AGL Pays the Price for Renewables: $1.9 Billion WInd Power Writedown

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In today’s Money Morning…spitting in the wind…there is no stopping the change that is coming…the future is looking bright for clean energy…and more…

2020 was a tough year for energy companies.

Or rather, it was a tough year for traditional energy companies.

Power prices had already been on a downward trend, but then the pandemic came into the picture. Resulting in plummeting demand, sending power prices to their lowest levels since 2015.

All the while, the renewables revolution was knocking on the door. Threatening to displace coal and gas markets with clean, green, and cheap electricity.

And for the most part, it has.

Renewable energy companies and downstream suppliers have gone nuts lately. Revelling in a market that has minted a whole lot of wealth.

But, like I said, the old guard hasn’t been so lucky. With many well-known energy companies of the past now stuck in a bit of a pickle.

Case in point was yesterday’s rather unfortunate writedown from AGL Energy Limited [ASX:AGL]. Announcing $2.69 billion worth of impairments on their power assets. Most of which they have blamed on said falling prices.

But, perhaps the biggest surprise was the fact that $1.9 billion of this writedown was attributed to wind power. With AGL flying the white flag for its once progressive renewables push.

So, could this be a sign that the green energy boom is nothing but hot air?

Energy expert Selva Freigedo reveals three ways you can capitalise on the $95 trillion renewable energy boom. Download your free report now.

Spitting in the wind

I’ll admit, at face value, when you hear that AGL is writing off wind assets, it doesn’t sound good. At least, not for those cheering on a renewables boom.

After all, AGL has been in the energy business since 1837. A preeminent player that has overseen and overcome plenty of market challenges in the past. So, if they can’t make wind power feasible, what hope does the rest of the industry have, right?

While that is an interesting question, unfortunately it is an irrelevant one.

See, the reason AGL has had to write off billions on these wind farms isn’t because they were a failure. Quite the contrary actually. The reason is that AGL wrongly predicted that energy prices would keep rising.

In fact, AGL doesn’t actually own these wind farms.

They simply built them, then promptly sold off their equity for a quick buck, and then bought back the rights to the actual energy output via a power purchase agreement. Thereby giving them more power to sell to customers, without holding onto and maintaining the costly infrastructure.

It was an interesting strategy, that’s for sure.

The only problem is these agreements locked AGL into paying a hefty premium. With the company willing to commit to prices of $100 per megawatt-hour (MWh) in 2010. Which isn’t adjusted for inflation either.

Meanwhile, today’s power prices are trading closer to $50 per MWh. Half the price that AGL is forking out for power generated from an asset that they built.

Obviously, that’s bound to sting. Especially as the actual owners of these wind assets — currently AMP Capital — are making a killing from these deals. And if the price of power keeps falling, which it may if the renewable revolution lives up to the hype, then AGL could be even worse off.

Suffice to say, wind power clearly isn’t the problem.

Instead, it was AGL’s risky bet that power prices wouldn’t go down.

There is no stopping the change that is coming

Getting back to my original point then, it is clear in this instance that renewables are not to blame.

Don’t expect to see a reversal of this trend anytime soon either. With 2020 seeing Australia lead the entire world for renewable take-up.

We are now 10 times faster at deploying new renewable energy projects (per capita) than the global average. As well as four times faster than Europe, China, or the US.

Clearly, there is no stopping this transition.

And why would we want to when it is only going to ensure power prices to stay lower for longer? Providing more competition to keep the market on its toes.

Granted, I am not suggesting renewables are a perfect solution right now.

There are still some pitfalls to the various types of green power. Much of which still has to be made up for via traditional fossil fuels.

Not to mention challenges related to our ageing grids and power networks. Infrastructure that wasn’t built to handle the demands and needs of some of these new renewable power sources.

Again though, these are just challenges yet to be overcome.

In time, whether it be five, 10, or 50 years, renewables are our future. There is no denying that. As for what it will look like, or how it will operate; well, that’s a little harder to say.

Because as AGL has learnt this week, even if you bet on the right strategy, you can lose it all via the wrong outcome.

A timely reminder as to just how fickle markets can be. Even for the most seasoned of experts.


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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