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By John WilsonDirector of Corporate Engagement, Calvert Research and Management

Washington - On Monday, Australia's top power producer, AGL Energy, announced that it would abandon plans to separate the company into a retail electricity provider and a generation business. The company is one of the most carbon-intensive utilities in the world, by some measures, because of its dependence on coal. The demerger was promoted as a means of accelerating the company's decarbonization.

Prior to that announcement, Calvert released an investor letter expressing our concerns about the proposed demerger. While some active investors expressed skepticism about the likely financial benefits of the proposed restructure, our letter detailed concerns about the proposed demerger proposal as it related to a robust climate change mitigation strategy. AGL Energy claimed that separating the company into independent retail and generation businesses would accelerate a low-carbon energy transition at both companies. We anticipated that it would instead greatly slow the company's energy transition by leaving the retail company in a financially weaker position and a cash-rich generation business without incentives to invest in renewables. In Calvert's view, the result would have been the creation of two entities that are poorly positioned to support Paris-aligned decarbonization goals.

We recommend that AGL Energy instead continue to run the coal plants through 2030, in line with the Paris agreement, and recycle the cash flow into a carbon-free generating fleet. This appears to us to be a more promising strategy over the medium and long term. It could create commercial opportunities to convert customers to new long-term contracts while also improving the company's emissions profile.

There are several steps that the company could take to reassure shareholders that it is positioned to execute on its energy transition plans:

  • In selecting new leadership, prioritize skill sets that are relevant for energy transition and the management of renewable energy resources.
  • Engage stakeholders and the state and federal governments to establish collaborations in support of a just energy transition that takes into consideration the needs of workers, communities and consumers.
  • Create management incentives to deliver on ESG commitments.
  • Disclose a clear plan for fossil fuel plant retirements, including appropriate capital expenditures, and explain how the company is using favorable market conditions to accelerate retirements and investments in clean energy.

You can read our letter to investors here.