AGL leads in the renewable energy race

Ahead of the election Grant King, CEO of Origin Energy (ASX: ORG), has stepped up his campaign against the Renewable Energy Target, claiming that proponents of environmental stewardship had “materially influenced public policy and resulted in more onerous and duplicative legislation…” In contrast, the CEO of AGL Energy (ASX: AGK), Michael Fraser, has voiced his support for the current legislation.

The history is informative. When the Renewable Energy Target was first enacted, the various large generator-retailers all went about planning to meet their obligations. AGL invested heavily in wind farms and has over the years built up considerable in-house expertise regarding the process of turning wind energy into electricity, and all the challenges that involves. Origin chose to invest heavily in cutting-edge geothermal technology.

That decision led to a great contribution by Origin, and its partner Geodynamics (who are still trying), but was a poor one financially and resulted in a $205 million write off in 2011. Unfortunately, the write-offs continued even after that. Coincidentally, it was around this time that King started to speak out against the Renewable Energy Target.

One popular misconception is that the Renewable Energy Target mandates 20% of electricity to be from renewable sources. While this is unfortunately the view of the average voter, investors really need to take the time to get the facts straight lest they make decisions based on political fantasy. The actual target is 41,000 gigawatt hours. The reason for this is that it provides certainty. This is obvious, as a 20% target would be unknowable until after the fact.

King is angling hard for this figure to be changed, but not because the legislation is poor (indeed, it is both market-based and effective at a reasonably low cost). Rather, he wants it changed for the financial benefit of Origin, at the expense of his competitors who have invested according to the targets set in the legislation. King is hoping that his political sway (and that of his shareholders) will lead to higher profits (which is, after all, part of his job description). However, his argument is internally inconsistent because changing the target would increase uncertainty, yet he complains of the lack of certainty.

More than that, for the government to change the law at Grant King’s behest would be a failure of democracy. Origin did not pick the lowest-cost renewable technology. As investors should know, one of the arguments for a market-based system is that it encourages the least-cost solution. For large-scale renewables, this was (and continues to be) wind power, although rooftop solar has made a significant contribution (and has fallen dramatically in cost) thanks to the various feed-in tariff laws (both here and overseas).

At the end of the day, the reason we have this law is in order to drive the costs of renewable energy down. Whereas fossil fuel technologies have literally had centuries of research, development and deployment, renewable energy has not. There is no doubt that eventually renewable energy will be cheaper as a result of the experience curve. Speaking of which, it is pleasing to see that AGL has committed to building the biggest solar farm in Australia. It also runs the country’s biggest wind farm. Asides from not requiring a fuel source, developing these technologies is a gift to future generations. That’s called leadership.

Foolish takeaway

Each and every company must decide upon a long-term strategy, and consider how they will interact with the community in order to generate profits for shareholders. One of the things investors should look for when buying shares is a CEO with an attractive vision and a strategy to achieve it. If nothing else, that will give you greater peace of mind.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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