Transformation of the energy sector.

Climate change policies and concerns about energy security are influencing the development of energy markets around the world. AGL has developed an integrated energy strategy which recognises that sustainability is integral to maximising value during a period of rapid transformation. This section of the AGL Sustainability Report explains how energy markets are changing and what this is likely to mean for many of our stakeholders.

Globally, energy policy makers are primarily responding to three public policy issues: anthropogenic climate change and air quality; energy security; and fuel poverty.

Climate Change and Air Quality: In many countries, governments are establishing emissions trading schemes and other policies to reduce greenhouse gas emissions from the energy sector. For example, the European Union Emissions Trading Scheme requires emissions to be reduced by 20% -30% of 1990 levels by 2020. Domestically, the proposed Carbon Pollution Reduction Scheme would require Australia to reduce emissions by between 5% and 25% of 2000 levels by 2020.
Energy Security: Approximately 70% of the world’s oil reserves are located in Eastern Europe and the Middle East. The concentration of reserves in these regions has created concerns about security of energy supplies in other parts of the world such as the European Union and the United States. Governments are increasingly implementing policies such as renewable energy targets to increase development and deployment of non-fossil fuel energy resources such as wind, solar and geothermal. In Australia, the expanded Renewable Energy Target will require 20% of our electricity to be sourced from renewable generation by 2020.
Fuel Poverty: Energy costs around the world are increasing. This is due to increased underlying fuel prices, increases in capital costs and in the cost of capital, and a shift towards more expensive renewable and low emission technologies. As energy prices rise, the number of customers experiencing fuel poverty (defined as customers who spend more than 10% of their incomes on electricity and gas) is also likely to rise.

In 2008, approximately 40% of new electricity generation capacity installed worldwide was renewable. Within Australia, up to 10,000 MW of new renewable generation will be built over the coming decade at a cost of up to $30 billion. As Australia moves towards renewable and other more expensive energy resources, energy companies will need to increasingly focus on the consequences of these trends for all stakeholders. AGL’s strategy is to provide electricity and gas to our customers while developing a suite of renewable and gas fired generation and upstream gas production assets. This strategy provides significant portfolio flexibility for AGL as energy markets continue to develop.

The following sections outline how AGL is integrating sustainability into our business decision making within the context of this energy market transformation. Our long-term sustainability goals and strategies help guide our focus around these issues.

Customers

The Commonwealth Government expects household electricity and gas bills to increase by 18% and 12% respectively after the Carbon Pollution Reduction Scheme is implemented. For an average customer, this translates into an increase in household energy expenditure of approximately $6 per week or $312 per year. However, the effects will not be evenly distributed. The overall cost of living for a single pensioner household in the lowest income quintile (i.e. the bottom 20% of households) is likely to increase by 1.4% as a result of these price increases whereas households in the highest income quintile face an average increase of 1.0%. Further cost of living increases may result from increased prices of other goods and services as higher energy costs are carried through the supply chain.

AGL has already commenced discussions with the AGL Customer Council about the consequences of these expected price increases for our customers. While this is an important first step in understanding the issues, ongoing engagement will be required so that customer consequences are understood and collectively managed by industry, governments and community organisations. AGL will continue to engage with our customers on this critical issue over the coming years.

Communities

As investment in renewable technologies increases over the coming decade, energy companies need to engage with the communities in which their renewable energy projects are developed. The characteristics of renewable projects are often different from traditional thermal technologies such as coal and gas. Increased investment in wind is likely to benefit regional communities by providing an additional source of revenue for landowners, as well as increased economic activity and employment in the area.

Issues such as visual amenity and health are important to communities where these assets are developed. AGL has had successful community engagement in places such as Hallett, South Australia, where one wind farm is operating, a second is being commissioned and a third is in construction. AGL will continue to engage and work with the communities in which we invest to understand and incorporate their views into our business planning.

Environment

While much of the focus of renewable and low emission energy investment is on reducing the effects of climate change, there are likely to be other environmental consequences. Our project environmental management will evolve so that we consider and address emerging environmental issues associated with the development and construction of new projects.

Employees

New technologies such as smart metering, smart grids, geothermal technology and electric vehicles will require AGL to develop new skills. To equip our workforce for these changes, we will need innovative talent attraction and training techniques. Our values reflect the environment of change and include ‘vitality’ and ‘safe and sustainable’. These values reflect the ‘open to new ideas’ culture being cultivated at AGL so that our business is sustainable over the long term.