The case for buying AGL
Energy is on everyone’s lips. First, Australia’s two biggest energy companies announce they will retire coal-fired power stations early. Great news: this is what climate science requires. Then Brookfield Asset Management and Mike Cannon-Brookes make a stunning play to buy AGL and rapidly replace coal with clean energy. Also good.
To anyone watching the electricity industry closely, however, none of this is surprising. It just makes sense.
I’d love to tell you I think there’s a great ecological awakening happening across the boardrooms of the world. But in reality it’s just about profits. Clean won the energy wars. Batteries and renewables are where the smart money is at.
Coal-fired electricity has become increasingly unprofitable and risky for investors. In America, utilities are voluntarily retiring coal early because it is cheaper to supply their customers with clean energy.
I’ve just returned to Australia after 25 years in the United States, where I am known as an entrepreneur and inventor. I have founded more than a dozen technology companies employing more than a thousand people. My laboratory has won more advanced energy research and development grants than almost any American research university. I have analysed the US energy system for the Department of Energy.
If I were assessing the price of AGL, the bits I would value are its customer base – Australia’s largest, at just under 40 per cent of the retail market – and its grid connections. Its coal generators, on the other hand, I’d value at less than a dollar.
While all the focus is on replacing generators with generators, if I had AGL’s millions of consumers, I wouldn’t be looking at replacing big coal-power stations with their equivalent in big wind and solar. I love big renewables and have built and sold companies in offshore wind and industrial solar. But something even more revolutionary is happening under the radar.
Consumers have become producers and stand to massively benefit, even if some Australian politicians like to shrug off rooftop solar as a minor novelty.
That means the future of energy in this country is about more than replacing big coal with big solar and wind. A new era of abundant, ultra-cheap, clean electricity is possible through consumers becoming competitors to their utility.
While the media and politicians seem obsessed with the traditional supply side of the energy equation, the real challenge comes with seizing the opportunities traditionally associated with the demand side of the market.
My Rewiring Australia project has been established precisely for this purpose – to decarbonise domestic power consumption. We want to rapidly replace the fossil fuel-powered technology in our cars, kitchens and heating with better technology powered by clean and cheap renewable electricity. Induction stoves instead of gas cooktops, heat pumps instead of gas heating, electric vehicles instead of combustion engines – and all of it backed up by sun-powered batteries.
This requires a massive shift in thinking. For decades we have been told the key to fighting climate change was to use less energy. Today’s technology requires no such sacrifice – we just need to switch the type of energy we use.
The fastest, cheapest and most effective path to zero emissions requires us to relentlessly pursue a basic concept: electrify everything and back it with renewable energy.
The scientific, economic and engineering path to rapid decarbonisation exists and no nation is better placed to be a torchbearer than Australia. But we must dispense with the misinformation and analytical laziness that has been on high rotation.
Chief among the popular myths is the idea that coal-fired electricity is more reliable than renewables. Capacity factor measures the percentage of time a plant is operating at its peak. A perfectly working coal plant (or any energy source) running all the time has a capacity factor of 100 per cent. Coal plants in Australia have fallen from 88 per cent to 67 per cent in the past decade.
According to The Australia Institute’s Gas and Coal Watch research, between December 2017 and December 2019 nine of Australia’s power plants, including Eraring, Liddell, Loy Yang A and Yallourn, broke down at least 10 times each. Even a younger plant, Queensland’s Callide C power station, broke down eight times in one year, causing widespread blackouts.
The idea that anyone wants to spend hundreds of millions of dollars on the maintenance of these plants is beyond fanciful. The idea the government should intervene to keep them running is irresponsible.
By comparison, wind and solar are very predictable. They may have capacity factors of about 35 per cent (wind) and 25 per cent (solar) but we know when the sun will come up and when it will go down. We can forecast wind quite accurately a week out.
With coal plants the risk is highly concentrated and highly unpredictable. Unlike solar and wind, they fail at random. When mixed together, solar and wind become far more reliable and predictable than either alone. When you add hydroelectricity, such as Tasmania and Snowy 2.0, the combination of all renewables from multiple sites and sources is more reliable and more predictable again.
Then you add the kicker: millions of rooftop solar panels, the ultimate in resilient design, connected to batteries in our homes, cars, communities and businesses. Any decent financial adviser will tell you to diversify your portfolio. The same logic applies to energy. Many sources spread the risk of our power supply effort, making us stronger individually and collectively.
So, the answer to the overemphasised question of “What will replace coal?” is not “A big battery” or “A wind farm”. It’s a more reliable, more predictable and ultimately cheaper combination of wind, solar, hydro and batteries. The grid will get better, the electricity will get cheaper, and the electricity from our rooftops will be the cheapest of all.
AGL management knows this. That’s why the company was already on a path to separate its fossil fuel assets from its renewables. Mike Cannon-Brookes and Brookfield have just given them a better idea to do it sooner and more deliberately.
This plan would deliver certainty for communities, workers and power-plant operators. We could have an honest time line for phaseout and prepare for the many opportunities to redeploy skills into the next source of Australian prosperity, clean energy.
The other great area of misinformation concerns prices. Definitively, energy prices will go down. Solar is now being installed at approximately $1 per watt (W) of capacity. After financing, that’s about 6 cents a kilowatt hour (kWh) delivered to you from your rooftop. This is about a quarter of the price of electricity from the grid. Managing a transmission and distribution grid is not cheap.
We can now say, with absolute confidence, that the cheapest electricity of the future will come from rooftop solar. Did you read about the exciting breakthroughs with fusion this year? Well, regardless of whether it ends up working – even if it generates free energy – it will cost more for the grid to get that electricity to a home than if the home generated it. So rooftop solar is here to stay – and we should move aggressively towards maximising it.
But let’s be clear: rooftop solar supply won’t be able to supply all the energy of a household all the time. If we electrify the heating systems and all the vehicles in a household, electricity consumption will increase about 250 per cent. Up to about half of that can be generated on site, perhaps more if you have a big roof or you don’t drive much.
Our use of electricity will double but our use of energy will halve.
So, we will still need the grid in the future, and it will need to be based on renewables. But given these are already cost competitive against gas and coal generators, and they are still dropping, their contribution too will be cheaper.
Batteries are the final piece that require clarity. Today, they find themselves roughly where solar was 10 years ago: not yet cost optimised and facing too much regulatory “green tape”. But we can see where the future is going.
Today it costs $16,000 to install a 13kWh battery – about $1200/kWh. They last about 5000 cycles under warranty, making the per kWh cycle cost 20 cents/kWh. That’s too expensive. But the new cells available at factory gate are now at $120/kWh and falling. For perspective, the $60,000 Tesla 3 comes with a 60kWh battery – cheaper than a battery on the side of your house and you get a free car.
The job of government is to see these trends coming and remove hurdles. Government should be designing the market to create savings for the general public as soon as possible and in greater quantity. Unfortunately, we are yet to see that.
So, in the absence of clear government direction, small wonder we are seeing ambitious private capital stepping in. Even though Mike Cannon-Brookes is a financial supporter of Rewiring Australia, I haven’t discussed the AGL bid with him. But for the reasons I have laid out, I suspect his play is about much more than retiring the coal-fired power generators or the natural gas. He can see how this revolution will deliver more to the consumer at a lower cost.
Governments are ultimately responsible for solving the climate crisis on behalf of the people. The experience of Covid-19 should remind people that the state is here for us all. But governments are often unambitious and time is so short that I wonder if a few billionaires around the world, investing in policy disruption and energy innovation, might give us the climate blitz of the early 2020s.
Cannon-Brookes will know the main game is connecting four million users to the cheapest energy humanity has ever known. Renewables deliver what it says on the box: infinite energy. All we need to do is nail the question of capital investment and we can completely change the story of climate and energy from one of sacrifice to one of abundance.
This article was first published in the print edition of The Saturday Paper on February 26, 2022 as "The case for buying AGL".
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