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AGL Energy Limited 64
Climate change adaptation risks
Climate change and climate change mitigation policies,
such as carbon pricing, bring a number of additional risks
to AGL’s operations and investment strategy.
Extreme weather events and changes in weather patterns present
risks to AGL’s business in terms of physical impacts to energy
infrastructure, as well as financial risks associated with changes
in energy demand.
Categories of climate change adaptation risk
Energy demand
Demand for electricity in Australia is correlated to both economic
activity and temperature. Historically, as the economy grows,
so does demand for energy. As temperatures rise, so too does
the demand for electricity because of higher utilisation of air
conditioning. Wholesale electricity prices at peak demand times
can often increase by several thousand percent. Electricity demand
is likely to become peakier with increased summer air conditioning
load. Peakier characteristics of the electricity sector require retailers
and integrated energy companies such as AGL to devote significant
resources to managing price volatility. AGL’s recent acquisitions
and investments demonstrate strategic efforts to manage price
volatility. These commercial risks are being managed by consistently
updating forecasts of energy demand based upon the latest
temperature and other weather data; and investing in assets
that provide profitable solutions, such as gas and hydro peaking
generation and gas storage capabilities.
As a result of changes to the collation of data, the uptake of energy
efficiency initiatives, the deployment of solar PV panels and general
price elasticity of demand, underlying energy demand forecasts
have been reduced by the Australian Energy Market Operator.
Unfortunately, in the context of climate change it is likely that
peak demand will continue to grow in excess of underlying energy
demand. This has a number of negative consequences, including
a deterioration of the capital stock utilisation. In other words, it
is the gap in the growth rates of peak demand and underlying
energy demand that create problems for consumers and producers.
Accordingly, AGL has been a leading advocate of the introduction
of smart metering technologies and dynamic pricing to provide
incentives to market participants to reduce peak demand (see AGL
Applied Economic and Policy Research Working Paper No. 24 and
AGL Applied Economic and Policy Research Working Paper No. 31 at
Physical risks to infrastructure
AGL owns a number of power stations and gas production assets
in the eastern states of Australia. The adaptation related risks to
AGL include both physical damage and reduced supply reliability.
Physical damage could result from extreme weather events including
exceptional bushfires and floods, which may reduce operating
capacity. In turn, reduced supply reliability could potentially impact
AGL’s ability to supply retail customers cost-effectively.
Water availability risks
AGL owns a number of hydro electricity generation assets. When
these assets were acquired, a key element of the due diligence work
undertaken involved long-term hydrology considerations.
Regulatory risks
AGL has identified climate change, and the changing regulatory,
economic and social environment impacts associated with mitigation
policies, including the introduction of a carbon price, as a significant
key risk.
AGL seeks to help its customers use energy more efficiently to
lower their energy costs and to reduce their own greenhouse gas
emission footprints. The Energy Services business unit provides
strategic consulting advice on climate change risks and opportunities
to customers, implements projects that reduce a customer’s
carbon footprint, and assists in managing exposure to increased
costs related to climate change policy responses. Preparatory work
undertaken in the latter half of the last decade advising customers
of the need to understand energy efficiency opportunities is
beginning to lead to significant project opportunities.
In FY2012, AGL held a number of workshops for our customers
providing advice in relation to minimising the impact of carbon
pricing on their businesses. These workshops had a strong
practical component in relation to energy efficiency opportunities.
To complement this information, AGL provided a ‘checklist’ for
companies to utilise to understand how carbon pricing will impact
on their bottom line (see AGL Applied Economic and Policy Research
Working Paper No.21). Working with customers in this way is critical
to AGL’s long-term success.