ENGIE Australia and New Zealand CEO Augustin Honorat spoke today at the National Energy Summit in Sydney, sharing that “we’re seeing more interest from businesses, cites and individuals to decarbonise their energy supply and enjoy lower prices by doing so. This essentially means we no longer face the market, but instead we face the customer.”
The speech, entitled “Measuring and managing risk during the energy transition” is available below in full.
Measuring and managing risk during the energy transition
Augustin Honorat, CEO ENGIE Australia and New Zealand
11 October 2019
AFR National Energy Summit
Thank you for that kind introduction and welcome
It’s a privilege to be here speaking to you today
I took up the role as head of ENGIE in Australia one year ago this month
Previously, and for the last several years, I had led one of ENGIE’s large energy retail and energy services businesses in France
And over this year, in Australia I have led our business through an important phase in our transformation
During this time, I’ve also been thinking about ENGIE’s decarbonisation strategy and the energy transition Australia.
Observations – Europe and Australia
There are some similarities between Europe and Australia when we look at energy markets
The first. Blackouts are never acceptable in any developed country - to customers or to Governments
Reliability will always be at the top of the list
Reliability issues, whether they come from
- ageing power stations
- the transmission network between States, or
- through the intermittency of renewables
will always trigger calls for intervention
This adds to the old debate about whether industry, Governments or regulators are responsible for keeping the lights on …
… and this pressures these players to step outside their natural roles to solve short term problems
I will spend a bit of my time this morning speaking about these roles, in the context of investment and risk management
My second observation, is that both Europe and Australia are undergoing a radical energy transition, that disrupts the traditional fuel sources that supply its power stations
Community and shareholder expectations, and the wider discussion about the use of coal, gas and nuclear are at different points in their evolution in those countries.
But all of these fuels are common in that they are being impacted by the rapid uptake of renewables on both continents.
And there is another commonality related to the fuel debate
In both Europe and in Australia, the views of industry experts are often drowned out by those advancing a political agenda…
… and this is unfortunate
My third observation, is that the risks coming from the energy transition can be mitigated, and even transformed into opportunities if they are anticipated, and assigned to those who are best placed to manage them
Or even just assigned to those who are least worst placed to manage them
In my view, there are three key risks to manage - technology risk, investment risk and policy risk
Let’s start with technology risk.
Managing technology risk keeps companies relevant, helps them capture value from unmet customer needs and advances our energy system and our society
It’s also what prevents the “Kodak” moments that some businesses face when they fail to plan, or respond to change
Technology risks should be handled by the private sector
Outside of their own purchase decisions, customers should not have to carry this risk in any way
All energy companies and investors face technology risks
ENGIE has stepped away from coal in Australia and around the world (in Asia Pacific, but also in Europe…), not because of any technical risk inherent to coal itself. But because we think this technology is not sustainable in the medium or long term
Its cost is simply too high – to the environment, to communities, to customers and to shareholders. This is measurable and has material impacts on the business
With our asset rotation in Australia now complete, our current and future investments do not involve coal
ENGIE has chosen not to wait for external forces to determine our business model
Obviously ageing coal needs to be replaced by new reliable generation
But the challenge that we see, is that we’re asking private investors to deploy capital on this new generation, but into an uncertain energy market where returns cannot be predicted
And we are running out of time to resolve this impasse
Which brings me to the topic of investment risk.
It’s clear to me that Australia’s energy transition can deliver clean, reliable power at lower prices if investment risks can be managed and mitigated
If they can’t, well, we end up standing still, and capital flows to other industries or to other countries where returns are more stable and more predictable
We know that investment risk is managed by proving an investment case, which satisfies four conditions:
When these conditions are met, actions can be taken
But today, future returns from the supply side of the energy markets appear to be more and more unpredictable and we don’t clearly see any improvement in the short term…
So, at ENGIE, we’ve turned our focus to customers’ demand
And here I’m not necessarily talking about today’s blunt demand response mechanisms where large customers curtail load
This can be effective in the short term but does not satisfy customers’ long- term interests nor does it reduce prices
Our approach has been to directly approach customers to understand their needs. And partner with them to help them better manage their energy use.
And we found ways to help customers achieve concrete energy outcomes. For B2B customers, B2C customers and even what we call B2T (Business to Territories, ie Cities and precincts). This means:
- One, the project should be globally competitive
- Two, the project needs to be bankable
- Three, counterparties should be sound and secure
- And four, there must be a reasonable degree of certainty
This essentially means we no longer face the market, but instead we face the customer
And we’re seeing more interest from these businesses, cites and individuals to decarbonise their energy supply and enjoy lower prices by doing so
Working with customers in this way, and co-creating solutions to help them manage demand is the best way to reconcile economic interests (their power bill) and environmental concerns (their footprint)
Globally, throughout Asia Pacific and in Australia, we see buildings, industries, precincts and cities as the centre of the energy transition
We think these are the locations where we can secure the best returns for our shareholders, and where we can find the partners to deliver ENGIE’s lower carbon solutions.
And we’ve made this our strategy.
It’s a simple proposition – customers’ desire to pay lower prices and access green energy is clear and predictable
But less predictable are Australia’s current energy policy settings, which brings me to the topic of policy risk.
- Aggregating the smaller loads of small to medium size customers to tap into the renewable PPA market. Like we’re doing with hundreds of hotels and pubs in New South Wales and the ACT
- Building a Virtual Power Plant in South Australia, to help households access stored energy from rooftop PV. And contribute to stabilising the grid
- Partnering on long term net-zero carbon initiatives with cities. Like the 50-year agreement we signed with the Springfield City Group in Queensland to co-develop their energy infrastructures.
The energy transition is at the centre of many of the market conflicts we see today in Australia
In such an environment, participants are asking for ‘certainty’ but this can be an overreach if we fail to also acknowledge our roles and responsibilities
Like others, ENGIE doesn’t expect Governments to lock in policies that are not endorsed by its citizens …
… just like we don’t expect customers to buy products they do not want
We’re careful not to advocate for ambitions that aren’t matched by citizens, which is why we remain concerned about some of the Government interventions and ad hoc subsidies that we see today
This does not mean we do not see an important role for Governments in the energy transition
Quite the contrary - as a policy setter, law maker, and customer itself, Governments can, and should, be a catalyst for change
Government support of new technologies and its role in fostering innovation will continue to be critical in delivering clean, affordable and reliable energy
But this does not mean we endorse management of the sector by a central planner who is also the primary investor
A better approach is to look at which risks need to be managed during the energy transition and who is best placed to manage those risks
Government can best support the energy transition by providing confidence. Confidence that policy and regulatory risk will be minimised.
And in turn, the private sector needs to accept that meeting voters’ wants and needs is a key driver of any Government policy
But this is far from where Australia is today
Regulatory risk continues to grow as do market interventions - the lessons of the past seem to have been forgotten
We seem to be regaining an appetite for large-scale Government-funded projects which are not driven by market signals
These will be locked into customers’ bills for decades and may not actually satisfy their needs into the future
For Governments, investing taxpayer capital on energy projects should be approached with great caution
Private participants are best placed to select the most efficient projects and draw finance from a range of domestic and international debt and equity sources
With private investment, customers have the choice to retain the best solution for them – or the best “value for money”
And this is not always the case with public investment
In essence, when you ask the customer, you always get the right answer
Private participants will build new generation in markets where the investment case stacks up, and where policy risk is stable.
This can leave Governments to deploy taxpayer capital on roads, schools and hospitals, instead of on energy projects that impair existing assets.
If changing technology trends leads to a stranded asset in the market, this would be part of the risk of being an investor
But when assets are stranded or impaired due to decisions that don’t reflect the needs of the market or customers …
…or worse, when assets are proposed that don’t reflect market signals, then something is amiss.
Let me conclude with just a few remarks
ENGIE’s position is that technology and investment risks are best managed by energy players. While energy policy should be designed by Governments to offer a framework that is as long-term and stable as possible.
No risk can be managed by the private sector when it is unclear, uncertain, or unpredictable
When faced with unclear future circumstances, innovation will be postponed. And the opportunities of the energy transition, I mean the customer benefits associated with the energy transition – lower prices and cleaner energy - may not be delivered
Within our business, ENGIE will continue to progress the energy transition and deliver lower carbon solutions for all our customers
And we’ll stay ever mindful of our role and responsibilities as an investor, a market participant and a provider of an essential service.
Thank you, merci