Mike Cannon-Brookes, AGL, and the future of coal

Alec: [00:00:03] From Equity Mates media. This is The Dive I'm your host Alec Renehan. This year Australia has watched as an Australian billionaire goes head to head with a $6 billion company. In one corner we've got Australia's largest electricity generator, AGL, with a market value of $6 billion. And in the other corner we've got Australia's third wealthiest person, Mike Cannon-Brookes, with a personal wealth of $27 billion. Earlier this year, Mike Cannon-Brookes partnered with Canadian asset manager Brookfield to try and buy AGL. That effort was thwarted, but Cannon-Brookes has recently re-emerged, this time as AGL's largest shareholder. So what is all this conflict about? It's about the transition away from fossil fuels to a net zero economy. AGL is Australia's oldest and largest electricity generator. It is also Australia's largest emitter of carbon dioxide. The company plans to shut its lost coal fired power station in 2045 and has been resisting calls for it to accelerate these plans to shut down coal fired power plants, which has put it in conflict with Mike Cannon-Brookes, who has been using his considerable wealth to try and accelerate Australia's transition to a zero emission energy grid. This week the conflict came to a head and ended with AGL's CEO and the chair of the board resigning. It's Friday, the 3rd of June. And today I want to know what happened with Mike Cannon-Brookes and AGL and what does this mean for the future of Australia's electricity grid? To do this, I'm joined by my colleague here at Equity Mates Darcy Cordell. Darcy, welcome. 

Darcy: [00:01:49] Thanks for having me, Alec. 

Alec: [00:01:51] So, Darcy, this conflict between a billionaire and $1,000,000,000 company has really been centred around AGL's plan to split itself into two smaller companies. So let's start there. What was Eagles plan? 

Darcy: [00:02:02] That's right. AGLs leadership wanted to split the company into. 

Audio clip: [00:02:06] AGL, Australia's oldest energy company and the nation's worst polluter. For months it's been locked in a demerger battle, a plan to break into a retail energy arm carved off from its power plants. 

Darcy: [00:02:19] AGL today owns and operates a number of coal and gas fired power stations, a variety of renewable energy generators, solar farms, wind turbines and hydroelectric power stations. And IT services over 4 million retail electricity accounts. Basically, it generates electricity, and then people like you and me can sign up to AGL to get that electricity. 

Audio clip: [00:02:40] To understand, AGL, Australia's oldest electricity company goes back to the 1840s. The Australian Gaslight Company lit the first gas lantern in Sydney. 

Darcy: [00:02:51] As Australia's biggest generator. It's also Australia's biggest emitter. Fun fact AGL emits as much CO2 as the entire country of New Zealand or Ireland or Switzerland on its own.

Alec: [00:03:04] Darcy I don't know how fun that is. 

Darcy: [00:03:06] Not fun at all, to be honest. Now, AGL's plan was to separate today's business into two. 

Audio clip: [00:03:12] Now, the reason why it wanted to split in two was because it is also Australia's largest coal fired power generator. And so it effectively wanted to put those assets into one company and keep many of its Joseph friendly, ameco friendly assets and its retail arm into a separate business, which was to be called AGL Australia. 

Alec: [00:03:32] And I take it Mike Cannon-Brookes didn't like this plan. 

Darcy: [00:03:35] He certainly didn't. Mike Cannon-Brookes thought AGL should remain as one company and manage a transition away from coal and gas fired power plants themselves. Essentially, they should have a plan to shut them down and replace that electricity generation with renewable energy. 

Alec: [00:03:51] Okay, now let's go to AGL's plan and understand why they wanted to do it, because I'm wondering what splitting your self-interest solves. Like, does it does it help with an energy transition? Does that make you more money? Why would you want to split yourself up? 

Darcy: [00:04:05] It's a good question, and there's a couple of reasons. It allows AGL to progress towards net zero without having to actually manage the closure of coal fired power plants themselves. Secondly, it allows shareholders who are concerned about sustainability and ESG to own AGL shares. AGL will no longer be part of this coal fired power plant business and the shareholders who didn't care about coal can continue to own the Accel shares, which would be the other part of the business. So essentially not about making money or facilitating the transition to renewables. It was about splitting off that unrepeatable part of the company, similar to what Australia's largest supermarket, Woolworths, did when they sold their alcohol and pokies business. 

Alec: [00:04:46] Right. Okay. I can start to understand why Mike Cannon-Brookes wasn't a massive fan of this plan. What was he out there saying? 

Audio clip: [00:04:54] Okay, I'm a deep believer as the now largest shareholder in the future for this company decarbonisation that. Transition is a huge possibility for Australia as the largest retailer, the largest generator. I think AGL has a huge ability to benefit from that transition. I've been very clear that I think the demerger plan is the wrong way to go about that. 

Darcy: [00:05:11] Cannon-Brookes saw this plan as a step backwards if the company was to split. They were basically just wiping their hands of the responsibility. AGL's management team can say they're zero carbon and basically make it the problem of the new management of Accel Energy. Cannon-Brookes wants AGL to deal with the coal fired power plants rather than shift the responsibility to someone else. Then they'll have to plan to end their operations and move to new, cleaner forms of power generation. And importantly, AGL has the balance sheet or the money in the bank to do it a lot quicker than Accel Energy. In a nutshell, staying together forces a transition away from coal, whereas breaking apart would have just made it someone else's problem. 

Alec: [00:05:51] Yeah. Right. Okay, I understand that. So if AGL stays together, but getting pressure to be net zero, they have to deal with coal fired power stations and manage that transition and replace that energy generation with something else. Whereas if they just split it off, then they can be the chair and the CEO and the management team of a of a company that only has renewable energy assets and it's someone else's problem over there. So that's the back story there. And in the background, Mike Cannon-Brookes was quietly buying shares in AGL, emerged as Israel's largest shareholder and then this all came to a head this week. What happened? 

Darcy: [00:06:29] So for this demerger to go ahead, AGL needed 75% of shareholders to agree to it. 

Alec: [00:06:35] So to split themselves into 75% of the shares had to say yes. 

Darcy: [00:06:40] Correct. And Mike Cannon-Brookes bought up 11% of the company and he was obviously going to vote against the demerger.

Alec: [00:06:47] Yeah, it would be a surprising twist if he then voted in favour of it, so. 

Darcy: [00:06:50] That meant he only needed another 14% of shareholders to support him and they would block the demerger. 

Audio clip: [00:06:56] It's a just game, right? And we were playing chess, not checkers. So this is certainly the move. And ahead of us is is the demerger vote. And that's a it's kind of a democratic process. Right. All the shareholders get to vote. 

Darcy: [00:07:08] After the campaign intensified in recent weeks ago this week, realise they didn't have enough votes to move forward with the demerger. 

Audio clip: [00:07:15] The tech billionaires high profile campaign against the split this morning securing a stunning corporate victory. He tweeted huge day for Australia. It's a win for corporate democracy. In this particular case, it was a massive loss for AGL, the demerger defunct. 

Alec: [00:07:31] Okay, so that feels like a pretty big loss for AGL. They had Mike Cannon-Brookes obviously very high profile, but outside the company just come in and absolutely decimate their plans to the point where the CEO, the chair of the board and two other board members all resigned. 

Darcy: [00:07:48] Their positions were pretty much untenable.

Alec: [00:07:50] So then what happens next? 

Darcy: [00:07:52] So AGL now has to manage their full energy generation portfolio going forward. We don't exactly know what they're going to do next, who the new CEO will be or what Mike Cannon-Brookes is going to do with his massive 11% ownership in the company. All we know as of today is their plan to split themselves into has been blocked.

Alec: [00:08:11] Yeah. Okay. So this is a fascinating story, Darcy, and I think it's worth everyone keeping in mind that earlier this year, Mike Cannon-Brookes tried to buy the company. I wouldn't be surprised if the fact that AGL now doesn't have a CEO or a chair of the board and two other board members have left that maybe he tries to do it again. But we should broaden this story out because this AGL Mike Cannon-Brookes conflict doesn't happen in a vacuum. Australia has other energy generators and countries all around the world are similarly trying to manage this energy transition. So I'd love to understand what other companies are doing in Australia and around the world. But first let's take a quick break to hear from our sponsors. We've got to be able to afford our energy bills somehow. 

Audio clip: [00:08:58] AGL Energy is set to dump long running plans to demerge its coal focussed generation business, with chief executive Graham Hunt and the chairman Peter Botten expected to leave the company. The energy giant claims it's due to a lack of sufficient shareholder support. 

Alec: [00:09:11] Welcome back to the Dive. We're talking about the story of Mike Cannon-Brookes and AGL. But Darcy, I want to broaden this out and understand how other companies and other countries are doing with their energy transition. So let's stay in Australia to begin with. We're talking about AGL, who is Australia's largest electricity generator, but what are other Australian electricity generators doing? 

Darcy: [00:09:32] We'll talk about origin energy. They operate Australia's largest coal fired power station in Lake Macquarie, New South Wales. 

Audio clip: [00:09:40] Australia's largest coal fired power plant. Eraring Power Station is set to close in 2025, seven years earlier than planned. The Federal Energy Minister Angus Taylor is upset, claiming the early closure could affect power supply and prices. It also.

Alec: [00:09:55] So just to put that in perspective, they were bringing it forward to 2025 and AGL, the last power plant, Loy Yang in Victoria was going to close in 2014.

Darcy: [00:10:05] It really shows the difference in priorities between the two over. 

Alec: [00:10:09] 20 years difference. Okay. 

Darcy: [00:10:10] An interesting thing as well about this move from Origin is that they had to keep it secret from the previous Federal Government while working on it with the New South Wales State Government. Australia's former minister for Industry, Energy and Emissions Reduction, Angus Taylor, was critical of the move, suggesting it would put too much pressure on energy production. 

Alec: [00:10:29] So let's move on from that because we're here to talk about the energy business, not politics. So Origin have announced that they're going to accelerate the closure of the the biggest coal fired power plant in Australia. It looks like Mike Cannon-Brookes has succeeded in pushing AGL to do something similar with their coal fired power stations. Are we seeing a similar trend in other countries around the world? 

Darcy: [00:10:53] Yeah, we are. We're seeing a trend driven by two factors government policy and economics. Let's start with government policy and the UK is a good example of that. From the 1st of October 2024. Great Britain will no longer use coal to generate electricity, and that's a year earlier than previously planned. This policy was brought in by the UK government and it's going to be enforced. And the second driver is the economics of coal. So coal's share of electricity generation in the US has gone from 50% a decade ago to less than 20% today. But the reason for that is because 80% of existing coal plants across America actually cost more to continue running than it would cost to replace them with new local wind or solar power stations. So it's more about the money than the government policy. 

Alec: [00:11:41] Obviously, governments are putting policies in place to phase out coal because of climate concerns. But the incredible cost reduction we've seen in wind and solar over the last decade has meant that the economics of a coal fired power station don't really stack up anymore.

Darcy: [00:11:57] We'll play a little game here, Alec. 

Alec: [00:11:58] Great. 

Darcy: [00:11:58] Love it. I'm going to list some countries and tell you what percentage of their energy usage came from coal a decade ago. And you're going to guess what they're at today. Great Australia, 65% a decade ago. 

Alec: [00:12:10] Oh well Australia has a love affair with coal. All I'm going to say 70% today.

Darcy: [00:12:15] Not quite. It's now 40%. Okay. Come down about 25%. The US with 55% a decade ago. 

Alec: [00:12:22] Well, you gave me this answer in your previous response. So 20%. 

Darcy: [00:12:26] That was a task. Well done. Germany, 50% a decade.

Alec: [00:12:30] Ago, 50% a decade ago. I'm going to say 30% today. 

Darcy: [00:12:35] Not a bad guess, 24%. And here's one for you. The UK 40% a decade ago.

Alec: [00:12:41] Well, Darcy, again, you gave me the answer in the previous response. They're phasing it out next year. It's going to be lower. But I'm going to say they still got a bit of work to do. 7% today. 

Darcy: [00:12:51] Nice try. 1.8%. 

Alec: [00:12:54] Wow. Very low. Full credit. 

Darcy: [00:12:56] That's not to say that there aren't outliers. And Indonesia and Vietnam are two countries where coal use is still growing to a meaningful extent. But the eyes of the world are on China and India. They do continue to build more coal fired power plants, a brand. 

Audio clip: [00:13:10] New coal power station under construction in China's Rust Belt. This is how long Zhang Province. 

Darcy: [00:13:16] But China's coal use peaked in 2013, so they're on the way down and growth in India has slowed to a crawl. 

Alec: [00:13:22] That makes sense that Indonesia, Vietnam, China and India are still using more or so. Building more access to electricity is so important in bringing people out of poverty. But it is good to say that across the world, especially in Western countries, that coal use is slowing. The question then becomes looking at those overseas case studies, looking at the UK, looking at the US as coal use declines, what do we say? What are the issues that emerge? What are the challenges that these countries face? 

Darcy: [00:13:52] There are two big concerns when it comes to this global transition and their baseload power. And electricity prices. 

Alec: [00:13:59] All right. Let's start with baseload power and let's start with a definition. What does it mean? And then what are the concerns here?

Darcy: [00:14:04] Baseload power is basically the term for the minimum level of electricity required all the time. The 24 seven power to keep the lights on. There's concern that replacing coal or gas fired power with renewables will make the grid more unreliable. Where are we going to get that power from when the sun is shining or the wind isn't blowing? And this is where conversations around batteries come into play, but they're expensive and don't have the storage capacity required quite yet. Pumped hydro like Malcolm Turnbull. Snowy Hydro 2.0 is another good example. Nuclear is also brought up in conversation when we talk about zero emission options for baseload power and a greater emphasis on hydrogen is also discussed. But basically where we are at today is that there are options but no great options. It's a technological and economic challenge that still needs to be solved. Yeah. 

Alec: [00:14:55] Okay. Fascinating. I feel there might be a whole other podcast on that down the line, but you mentioned prices. Talk to me about my energy bills. How much am I going to be paying or am I going to be paying less for fuel? 

Audio clip: [00:15:06] The groceries, the cost of living, as we've been speaking throughout this election campaign has been hit. The big changes keep coming for Aussie households, with electricity companies confirming they'll be next to push out.

Audio clip: [00:15:15] Every time we turn around. There's been a price rise with our milk or our coffee or electricity, water. 

Darcy: [00:15:21] So Adam and Thomas from the Canadian Versus Economist podcast did a really good segment on electricity prices this week, and there's no denying it's getting more expensive. 

Alec: [00:15:30] Darcy, I'm just going to interrupt you there. I don't need a podcast to tell me my electricity prices are going up. 

Darcy: [00:15:34] I go, well, here's here's some stats for you. In September last year, prices were about $50 per megawatt hour. In January, they were $80, March $100. But the current price is about $300 per megawatt hour. The Australian Energy Regulator recently approved price increases for energy bills of up to 18% in New South Wales and 12% in Queensland. 

Alec: [00:15:58] There's no doubt that energy prices have gone up, but what's driving those? Is this about the energy transition? 

Darcy: [00:16:05] It's not about renewables per se, but it is about the transition that we're living through. A lot of these existing power stations, coal and gas fired, are coming to the end of their lifespan. They're becoming less efficient and more prone to malfunction, but they're not being upgraded and new ones aren't being built because of this transition to clean energy. So this is leaving a hole in electricity generation capacity in Australia, capacity is currently down about 20% and that's leading to this increase in wholesale energy prices. 

Alec: [00:16:35] Okay. So Darcy, two important things for I guess everyone to be mindful of during this transition. The question around baseload power, the question around energy prices. Let's ended on a positive note, though. Where where are the case studies that we can look to? Who like what are the countries that are successfully navigating this transition? Who's leading the way here?

Darcy: [00:16:55] Sweden, Norway and Denmark. They've topped the World Economic Forum's latest energy transition index.

Alec: [00:17:02] No surprise seeing the Scandinavians up there

Darcy: [00:17:04] and that index is released every year and it provides a numerical value for how well a country is doing in the transition to renewables. Now, it's obviously skewed to more economically advanced countries, but looking at the index, here are some of the leaders. So New Zealand's number eight in the world, Canada is number 22 in the world, and Canada's economy is often compared to Australia as resource rich. Australia is ranked 35th but one of the lowest of the advanced economies. 

Alec: [00:17:33] Okay, not, not great. 

Darcy: [00:17:34] And the US is 24th and the UK is seventh. So those countries on top of the energy transition index source most of their energy from hydro, nuclear and wind power. 

Alec: [00:17:45] Yeah. Okay, that's interesting. Obviously Australia not as strong in any of those, but we've just seen a federal election take place. There was a clear takeaway that voters want more action on climate change. We're currently 35. Let's see how high we can get to. 

Darcy: [00:18:02] The challenges on.

Alec: [00:18:03] Yeah, well, if Mike Cannon-Brookes is throwing his billions around, hopefully that can help get us there. But look Darcy, that does get us to the end of this episode today. I think we will wait and see what happens with AGL, but I think what we can take away from this episode is that the wind of change in the energy industry is blowing pretty strongly and it looks like AGL's senior leadership just got blown over by Wilson. Duh. All right. Well, thanks for joining us today on this episode of The Dive. If there's a story that you want us to talk about, contact us at the dive at Equity Mates dot com or follow us across all the social media channels. Those details are in the show notes. Remember to write and review in your favourite podcast app. It really does help and subscribe, so you'll be able to have every episode delivered to you the moment it drops. Darcy, thanks for joining us today. 

Darcy: [00:18:53] Thanks, Alec. 

Alec: [00:18:54] And we'll catch you Monday.