EcoGeneration talks to Tim Nelson, Head of Economics, Policy and Sustainability at AGL.

Why is the financial model of the Powering Australian Renewables Fund a gamechanger in the industry?


For some time, AGL has been talking about financing innovation keeping pace with technology innovation. We’re seeing new technology come into the market with the costs of this technology falling over time. Historically, utilities have been significant users of debt and are the third most capital intensive industry in the world from a debt perspective after governments and banks. The financing side of projects has historically been through project financing and other types of financing vehicles.

What we’re seeing with RET requirements is AGL and other retailers having to procure LGCs. From a project developer perspective, they want longer term contracts (PPAs) so they can attract project financing from banks. Due to credit ratings of some retailers not being sufficient to meet banking lending criteria or preferences not to take market risk for projects over their entire project life, we are seeing a financing barrier to getting projects across the line.

What this new Powering Australian Renewables Fund will do is provide investors with an appetite for renewable energy investment to jump into renewables on a large scale to facilitate renewable investment. By changing the way offtake structures are thought about – instead of long-term PPAs the fund is to be based on a short-term firm pricing, medium-term risk-based pricing and long-term merchant concept – we can overcome the financing barriers that have been in place over the last few years.

Who are the “small number of parties” who will be invited to contribute equity to the fund?

Australian-based investors taking a long-term outlook to renewables investment. There have been statements from superannuation funds and those type of investors that are looking to make sizeable investments into renewables. Those are the type of parties that AGL will be talking to.

Why are traditional renewable energy financing techniques no longer acceptable? With all of the changes in the market – be it demand, technology or consumer preferences – we are in a scenario where customers are more interested in a three-year contract while a project developer is looking for a 15-year commitment. For retailers, we have to match customer risk profiles with developer risk profiles. We want to overcome that issue and the fund will allow us to do this by providing firm pricing in the short-term and some degree of certainty for project developers through financial derivative options in the medium term, and in the longer term, at the back end, take some kind of merchant risk.

Do you foresee Australia meeting its RET as a result of this new fund?

I think it’s an important step towards the RET being met. This fund in itself is designed to facilitate around a fifth of the total MW that would be required, which translates to around 5000 MW. With our announcement, we have outlined that these are the steps we’ll take to facilitate renewables investment. We expect others to do similar things to overcome financing barriers. Beyond 2020, expansion of the RET will require some degree of complementary policy so our ambitions to transform the electricity sector depends on policy that provides signals for ageing coal-fired plants to exit the market.

Why did AGL choose to partner with Sunverge and what is AGL’s vision for a virtual power plant?

I think the reality is distributed energy resources will play a significant role in the coming decade or two. Consumers have a preference for greater control over how they use their energy to minimise their bills – whether it’s through advanced battery systems, storage management systems or energy management systems. With demand tariffs being progressively introduced, there will be a compelling case for consumers to adopt these type of systems. The investment with Sunverge is a consequence of that long-term vision. Increasingly we’re seeing consumers – whether through distributed energy and storage – act as both consumer and a producer; a manager of energy systems. Adoption of decentralised forms of distributed energy resources will continue to evolve.

AGL has said it will exit coal completely by 2048. Are there any strategies in place to bring this forward?

2048 represents the end date. Andy Vesey, our CEO, has said if circumstances change, the date could be earlier. We’re not renewing assets beyond their operating life. The first hard deadline is the closure of the Liddell Power Station in 2022 and Bayswater Power Station in the 2030s and Loy Yang in 2048. So much depends on government policy, but what we have tried to do is take a leadership role because there’s a move towards distributed energy and large-scale renewables. It’s important that as a business, we reflect consumer and society sentiment.