AGL
DEMERGER DEFEATED
May 29, 2022, Update: Following huge civil society and investor backlash, AGL have abandoned the demerger and four directors, including the CEO, have stepped down.
The Demerger Vote at AGL’s Annual General Meeting
AGL is Australia’s largest polluter accounting for 8% of the country’s total climate emissions. This is due to its ownership of the largest privately owned coal power fleet in the country. AGL is also the largest retailer of electricity and gas serving over 3 million Australian households.
In recent years, the company has suffered significant financial losses as it clumsily attempts to navigate the clean energy transition by defending its coal generation assets that are eroding its profits rather than investing in renewable energy assets.
Rather than doubling down on renewable energy, AGL’s board has proposed a demerger that would split the company in two.
Earlier in 2022, the AGL board rebuffed a take-over bid from a consortium of Brookfield and Grok which proposed to accelerate coal power closure and invest up to AUD $20 billion in renewable energy generation. And most recently, Australian tech billionaire Mike Cannon Brooks has become the company’s largest shareholder as part of the effort to stop the demerger.
In June, AGL’s shareholders will vote on the proposed demerger. We urge shareholders to vote against the demerger and instead steer the company towards a strategy of accelerated coal power closure and investment in renewable energy.
Why is the proposed demerger a bad outcome for the climate?
The AGL demerger proposal is to separate the coal power generating assets into one company (Accel Energy) isolating them from the retail customer company (AGL Australia). The rationale given is that the direction and interests of two parts of the business — the retail customer base and the coal generation assets — are incongruous. The AGL board argues that the two separate entities will be more valuable if separated.
There are significant flaws within this argument which reflect the misunderstanding AGL’s leadership has of the nature and pace of the energy transition. A misunderstanding that the AGL have indeed been forced to acknowledge previously.
AGL represents a standout case of a utility that can and should transition from fossil fuels to renewables. Separating the company represents not just a wasted opportunity but a risk of creating a huge, polluting stranded asset.
The AGL leadership have still not come to terms with the pace of coal power closure in Australia and the implications that has for rapidly escalating costs of capital for the Accel business (the coal generation arm of the proposed demerger). The AGL leadership imply that Accel will be in a position to lobby for market reforms that will create increased profit for coal power but this is a flawed view of reality. As can be seen by the significant industry, community and State Government push back to the idea of a ‘capacity market’, political support to support such changes is ice-thin. And the announcement by Origin Energy to bring forward the closure of Eraring from 2032 to 2025 shows us that AGL’s competitors see accelerated coal closure as the key path to transform their business.
AGL claims that a demerger will enable the retail arm to attract higher ESG ratings and cheaper capital costs. Yet the demerger structure includes a coal offtake between Accel and AGL Australia for at least 5 years. The AGL leadership is failing to appreciate the likely evolution and sophistication of ESG metrics and retail customers in the future. Without a plan to substitute the coal generation base with renewable energy by 2030, AGL Australia will lose ESG and retail credibility. The demerger means cutting off AGL Australia from the required cash flow from coal generation over the coming 5 or so years and instead saddling it with significant debt.
The AGL leadership have implied that once separated from its retail business, the coal generation arm would be freed up to advocate for market reform that favours coal generation. This is a misplaced hope that again fails to acknowledge the lack of financial and political support for coal power that continues to rapidly deteriorate.
As such, we urge shareholders to vote against the demerger and instead steer the company towards a strategy of accelerated coal power closure and investment in renewable energy.
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