Page 72 - AGL Sustainability Report 2011

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Climate
change
AGL Energy Limited 70
Sustainable generation sources
Carbon price
“AGL wants to see the bipartisan emission reduction
target achieved at the lowest cost to our customers and
all Australian families and businesses”, AGL CEO and MD,
Michael Fraser, 10 July 2011
Approach
AGL has continued to be a leader in the energy supply sector in
advocating the introduction of a price on carbon. AGL’s Climate
Change Council, consisting of non-government organisations
advocating climate change policy, continues to meet quarterly to
inform AGL’s policy and strategy. Research by AGL economists
completed with assistance from The Climate Institute (a member
of the AGL Climate Change Council) has conclusively demonstrated
the material economic costs being imposed upon the community
because of a lack of political agreement on the policy mechanism
to deliver emission reductions that have bipartisan support.
This research led to the establishment of the Commonwealth
Department of Resources, Energy and Tourism Investment
Review Group and completion of a report by Deloitte confirming
these findings.
Despite uncertainty regarding bipartisan political commitment for
the introduction of a price on carbon emissions, the vast majority
of industry commentators and representatives, including the Energy
Supply Association of Australia, support the introduction of a well-
designed national emissions trading scheme (ETS). AGL supports
the introduction of the Commonwealth Government’s Clean Energy
Future package, and specifically placing a price on carbon on 1 July
2012. Adopting a market-based trading approach will allow Australia
to achieve its 2020 greenhouse gas reduction target range of
5%-25% below 2000 levels by 2020, in a way that minimises costs
on Australian families and businesses.
AGL continues to strategically prepare and measure performance
in relation to the management of greenhouse gas emissions.
AGL is well prepared to participate in emission reduction activities.
The National Greenhouse and Energy Reporting Scheme requires
AGL to disclose scope 1 and scope 2 emissions. Although a
compliance obligation, this reporting protocol directly feeds into
AGL’s investment strategy and risk management. AGL is progressing
its carbon risk assessment process beyond mitigation to more
closely look at adaptation issues, and has continued to update
vulnerability assessments of critical infrastructure, working off the
release of updated information on the impacts of climate change on
Australia’s physical climate.
Domestic emissions trading
AGL’s integrated strategy reflects the acceptance of
Intergovernmental Panel on Climate Change advice that significant
greenhouse gas emission reductions are required by the middle of
this century to stabilise the concentration of CO
2
e in the atmosphere
and the adoption of a price on carbon to achieve such reductions.
A key metric to measuring performance of the implementation
of this strategy is the anticipated uplift in AGL asset value due
to the introduction of a carbon price. The uplift in value is based
upon modelling the impact on wholesale electricity prices due to
carbon costs and comparing it with the costs that AGL’s electricity
generation assets would incur. Advancing this metric will require
investment in low-emission generation and the deployment of new
renewable energy generation. For several years, AGL has outlined
scenario analysis in relation to the impacts of carbon pricing (refer
to 2009 Sustainability Report).
Clean Energy Future – Impact on AGL
Australia’s electricity supply sector is dominated by coal fired
generation, providing some 81% of Australia’s electricity
(esaa 2010). Consequently, electricity generation accounts for
over one third of greenhouse gas emissions in Australia. Consistent
with the Board approved AGL Greenhouse Gas Policy, AGL has
identified that placing a cost on greenhouse gas emissions will alter
the economic incentives for electricity generation. In particular,
lower intensity generation over time will become comparatively
lower cost relative to coal fired generation, increasing its market
share and contributing to the reduction of Australia’s greenhouse
gas emissions.
In terms of electricity generation and upstream gas assets directly
owned or controlled by AGL, an ETS would require AGL to pay a
carbon price (fixed for the first three years and variable beyond
2015) for each tonne of greenhouse gas emissions. It would also
require AGL to pay a carbon price for the combustion emissions
associated with small gas customers, including households. In
addition to the costs incurred in paying the carbon price directly,
AGL would also experience increased costs in electricity and gas
purchased from wholesale markets, as those producers seek
to recover their costs for paying a carbon price for their direct
emissions. Subsequently, energy consumers will face uplifts in
energy prices as the cost of emissions is introduced to the energy
supply chain. After several years of ongoing detailed analysis,
AGL has a thorough understanding of these aggregated impacts
on its business.
Mandatory markets
AGL has continued to participate in the existing climate-related
markets such as the New South Wales Greenhouse Gas Reduction
Scheme, and the Queensland 13% Gas Electricity Scheme.
AGL considers the existing state-based mandatory ETS markets
have a key transitionary role to play for preparing industry for a
national mechanism. However, once a national ETS does commence,
these schemes should be discontinued in a manner that preserves
or compensates the value of investment decisions made under
these schemes.
Voluntary abatement
AGL has secured significant customer contracts for renewable
energy, which effectively underwrite new renewable energy
projects. Through these contracts, AGL is meeting its goal of
being Australia’s largest retailer of new renewable energy, selling
over 1 TWh annually.
International emissions trading
AGL does not have facilities operating outside of Australia. As such,
AGL is not engaged in international emissions trading.