Strategy: Develop portfolio flexibility to minimise risks associated with changing climate change policies.

There are a number of risks AGL faces as a result of climate change policy. However, as a result of early positioning by AGL, we believe that the opportunities arising from climate change regulation outweigh the risks.

Major initiatives that are ongoing or were introduced in 2008/09 include:

Carbon Implementation Project - This Project is designed to make all AGL systems and processes consistent with the requirements of the proposed Carbon Pollution Reduction Scheme. The Project involves a number of focus areas including contracts, information technology, employee awareness, electricity and gas trading and regulatory compliance.
Board Reporting – The Board receives quarterly reports of AGL’s current and projected greenhouse gas emissions performance compared to the greenhouse intensity of the National Electricity Market.
Commencement of National Greenhouse and Energy Reporting (NGER) Act Compliance Preparations - AGL continued activities throughout the year to be able to report under the NGER Act. Work to prepare for this reporting requirement included confirming reporting boundaries, identifying activities required to be reported and working with representatives across our facilities to ensure that the data captured meets the requirements of the NGER Act.
Energy Efficiency Compliance Strategies - Detailed strategies have been prepared to maximise AGL’s opportunities under the various State-based energy efficiency schemes.

Regulatory risks

AGL is exposed to the consequences of the CPRS which will place a cap on Australian greenhouse gas emissions. Businesses that emit large quantities of greenhouse gases will be required to purchase a permit (called an Australian Emissions Unit – AEU) for each tonne of greenhouse gas emitted. These AEUs will be created and sold by Government through auctions. Some allocation of AEUs will be provided for free to energy intensive (e.g. aluminium smelters) and strongly affected (e.g. coal fired power stations) industries.

Under the CPRS, AGL will be responsible for acquiring AEUs for emissions produced by our power generation assets and the emissions produced by our small business and residential gas customers. In addition, AGL will experience higher wholesale energy costs as generators and gas producers pass through the cost (to the extent possible) of acquiring AEUs in wholesale energy markets.

In summary, the risks and opportunities associated with the CPRS are:

Portfolio management associated with higher wholesale energy costs of around $800 million per annum (assuming a constant $20 AEU price).
A direct liability (to purchase AEUs) of around $150 million per annum (assuming a constant $20 AEU price).
Increased risks associated with price regulation and AGL’s ability to pass these wholesale energy costs and direct liability expenses through to end customers.
Cashflow and balance sheet management.
An increase in the value of AGL’s renewable portfolio.
Substantial opportunities to develop low and zero emission generation assets.

We consider that current or anticipated climate change regulatory requirements offer opportunities because of AGL’s portfolio flexibility around significant renewable and low emission (gas) pipeline of development opportunities. In particular, the expansion of the Renewable Energy Target and implementation of the CPRS will provide further incentive for AGL and our customers to proactively manage greenhouse emissions and associated business risks.

AGL estimates that the introduction of the CPRS may add up to $300 million in value to AGL between now and 2020. This is because our renewable and low emission assets will receive greater revenues as energy prices rise but will not be required to purchase AEUs. The expansion of the Renewable Energy Target will provide AGL with the ability to develop the 2,000 MW of identified renewable generation projects in addition to the 353 MW of renewable generation projects already under construction.

To manage the overall response to climate change policy risks, AGL has established a Carbon Implementation Project. This project employs a Senior Project Manager to oversee development of the systems and processes to manage the consequences of the CPRS on AGL.

Physical risks

Extreme weather events and changes in weather patterns arising from climate change present risks to our business in terms of physical impacts to energy infrastructure as well financial risks associated with changes to energy demand.

AGL has based its assessments of these risks on the following key documents:

The work of the Intergovernmental Panel on Climate Change including the latest IPCC report released in 2007;
Climate Change: An Australian Guide by the Australian Greenhouse Office;
Climate Change in New South Wales by the CSIRO and New South Wales Government; and
Climate Change: Risks and Vulnerability by the Australian Greenhouse Office.

AGL will continue to monitor the impacts of climate change risks on our business.