The long-term value of hotly contested $10.6 billion takeover target Origin Energy (ORG.AX) has been muddied by a government plan to accelerate the rollout of renewable energy, announced just hours before a key shareholder vote on the deal. The Australian government will radically expand a taxpayer-underwritten scheme to support new power generation and storage capacity. It could spur investment worth at least A$30 billion ($20 billion).
Australia climate change minister Chris Bowen will announce a plan to underwrite 32 gigawatts (GW) of new wind, solar, and battery projects on Thursday, including 9 GW of capacity that can be dispatched on demand and 23 GW of variable renewables. The projects will be awarded contracts for differences, with investors and the commonwealth sharing the risks through agreements that include floor and ceiling prices on revenue. The cost to taxpayers will be kept secret under commercial-in-confidence arrangements, but energy experts told Reuters the costs would not exceed A$10 billion ($6.8 billion).
Unlike previous schemes that have underwritten new investments in renewables, the government’s Capacity Investment Scheme will only fund those projects that can be built without subsidy. The new contracts will also require developers to sign bilateral agreements with state and territory governments, reflecting the needs of each region.
The new scheme will also require that proponents sign up to Australia’s National Electricity Market (NEM) rules and commit to supplying the NEM with their electricity for 15 years. This is a crucial condition for the scheme’s success, as it will allow the projects to sell their energy into the wholesale market long-term. The NEM is Australia’s largest grid, connecting over a fifth of its population.
The accelerated clean energy policy acknowledges the need for further government intervention to meet Australia’s renewable energy target and firm the grid as coal plants retire. It will take more than just the planned accelerated implementation of renewable energy zones and faster permitting of grid-related projects to reach the labor goal of 82% of Australia running on low-carbon energy by 2030.
Origin’s board is evaluating the impact of the government’s move on its bid to buy the company and is likely to recommend that shareholders reject it. The industry fund AusSuper, which holds a significant stake in Origin, has indicated it will vote against the deal.
EIG Partners, the consortium that wants to take over Origin, is working on a “Plan B” in case the deal fails, but it is still unclear what that will look like. EIG has a big job to convince Origin shareholders that it can get better returns from the company’s portfolio of assets than from other investments or by investing directly in the energy sector. It will likely involve private arm-twisting and public advocacy for the benefits of taking over Origin.