What’s the Similarity between the Japanese government and Australian electricity provider AGL Energy?

Both have paid dearly for their previous reliance on renewable energy. The Financial Times reported on Wednesday that Tokyo is involved in a legal battle with a Hong Kong company over Tokyo’s reversal of incentives for solar power and similar technologies. As a result of high-priced long-term wind contracts, AGL suffered a $1.5 billion ($1.9 billion) loss last month.

Increasing foreign investment in clean energy became a problem for Japan in 2012. After the Fukushima power plant was overwhelmed by a tsunami caused by an earthquake, authorities were forced to close nuclear power plants. Tokyo agreed to pay generous prices for the new projects’ electricity, but the Shinzo Abe administration changed its mind after a year or so. As a result, a fund called Shift Energy filed a lawsuit against the Japanese government, which led to an increase in renewable-power bankruptcies.

AGL made a U-turn and headed in the other direction. It began selling off its wind farms in 2007 but continued to operate them, securing long-term contracts to buy the electricity from them. At the time, it may have seemed like a smart strategy for generating immediate cash. With fixed-term contracts, AGL assumed that power prices would remain high for years and ignored the rapidly falling costs associated with installing renewable energy in later deals.

Because of the company’s decision to buy several coal mines and thus become one of the country’s largest emitters of greenhouse gasses, the company had to write down A$530 million in goodwill in the previous month. The company has been led by Brett Redman since 2018. As a result, its shares have dropped by about a fifth.

Aside from the coal, both would have benefited from adopting the other’s strategy. While it’s important to be fiscally responsible, Tokyo needs to keep prices stable in order to support a crucial but in its infancy industry. In the meantime, AGL would have been better off maintaining price flexibility. Short-termism is clearly a bad way to manage climate risk, regardless of your point of view.


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