access to 100% of the output, and the ability to contract as those projects come to market. And if you think about how much sourcing the new AGI is going to want to do, I think you’ll see it’s going to be a powerful partnership, no pun intended, that will set both of those businesses up in the future. And New AGL won’t just be looking to source from power, it’s going to need a lot more than that again, so it will keep looking at, you know, how can it underpin other contracts and other developments around the country?
Giles Parkinson 10:43
I’d like to get back to my original question, which is about the pace of transition and the exit from coal. And when we talk about PrimeCo I guess the general expectation is that the world’s gonna have to accelerate its efforts to get to zero emission. So where does that leave PrimeCo then as an ongoing concern? Is there an ability for it to also accelerate its transition away from fossil fuels? And what would that business look like in a zero emissions environment?
Brett Redman 11:09
So, so through the lens of PrimeCo it inherits, you know, that part of the AGL narrative that’s always been mindful of, as a responsible citizen, you know, we do have a role to play there in keeping the lights on and, you know, as I know you know, we can’t shut down in 24 hours. You know, the, you know, we’ve got to keep significant amounts of energy coming from thermal generation for a long time to come. We’ve, we’ve always been upfront and clear about, you know, how we think about what will change the pace of change. So, and the way, the way we’ve always articulated it, is through the lens of customer, community and technology.
So we see customers now at a big acceleration, even in the last 12 months, and particularly at the corporate end of town, of customers hunting for low or no carbon energy. And so that will shape, you know, the product set going forward. We see community continuing to articulate for low or no carbon future. So the pace in somewhat will be dictated by community through government regulators. We also see technology coming in and increasingly changing the shape of output. So then you start to sort of talk about, we haven’t changed the backstop, technical backstop dates for those plants. But we are starting to talk about how we’re running the plants in an evolving and accelerating market. So some of the presentation yesterday was recognising that the plants will start to cycle more. Part of that in response to renewables in the in the market, at different times of the day, will push out thermal.
So you see us talking about more cycling of our units. There was a graph in yesterday’s presentation that started to articulate that in a pure volume sense we see volume coming down, even if it’s only a small amount in the short term, but starting to come down compared to what it might have been producing in in previous years. So all these things are signs of a business recognising that change is happening and being responsive to it. While at the same time we spent a lot of time yesterday talking about how we can repurpose those sites, the energy hubs of the future, we’ve got genuine and real projects being built on these sites that will outlive the coal fired generation. And we’re thinking about, in the PrimeCo context too, about how it can also invest in the intermittent baseload of the future, which is consistent with its strategic rationale, which is projects like wind, it can start to reshift expertise in…
Giles Parkinson 13:41
We’re very conscious of the time and just got one quick question. Getting back to New AGL and this focus on the retailer, on the consumer, on batteries, solar, electric vehicles and other things, there’s going to be a lot of new competitors in there. There’s going to be the Googles and the Amazons and all the others, how confident are you in the ability for traditional gentailers, as you say that model is broken, but how can they compete with all these new competitors? Because that’s going to be the basis of your survival, isn’t it?
Brett Redman 14:06
It is, and I’m looking forward to the fight. I would say to you that in my years as CEO and before that as CFO, a regular question was big global competitor, sometimes a tech companies, now sometimes an oil and gas major, sometimes a different participant, so insert: big global name is coming into town to eat your lunch, how are you going to go? I’ll back us all day, every day, and our ability to connect with our customers to be responsive for what they’re looking for, and to source the products that they’re after.
If you’ve heard me talk in other forums, I’ve always said, first and foremost, I want a big customer base. And then I want, so I’m finding products for our customers as opposed to customers for our products. And with that customer first mindset, you see things like we’re now the biggest multi product energy retailer in the market and we continue to grow. We’ve got the best NPS score of the tier one players in the market. We continue to expand the product set with with good take up so I see the threat and i’m ready to meet it.
Giles Parkinson 15:13
Good on you.
David Leitch 15:14
I’m interested to see how the platform business goes. You and Origin both have one now and it’s great to see you both got positive NPS’s so that’s a big improvement from where you were.
Brett Redman 15:25
I’m more than ready to compete with anybody and I come back to published numbers as my proof point that we’re doing okay, and the customer is winning because of it.
Giles Parkinson 15:38
Brett, thank you very much. We do appreciate your time today. We have so many other questions we’d like to ask about floating solar, electrical thermal, solar storage and all the other things, but look thank you very much for fitting in and all the best.
Brett Redman 15:50
No worries! These are exciting times. Pleasure to catch up.
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