WHAT can we learn from the AGL takeover bid by Brookfield Asset Management and Mike Cannon-Brookes’s Grok Ventures?
Anyone with a charcoal barbeque has some sense of the challenge facing coal as a power source.
Coal takes a while to heat up and you need to keep adding more to keep it hot.
Historically, this wasn’t much of a burden. Steam-powered locomotives worked fine as long you had someone shovelling more coal in.
Why is it a problem now?
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Health and economics.
Coal is one of the dirtier ways to produce energy. Burning coal releases a lot of carbon emissions as well as air pollution in the atmosphere.
Coal will need to be phased out to reduce emissions and prevent the extreme consequences of climate change.
But there’s also economics at play. With the rapid increase in renewables, the economics of energy has changed.
It’s far too simple to say renewables are cheaper than fossil fuels, especially accounting for transmission costs. But the way the wholesale electricity market works, when renewables are available, they are often the cheapest bids and get dispatched for use in the grid.
Gas can be turned off when the sun is shining and the wind is blowing. Coal stays on, so there are times when it’s burning and making no money.
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These are also the issues behind the news that the coal-fired Eraring power station will close seven years earlier than planned.
AGL, as the country’s biggest emitter, has announced plans to split up its coal and renewable assets into separate businesses.
The Cannon-Brookes/Brookfield takeover bid can be viewed as a challenge to management’s plan.
The consortium doesn’t believe the business should be split up, but it should more aggressively phase out coal.
For investors, the changing economics means businesses exposed to coal face real credit risks as well as decreased demand due to ESG concerns.
We also need to consider a range of flow-on effects to understand credit risks for investments and asset allocation.
There’s been a lot of focus on stranded assets such as coal-fired power plants which won’t be economically viable for their originally planned lifespan.
But we’ve also been divesting from coal-adjacent businesses such as coal transportation railways due to fears they won’t be able to generate revenue when coal ends.
Concern about climate change is changing the way our energy system operates.
The flow-on effects aren’t restricted to takeover bids.
It’s become a vital part of credit analysis.
Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
Regnan Credit Impact Trust is a defensive investment strategy that puts capital to work for positive change.
Pendal Sustainable Australian Fixed Interest Fund is a defensive Australian bond fund that delivers market-leading performance with positive environmental and social outcomes.
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