Why did EnergyAustralia’s McIndoe go?

The announcement of the departure of the energy giant's chief over the holidays may have, ironically, been due to the gentailer's successful focus on combating climate policy.

As many of us were about to head off on Christmas holidays, EnergyAustralia, the third largest electricity retailer and a major electricity generator, announced that its chief executive, Richard McIndoe, was moving on. McIndoe had been the long-time head of EnergyAustralia and its predecessor TRUenergy, over a period of eight years.

McIndoe led the public fight by electricity generators against carbon pricing, both in its guise of the CPRS (Carbon Pollution Reduction Scheme, which fell victim to Malcolm Turnbull losing the Liberal leadership) and then the second attempt under the Clean Energy Act. More recently, he did a backflip on the Renewable Energy Target arguing for it to be drastically reduced just a few years after he argued in favour of the policy when he was chair of the Clean Energy Council. McIndoe could also claim some credit for the shape of the Coalition’s Direct Action policy, although it probably hasn’t turned out quite as he’d hoped.

In the end McIndoe was doing precisely what he was paid to do – defend the financial viability of EnergyAustralia’s portfolio of assets. Number one among them all was Yallourn – a large, ageing, inefficient brown coal generator which had traditionally provided around a fifth of Victoria’s power needs. While Hazelwood power station is usually the prime target of environmentalists, Yallourn is not far behind in terms of its overall size and very high emissions intensity.

Yet while McIndoe appears likely to have been successful in seeing off the carbon price, one wonders whether an excessive focus on defending Yallourn from progressive climate change policy has come at the expense of the business as a whole.

EnergyAustralia’s parent company, Hong Kong-based China Light and Power, in its last reported financial results described the subsidiaries’ financial performance as “highly disappointing”, with it reporting a loss during the first half of 2013. It noted that:

“...against a backdrop of adverse economic and wholesale market conditions the business will continue to face immense difficulties. As such, it may take some time for our improvement measures to come into fruition.”

The company seeks to lay much of the blame for poor performance on external factors beyond its control. But the reality is that the EnergyAustralia itself, and McIndoe as its CEO, must accept responsibility for a range of problems that have plagued the company’s performance.  

Yallourn power station has suffered not one but two major flooding events which have significantly reduced its output for extended periods. These have been so bad that the mine has taken on an appearance more akin to a hydro facility than a brown coal power station. These floods were the product of problems with the integrity of engineering work in the mine to divert a river as part of a mine expansion. They were not something that could be pinned on an act of God.

It has also suffered a complete debacle with its sales and billing computer systems. China Light and Power acknowledged the subsidiary:

“...encountered a number of issues during the implementation of its new billing system such as delays in registrations, billings, and customer collections, resulting in additional costs.”

A report in The Australian revealed several months earlier that the company (then known as TRUenergy) in acquiring the NSW government-owned retailer EnergyAustralia encountered significant difficulties in migrating its customers over to TRUenergy’s systems. Disgruntled staff had told The Australian they had elected to go over McIndoe’s head to complain to China Light and Power’s head office over poor management of the IT project. Because of considerable delays in migrating these customers, TRUenergy had incurred $288 million paying the NSW government to maintain and service those customers on the old system. 

These billing system problems extended beyond NSW. A rap over the knuckles (see here) from the Victorian Essential Services Commission reveals just how embarrassing some of the problems were. These included:

– Failing to recognise discounts they'd awarded to 225,000 customers (probably to get them to sign up as customers) and then threatening them for non-payment of inaccurate bills.

– Failing to even bill large numbers of customers and then hitting them with requests for back payments covering periods longer than nine months; and

– After switching customers over from another retailer it'd acquired, then charging these customers an early termination fee.

The company also complained that its financial results had been hampered by “declining electricity demand combined with more renewable generation [which] means we have an oversupplied wholesale electricity market and suppressed prices.” Yet this is something the company can hardly argue it shouldn’t have been prepared for. 

Hugh Saddler’s analysis of the decline in electricity demand outlines that a large proportion of the decline was due to government energy efficiency standards that were foreshadowed often more than five years in advance. On top of this, government and a range of energy analysts had been highlighting for several years that there was large potential for attractive financial returns from improved energy efficiency and it should be encouraged. 

Also, the enlarged Renewable Energy Target had been government policy since late 2007 – indeed, McIndoe had been chairman of the main industry body for renewable energy when the legislation was developed.

McIndoe’s efforts to prepare for this low carbon future have been lacklustre. In spite of an earlier joint venture into wind farm development (Roaring 40s), EnergyAustralia’s wind farm development portfolio is thin. The company ended up withdrawing from a large scale solar project in Mildura with Solar Systems and a second solar PV project in Mildura has also failed to materialise. It also ended up withdrawing from a geothermal project joint venture with Petratherm which came to nothing. Lastly, there was a project to develop a gas-fired power plant in place of the existing Yallourn power station. However, the Coalition has now backed away from the idea they might pay for the closure of a coal generator to be replaced by gas. In addition, the surge in the gas price has made such a proposition very expensive.

Meanwhile, McIndoe’s chief rivals appear in far better positions. Origin’s Grant King was recognised as one of the top 100 CEOs in the world last year. His company’s bet on gas has now paid off handsomely, even if it occurred through LNG rather than a price on carbon. The company, for a period, also did well out of the boom in solar PV thanks to investment in PV retailing. 

Also AGL’s Michael Fraser is better positioned to benefit from the RET with a strong portfolio of wind development sites. While AGL, too, bought a large brown coal generator very recently, it did so at a low price and the asset is better positioned than Yallourn.

History suggests that defending the past rather than building a better future tends not to pay off as a business strategy.

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