Chart of the Month - October 2023

Australia has the tenth-highest Greenhouse Emissions (GHG) per capita in the world. Our top ten GHG emitters produce 45% of our emissions. Seven of these emitters are electricity producers (see chart below). The fourth-largest emitter, Origin Energy, is currently facing a takeover bid. The largest emitter, AGL, rebuffed a bid last year. Australian energy companies are facing a challenging transition to green energy. A transition that provides opportunities.

Takeover fever

Once bitten, twice shy, unless you are a nearly trillion USD Canadian investment company.

Back in February 2022, Brookfield Asset Management tried to take over the Australian energy producer and retailer AGL for AUD 5 billion in a private equity buyout. They partnered with Australia’s then second-richest person, Mike Cannon-Brookes, co-founder of tech startup Atlassian. However, after a second failed bid in March 2022, they gave up.

Early in November, Brookfield turned their attention to AGL’s chief rival, Origin Energy, launching a AUD 19 billion takeover bid. Brookfield wants to demerge Origin’s energy generation and retail business. They have also pledged to invest AUD 20 to 30 billion in renewable energy and storage by 2033 if their bid is successful. So far, Brookfield’s bid and an alternative bid which sees Brookfield partner with EIG Global Energy Partners has been rebuffed. A shareholder vote is being held on 4 December.

In addition to opposition from the Origin board, Origin’s largest shareholder AustralianSuper (17%), which is Australia’s largest pension fund, is also against the bid. They do not believe that the bids are in shareholders’ interest and believe that the company can handle the green transition better on its own. 

“AustralianSuper believes the ongoing energy transition has further enhanced the value of strategic energy transition platforms, such as Origin … and is open to providing capital to assist Origin as it prepares to transition over the coming decades”. Statement by AustralianSuper, 23 November, 2023.

Meanwhile, Cannon-Brookes ended up buying a 11% stake in AGL in May 2022. With that stake and his profile, he was able to convince enough shareholders to scupper the board’s plan for a demerger of the company’s energy generation and retail business. Instead, Cannon-Brookes wants the company to close down its coal-fired power stations early and transition to green energy. Cannon-Brooke has already invested heavily in solar power.

Green gold

Brookfield and other PE interest in Australian energy is evidence of the opportunities in Australia’s green energy transition.

Australia has a huge potential in renewable energy such as solar, wind, and green hydrogen. While investment in these industries is growing fast as is energy generation (see chart below), the potential is huge. The installed base or renewable energy is expected to grow from 46 gigawatt in 2023 to 79 gigawatt by 2028 according to Mordor intelligence.

Australia is also playing a global role in the global LNG market, which rightly or wrongly is being used as a transition from “dirtier” fossil fuels like coal. In 2022, Australia was the second-largest exporter of LNG (20.7% of global exports).

Then there is its overlooked potential for nuclear power. Australia has the largest recoverable uranium reserves in the world: 31% of global reserves. At the moment, it only produces around 11% of global production and does not have a nuclear power station (just a research reactor).

What does this mean for Private Debt in Australia?

In addition to the larger energy companies, Australia is also developing energy startups and cleantech companies across the supply-chain. This will present a once-in-a generation opportunity for investors. Most of these companies are not publicly listed, instead investors can look at pre-IPO investments or at private debt funds exposed to such companies.