The boss of Australia’s largest emitter of greenhouse gases says his company needs to be out of the “CO2 emissions business” regardless of what they think of the science of climate change, simply to manage the financial risk.
“We’re not necessarily out of the coal business and it’s not fossil fuels because we’ll still use gas. We need to be out of the CO2 emissions business,” Andrew Vesey, the chief executive of AGL told Guardian Australia. “We’ve done a lot of thinking around this and we believe our view of the future will be restraints on carbon emissions.”
Vesey also admitted the expense of decommissioning power plants and mines and returning them to their natural state – the so-called rehabilitation cost – was a concern at the top of their “issues list”.
AGL, established in 1837 as the Australian Gaslight Company, is a $12.3bn company and provides gas or electricity to 3.7 million people in eastern Australia. Before 2012, it was Australia’s biggest investor in renewable energy. Then it went on a buying spree of coal-fired power stations, making it also Australia’s biggest investor in coal power and Australia’s biggest greenhouse gas emitter.
But in what appeared to be an about-face last year, less than six months after Vesey took control, AGL announced it would be not be involved with conventional coal-fired power generation after 2050 and said the company supported a target of less than 2C of global warming.
“It’s nothing to do with the science – it’s irrelevant what I believe. If markets believe it, if customers believe it, if investors believe it, if government is making policy, then what I have is a significant risk in my portfolio that I have to mitigate,” Vesey told Guardian Australia this week.
In practice, the announcement last year meant the company would run its coal-fired power stations through to the end of their life, including Loy Yang A, the country’s biggest-emitting generator, which produces 15m tonnes of CO2 each year.
But it also meant AGL wouldn’t extend the life of those plants or invest in any others unless they had carbon capture and storage.
Critics said the move was merely window-dressing, arguing the closure of coal-fired power stations by mid century was inevitable. And it meant the country’s biggest polluter would continue running the most polluting power station until the middle of the century – something that seems at odds with a target of 2C of warming.
But Vesey argued it was a significant move. “We fundamentally said we … are not going to extend the lives of the plants, which is quite a big commitment if you think about it because that’s a very low cost option. And the last thing you want to do as the manager of a company is close off options, but we did. And we said we wouldn’t finance any new plants and we wouldn’t acquire any new plants.”
Critics also questioned the timeframe. “People immediately came out and said 2048 is too long,” Vesey said. But change needed to be managed carefully.
“Change takes a long time but when it comes everybody is always surprised. The impacts on customers on communities and on shareholders are [more] significant the faster you do this. The quicker you want to try to do this, the more you need the intervention of government.”
He said that announcement was a first move in an uncertain environment. “We did this in an environment where there was no clear policy about transition – there were no set goals.”
At the time the Australian prime minister Tony Abbott had been trumpeting the importance of coal, having famously said it was “good for humanity”.
“If things change, if there are other mechanisms, they could be brought forward – if there’s consensus in the policy framework,” Vesey said. “But we have been very clear about what we’re doing.”
Vesey supports a price on carbon. And previously, he has said the government should simply mandate that old or dirty power plants be shut.
Asked if that meant AGL would be looking for compensation for shutting plants, Vesey said he didn’t believe plants should be paid for closure. “We believe that you’ve made the investment and you take the upside of that. But if you’ve made an investment that is not right, there must be some accountability for investors.”
But Vesey went on to say he’d be supportive of anything that helped develop consensus around the closure of ageing plants. He has previously been critical of an idea by Frank Jotzo from the Australian National University, where competitors would bid in a reverse auction for how much they needed to be paid by other companies to shut their plant. But Vesey now said the idea could work.
“It’s not what we would have argued for,” Vesey said. “But if somebody comes up with this and it’s politically acceptable … if it’s doable and it gets capacity out of the market then we would take a very hard look at it. We won’t stand in the way of anything that does that.”
But environmentalists have pointed out that shutting power plants and coalmines raises the prospect of decommissioning and rehabilitation costs that companies might not be prepared to pay for.
A Credit Suisse report from January noted AGL only had $77m put aside for rehabilitating its Loy Yang power plant and associated mine, which will leave them $320m short when it closes in 2048.
AGL disputes the way the way the provisioning is calculated to grow over that time, but Vesey admits that a blow-out of rehabilitation costs is at the top of their “issues list”.
If mines are closed early, that could mean they need to find more money. But Vesey said he was more concerned about costs associated with stricter demands on rehabilitation in the future.
“The world changes. So is there a sense that expectations in 2048 for rehab will be different than today? I’d say yes.”
Since the first of AGL’s coal power plants closes in just six years and it is already beginning to deal with rehabilitation of the coal seam gas projects it’s pulling out of, Vesey said the company was confronting the issue now. “It’s becoming very real to us and we really want to take a position that is ahead of where we need to be so that we can have a conversation.”
In December Vesey attended sideline talks at the Paris climate conference and shortly after announced a $3bn Powering Australian Renewables Fund (Parf).
It was met with headlines declaring AGL was going greener, but critics were quick to point out it aimed to create 1,000MW of renewable capacity, which is roughly AGL’s share of the government’s renewable energy target.
Vesey dismissed that criticism, saying that between the Parf and its other renewable ventures, “we’re going to blow the doors off the renewables target.”
But to get renewables moving, Vesey argued the basic problem was the balance of supply and demand, and to fix that old coal-fired power stations needed to be shut down one way or another to lower supply.
“The fact of the matter is you can’t continue to add capacity to a market that is over supplied.” If supply was lowered, wholesale prices would go up, which would make investment in new infrastructure more profitable, he said.
“It’s 7,000MW oversupplied and we’re adding 5,000MW just to hit the RET target.”
“Having the target, while good, is not enough. My view is that, you need to get to the fundamentals of what’s preventing private capital from moving.”
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