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Business Value Driver

Environment

Access to and stewardship and use of scarce natural resources, and AGL’s impact
on the natural environment, both directly and as a result of the products and services provided.

AGL's vision for the long-term future of energy is that electricity from renewable sources, backed by flexible energy generation and storage technologies, will power our homes, businesses and vehicles. Energy will be both affordable and smart, and greenhouse gas emissions will be much lower, helping us to tackle climate change.

We recognise that our stakeholders expect AGL to have strong and responsible transition plans towards a low carbon economy, coupled with measurable targets and transparent reporting. At AGL, we accept the science of climate change and the need for decarbonisation. We believe that Australia has the opportunity to be carbon neutral and an energy superpower by 2050. As one of Australia’s leading integrated energy companies, and as Australia’s largest greenhouse gas emitter, we have a meaningful part to play in the achievement of this vision.

In 2015, AGL committed, via our Greenhouse Gas Policy, not to extend the life of our coal-fired power plants. As we work towards the full closure of these plants and as the Australian economy transitions toward full decarbonisation of the electricity sector by 2050, we are expanding our commitments in pursuit of our target to achieve net zero emissions by 2050.

AGL's Climate Statement was released on 30 June 2020 and focuses on five climate commitments. These commitments recognise that the pace of the energy transition will be driven by customer demand, how communities act, and how technology evolves. Customers will increasingly demand carbon neutral solutions, starting with major corporations and institutions before extending to households and small businesses as costs fall. Community expectations will evolve into new actions, regulations and standards that frame our markets and create new opportunities for AGL. The development of different energy generation and storage technology costs will drive how fast the system changes.

In recognition of changing customer demands, from 1 July 2020 AGL will always offer a second, carbon-neutral electricity price, certified through the Climate Active Carbon Neutral Standard (an independent government body standard) to all residential, small business and commercial and industrial customers. AGL also continues to offer accredited GreenPower (100% renewable electricity) products, and is looking to provide a carbon-neutral offering for all products, including gas and telecommunications, during FY21.

As Australia's largest greenhouse gas emitter, we have a particular responsibility to be transparent about the risks and opportunities that climate change poses to our business, the community and the economy more broadly. For this reason, AGL follows the guidance provided by the TCFD Framework. 'Pathways to 2050', our FY20 TCFD report, details how we consider governance, risk management, strategy, and metrics and targets in relation to climate change. A core aspect of this report is the use of scenario analysis to demonstrate how our strategy is likely to be impacted under different climate outcomes. A summary of the scenario analysis is provided on the next page. As noted within the Remuneration Report , AGL has also taken the significant step of including three carbon transition metrics within our long-term incentive (LTI) plan with effect from FY21.

More information

Detailed information about AGL’s FY20 scenario analysis methodology and results can be found in the report 'Pathways to 2050', available at agl.com.au/specialreports.

Performance data in relation to other environmental aspects, including air emissions, water consumption and management, waste management, land use and biodiversity is available at 2020datacentre.agl.com.au.

Climate scenario analysis

Australia’s transition to a low carbon economy is subject to considerable uncertainty including in relation to government policy, technology development and consumer uptake of new technologies. Accordingly, during FY20 we have undertaken scenario analysis of potential future carbon reduction pathways to better understand the long-term implications for AGL's generation fleet, customers, and the NEM. The methodology for and results of this analysis are available in our 'Pathways to 2050' report, available on our website.

A top-down approach was undertaken to inform the development of Australian scenarios and carbon budgets, using recognised global and Australian scenarios to facilitate comparability and to ensure that the global context of the impacts of different climate scenarios was considered.

Scenario

Description

Temp. outcome

Global reference: RCP1

Global reference: SSP1

AEMO ISP1 scenario

Scenario A
National Targets

Current industry commitments and policy settings are maintained over the medium to long-term without material change

Assumes Australia meets its Paris commitments of reducing emissions by 26% to 28% of 2005 levels by 2030

Not assessed

N/A

SSP3

Central

Scenario B
Response 2020

Policies and technology allow for a steady, market-led decarbonisation

1.7 - 3.2°C

RCP4.5

SSP2

Fast Change

Scenario C
Response 2030

Limited action over the short to medium term prior to stronger policy intervention for rapid decarbonisation from 2030

1.7 - 3.2°C

Blended (~RCP4.5) RCP6.0 (2020-2030) / RCP2.6 (2030-2050)

Blended SSP3 (2020-2030) / SSP1 (2030-2050)

Central and Fast Change

Scenario D
1.5 Degree Limit

Coordinated, cooperative and immediate decarbonisation approach with combined government intervention, policy and market approaches to achieve rapid decarbonisation

0.9 - 2.3°C

RCP2.6

SSP1

Step Change

  1. 1 RCP: Representative Concentration Pathway, concentration pathways for greenhouse gases and aerosols, demonstrating possible future emissions and radiative forcing (i.e. temperature intensity) scenarios for the world until 2100, as defined by the IPCC. SSP: Shared Socioeconomic Pathways, which describe how socioeconomic trends around the world may evolve over time, as defined by the Intergovernmental Panel on Climate Change. AEMO ISP: Australian Energy Market Operator's Draft 2020 Integrated System Plan.

Electricity market modelling of each scenario was undertaken utilising a carbon constraint applied to the NEM to ensure that the predetermined carbon budget for each scenario was met. The market model is policy agnostic and therefore the carbon constraint is applied by placing a value on carbon, an effective "price", at the minimum level to drive the decarbonisation required to meet the budget.

The results of the modelling show that under all scenarios significant decarbonisation of the Australian electricity sector occurs by 2050, with AGL achieving net zero emissions by this time or earlier. This is as a result of generator retirements as already planned, and lowered capacity factors, as assets age and carbon constraints are applied. AGL achieves a significant reduction in emissions of more than 20% over the next five years due to the closure of the Liddell Power Station under all scenarios.

Under scenarios A, B, and C, the retirement dates for AGL assets are consistent with our present expectations and closure commitments. Under Scenario D, AGL Loy Yang would need to close earlier to meet the constraints applied in the model. The variances in emission trajectories between the scenarios, particularly in the 2040s, arise from varying load factors driven by the carbon constraints applied in each scenario. AGL's assets are able to operate profitably even at these lower levels of output, reflective of their relatively favourable position in the NEM cost stack.

The modelling also shows that there are significant investment opportunities for AGL and other participants to develop or support renewables. All four scenarios would result in an increase in renewable generation to around 50% of NEM output by 2030, and rising to at least 80% by 2050, with the NEM requiring a further 60 GW of utility-scale renewables and storage capacity.

There is also considerable opportunity for further investment in decentralised energy across the NEM under all scenarios, including an additional 8 GW behind-the-meter battery storage, 13 GW rooftop solar and 41 TWh demand from electric vehicles under Scenario A, and an additional 16 GW behind-the-meter battery storage, 31 GW rooftop solar and 42 TWh demand from electric vehicles under Scenario D (additional to FY20 levels).

AGL’s strategy will continue to remain flexible to respond to the transition as customer needs, community expectations and technologies develop and as government and regulatory policy evolves.

Irrespective of how the future unfolds, AGL is resilient and well positioned to capitalise on the opportunities created by the market transition.

Climate-related risk

AGL’s climate-related risks can be categorised into two main areas: transitional risk and physical risk. AGL's Pathways to 2050 report contains more detail about AGL's approach to climate risks and the best way to manage those risks. AGL's current focus is on the strategic risks to AGL of the energy transition, as opposed to the specific physical risks that may arise as a result of climate change. We anticipate physical risk will be a larger component of AGL's future TCFD reports.

Transitional risks

AGL's Climate Statement reflects our approach to the strategic management of risks and opportunities associated with the energy transition. These risks incorporate policy and legal risk, technology risk, market risk and reputation risk. Transitional risks also include risks in end-of-life asset planning and the rehabilitation of assets. Misalignment of these plans with future scenarios may lead to possible stranded assets and revenue loss amid continued policy uncertainty.

A further growing transitional risk facing AGL is access to capital from both equity and debt investors. During FY20, AGL became the first energy company in the Asia Pacific region to launch a Sustainability Linked Loan, which incentivises efficiency and gradual improvement in AGL’s emissions performance, recognising the scale and complexity of transitioning AGL’s operations given our important role in managing the stability of Australia’s electricity grid.

Customer response to climate change is a driver of the increasing adoption of decentralised energy services. To mitigate risks posed by changes to the nature of energy demand, we have developed a range of new products and services designed to focus on customers’ changing expectations, including developing capabilities to deliver residential battery and electric vehicle solutions.

Physical risks

Physical risks include increased frequency and severity of extreme weather events resulting in operational disruption, higher average temperatures (causing increases to frequency and magnitude of peak electricity demand and de-rating thermal plant), and precipitation changes impacting upon the efficacy of hydroelectric generation assets and access to water.

AGL is resilient to direct physical risks in part through our geographically distributed electricity generation portfolio allowing for AGL to mitigate the impact of location specific acute impacts. AGL's generation fleet is also technologically diverse which provides increased resilience to the impact of temperature increases on thermal generation efficiency. AGL anticipates that as our thermal plant capacity decreases following planned closures, portfolio growth will be in various renewable and storage technologies reducing the impacts of lowered thermal efficiencies.

We have not incorporated a quantitative assessment of AGL’s water security into the climate scenario analysis undertaken during FY20. However, we have a good understanding of our level of water use, access rights, risks to supply, and our level of water security at our major sites. AGL's significant water rights and supply security allows for certainty even in extensive drought conditions, and the analysis that we have performed demonstrates that we have a good level of water security at all our major sites at least over the near term.

We recognise that the physical risks posed by climate change include risks to our people as well as our assets.

2019/20 bushfire season

The recent 2019/20 bushfire season provided an opportunity to test and improve our processes for operating our sites under the type of high temperature conditions that are likely to be more frequently experienced in a warming climate.

High temperatures create challenges for our people, particularly those undertaking physical work outdoors and within our power stations. AGL has a comprehensive Heat Stress Management Procedure which outlines how AGL will manage the risk of heat stress faced by our people including by ensuring appropriate accountabilities at senior levels throughout AGL, provides details about likely physical impacts to the body of heat stress, and sets out procedural requirements such as work planning, risk assessments and the circumstances in which a total work stoppage would become necessary.

This procedure was successfully implemented across our operations during the unprecedented bushfire conditions experienced in FY20, with an increased focus on scheduling outdoor work activities to early morning or late evening, where possible, more frequent worker rotations and the provision of additional cool down areas. In addition, poor air quality and visibility posed increased risk to anyone travelling and/or working outside for an extended period of time. For this reason, travel to/from our operating sites was not permitted unless absolutely essential and additional PPE and personal monitoring measures were implemented at our operating sites. Furthermore, workers at our corporate offices were asked to work from home, if possible, to minimise the risk of eye irritation and smoke inhalation.

Creating value

Greenhouse gas emissions

AGL’s total greenhouse gas emissions reduced in FY20 primarily due to the major outage of Unit 2 at AGL Loy Yang. There has been a corresponding decrease in our operated and controlled intensities which has been further driven by high levels of renewable electricity generation. The emissions intensity of total revenue has increased as a result of declining revenue in FY20.

KPI

FY20

FY19

FY18

FY17

FY16

Target

Operated scope 1 & 2 emissions (MtCO2e)

42.7

43.2

43.6

43.9

43.8

FY50: Net zero

Controlled generation intensity (tCO2e/MWh)

0.931

0.95

0.96

0.97

0.95

FY21: Improvement on FY20, consistent with objectives of the FY21 LTI

Controlled renewable and battery capacity (%)

22.5

19.6

18.4

18.4

18.4

FY21: Improvement on FY20, consistent with objectives of the FY21 LTI
FY24: 34%

Emissions intensity of total revenue (ktCO2e/$m)

3.5

3.3

3.4

3.5

3.9

-

Revenue from green energy and carbon neutral products (%)

11.5

10.8

Not reported

Not reported

Not reported

FY21: Improvement on FY20, consistent with objectives of the FY21 LTI
FY24: 20%

  1. 1 FY20 generation intensity is calculated on measured emissions from material sources and measured electricity generation, with estimates for minor emissions sources. This metric will be updated later in 2020 and may change.

Rehabilitation and transition

AGL is committed to providing ongoing, transparent disclosure in relation to our approach to the progressive and final rehabilitation of assets at the end of their operational lives. Provisions for environmental restorations are detailed in Note 18 to the Consolidated Financial Statements, and include $45 million and $299 million in current and non-current provisions respectively, being best estimates of the present value of the expenditure required to settle the restoration obligation at the end of the period. AGL intends to complete a comprehensive review of rehabilitation provisioning in FY21.

With three years until the retirement of the Liddell Power Station, AGL is preparing plans to safely decommission, demolish and rehabilitate the site, while considering the planned retirement of the neighbouring Bayswater Power Station in 2035. Ongoing capping and rehabilitation activities in FY20 totalled 33.72 hectares at the Liddell Ash Dam and the Ravensworth mine. AGL Loy Yang’s operational footprint is currently approximately 2,215 hectares (mine: 1,528 hectares; overburden dump: 687 hectares). Of this, a cumulative total of 693 hectares has been rehabilitated since mining commenced. FY20 saw 19.18 hectares of progressive rehabilitation.

AGL is continuing the progressive decommissioning and rehabilitation of gas production wells at the Camden Gas Project prior to the site ceasing production in 2023. The project has overcome many challenges with vegetation establishment in FY20 as a result of drought, bushfires and localised flooding. As at 30 June 2020, 45 of Camden's 144 well sites have been, or are in the process of being, decommissioned, rehabilitated and returned to the respective landowner.

Other environmental risks

The number of environmental regulatory reportable incidents in FY20 decreased to nine from 12 in FY19. AGL received one penalty infringement notice (PIN) during FY20 for an event that occurred in FY19, and additionally has received a PIN in July 2020 for an incident that occurred during FY20. Further details relating to these PINs, as well as other Environmental Protection Authority (EPA) matters, are included on page Environmental regulation .

Both the New South Wales and Victorian EPA are currently undertaking reviews of the environmental protection licences for coal-fired power stations with the view to reducing air emission limits. Updated licences for AGL Macquarie's Bayswater and Liddell power stations have been received. We are waiting to hear from the Victorian EPA on the next steps of their licence review process. AGL Macquarie has been investing in continuous emissions monitoring systems and this has improved the accuracy of our emissions data, which we upload to our website every month.

KPI

FY20

FY19

FY18

FY17

FY16

Environmental Regulatory Reportable incidents

9

12

14

10

16

Legend

Improving trend and/or satisfactory outcome

Deteriorating trend

Neutral trend

KPI linked to FY20 remuneration outcomes for CEO and Key Management Personnel (page STI approach and outcomes )

Beyond FY20

Our Climate Statement, together with the incorporation of carbon transition metrics within our long-term incentive structure, will drive AGL's decarbonisation activities over the short-term. We are developing a roadmap to deliver on our commitment of reaching net zero emissions by 2050, and we remain committed to working towards the full closure of our coal-fired power plants within the timelines set in 2015 and tackling the challenges associated with this transition with our workforce and the communities where we operate.

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