As we transition into a new energy future, climate-related risks are a major consideration. We regularly model future scenarios to better understand the longer-term, risks and opportunities, of climate change for our generation fleet, our people, our customers, the community, and the broader National Electricity Market (NEM).
We do not commit to any particular scenario created by the models. Rather, the models are broad and hypothetical, and allow us to understand better what risks and opportunities might arise if similar scenarios happen in the future.
It’s important to stress that the scenarios are just scenarios. They are not estimates of what will happen or proposed strategic or policy positions, but a range of examples, based on some broad assumptions, of how the future might unfold.
The purpose of this modelling is not to commit to a particular scenario but to understand how resilient our business is under each scenario to support our discussions with the market about risk.
Our most recent draft modelling was created with the help of external experts (in this year’s case, KPMG and Aurora Energy Research), and also allow us to better disclose our climate-related risks within the framework set by the Task Force on Climate-related Financial Disclosures.
What is the Task Force on Climate-related Financial Disclosures?
In most G20 nations, companies with public debt or equity are legally obliged to disclose material risks in their financial reporting. However, when it came to climate-related material risks, there was no consensus or consistency in that reporting – making it difficult for companies to decide what risks to include in their reporting and how to present it.
In 2015, the G20 asked the Financial Stability Board (the FSB - the body that monitors and makes recommendations about the global financial system) to bring together participants from both the private and public sectors to consider the implications of climate-related issues on the finance sector.
This led to the creation of industry-led ‘Task Force on Climate-related Financial Disclosures’ (TCFD) to design recommendations that would help financial market participants – such as investors – understand climate-related risks.
AGL and the TCFD framework
Use of the TCFD framework is currently voluntary in Australia.
However, there is a growing expectation from investors, governments, customers, and communities that businesses assess climate related-risks – and report them.
We were one of the first companies in Australia to commit to the TCFD framework and to making our disclosures public in accordance with it. From 2016 onwards, AGL’s annual corporate disclosures have incorporated both climate-related risk and strategy disclosures, as well as scenario analysis and modelling.
In 2018 we released our first dedicated report in accordance with the TCFD recommendations, ‘Powering A Climate Resilient Economy’; in 2019, we followed up with our ‘FY19 Carbon Scenario Analysis’. We additionally committed to undertake and release the results of modelling a scenario aligned with limiting warming to 1.5 degrees Celsius above pre-industrial levels in our FY19 Annual Report (and at our 2019 Annual General Meeting).
Modelling a new look
For FY20, we have modelled four separate draft models:
- Scenario A: National Targets. The current industry commitments and policy settings are maintained over the medium-to-long term without material change. It’s the current status quo.
- Scenarios B and C: Response 2020 and Response 2030. Both these scenarios see a step-up in government intervention to reduce carbon emissions and have the same end-point and carbon budget. The models differ in that action begins to meet this endpoint in 2020 and 2030, respectively.
- Scenario D: 1.5 Degree Limit. The most aggressive scenario, with much stronger international and national action to keep the global average temperature rise at no more than 1.5 degrees Celsius above pre-industrial levels.
To create the modelling, we used both globally1 and nationally2 recognised scenarios, which allowed us to develop a market model – and one which could be compared with other international and Australian modelling to make sure the global context of climate change was considered.
The scenario analysis is policy agnostic. To ensure the carbon budget is met in the Response 2020, Response 2030, and 1.5 Degree Limit scenarios the modelling uses a carbon constraint; this is done by setting the carbon value (effectively a ‘carbon price’) at the minimum level needed to drive the required decarbonisation to meet the budget.
In all four scenarios, the modelling shows that by 2050, 80% or more of generation in the NEM will come from renewable energy sources.
However, the scenarios show different kinds of energy mixes. For example, the National Targets scenario shows more utility-scale projects; while the 1.5 Degree Limit scenario, through a larger increase in rooftop solar and household (‘behind-the-meter’) batteries, suggests that customers will drive the energy transitions investment.
Why is this important?
As the largest generator in the NEM and the country’s largest carbon emitter, it’s important to consider the effects of climate change on our business, our customers, our people, and the community that these different scenarios may have.
We take seriously our responsibility to provide sustainable, secure, reliable and affordable energy. We are committed to responsibly transitioning the energy system and supporting our employees and local communities as our assets reach retirement. We already operate some of Australia’s largest solar and wind farms and are focused on developing flexible supply and storage to support the transition to a new energy system.
We’ve helped Australia grow and innovate for almost two centuries – and we’re still passionately committed to this goal as we move towards 2050.
1 IPCC Representative Concentration Pathways (RCPs) and Shared Socioeconomic Pathways (SSPs)
2 AEMO 2020 ISP scenarios