Christopher Niesche speaks to the Chair of AGL about renewable energy, market disruption and the need for greater clarity on executive remuneration.
Jerry Maycock FAICD says energy policy in Australia has become a political hot potato. Yet as chair of electricity and gas company AGL, Maycock doesn’t shy away from the issues confronting the energy sector.
“We are in the energy industry here which unfortunately has become a very hot political potato in terms of energy security, energy pricing and climate change – all these social issues that have a much higher profile than they may have had previously,” say Maycock, who has served on the AGL board for more than a decade, following a career in construction materials.
Of climate change policy, he says: “Frankly, the evolution of policy in this area in Australia has been poor.”
Maycock is steering Australia’s largest energy generator, and one of our largest electricity and gas retailers, through a period of rapid change. The company has started the transition to low carbon emissions while simultaneously navigating state and federal government attempts to deal with climate change and provide energy security. It is also harnessing fast-moving technological advancements that promise to change the nature of the industry.
If the power sector is undergoing a period of major disruption, Maycock says AGL (or Australian Gas Light as it was) has been there before.
“If you think about it, AGL was founded on the basis of disruption. We were founded to bring gaslights to the streets of Sydney. That, at the time, was a new technology and it doubtless disrupted whatever previous form of lighting was here, if any, on the streets of Sydney,” he says.
AGL has gone through several disruptions and transformations since it was founded in 1837, such as the change to natural gas from town gas in 1976. Later, in 2006, it merged and demerged with Alinta to create separate retail and infrastructure companies, leaving AGL essentially as a business that retailed gas and traded electricity.
With the acquisition of its own generation capacity and the acquisition of retail electricity customers over the past 11 years, the company is now one of the largest retailers of electricity and gas and the largest generator in Australia.
“Change is nothing new for AGL. It reinvents itself on a regular basis,” Maycock says. “What we’re witnessing now is the start of a quite fundamental change to the way electricity is generated, stored and sold, because the era of large, centralised fossil fuel power stations is going to decline – and it’s already started.
“It is going to be replaced by a combination of large-scale renewable generation; small-scale renewable generation; storage of various forms – be it water pumped up into dams or be it batteries or whatever. Probably a few gas-fired peaking plants, maybe younger coal-fired stations will carry on. This transition will take twenty years. It will take decades.”
Overseeing a company that is facing disruption on several fronts presents its own challenges. Maycock says his approach as chair is to ensure the organisation is spending enough time on the key strategic issues. It is about ensuring the company has options and is as well positioned – or better positioned – than its competitors to create value from this emerging disruption.
“It’s about having the right people. It’s about having the right strategic planning processes, and being more agile in terms of where we invest our money. It’s about how quickly we can change direction if something comes out of left field that we hadn’t thought about, and how quickly we can adapt and head off in a different direction without having burnt too much in terms of investor capital.”
Maycock spent a quarter of a century in the building and construction materials sector, his final role as chief executive officer (CEO) of CSR, but he did not set out to have an executive career and took a roundabout path to the c-suite and the boardroom.
Born in London, he studied engineering at the University of Liverpool, picking up skills that would prove valuable later in his career.
“The beauty of engineering is that it teaches you a bunch of skills which are quite transportable in the corporate world. Good engineers: they’re numerate, they’re logical, they’re interested in solving problems, and they’re interested in what we now call ‘innovation’ as a means of solving problems,” he says. “I think those skills are all transportable into a wide range of executive and non-executive roles.”
He first started working for Shell Research in the UK, before he and his wife Elizabeth decided they would like to have some time away from 1970s England, which was suffering the oil price shock, industrial strife and, of course, the weather.
Elizabeth, an anaesthetist, spotted an advertisement for doctors to work in New Zealand, so they headed there on a two-year contract. Maycock went along as the “baggage handler” and ended up getting a job with Shell. Because the oil giant did not have many research positions in New Zealand, he worked in sales, which provided him with a solid grounding for his business career.
“At the time, I was a bit nonplussed about being asked to go into sales because I considered that to be a backward step from a career point of view,” he says. “But as it turned out, this was a very sensible development move because it put me in front of customers at a pretty young age.”
He learned about dealing with day-to-day problems on the ground, distribution, credit, branding, looking after service stations, property development and business development. “It was quite a broadening experience and there’s no doubt that then launched me on a different track than I probably would have been on if I’d have stayed in the UK,” he says.
Deciding he did not want to leave New Zealand to advance his career at Shell because his wife’s own career was taking off, Maycock joined a company that would become part of Swiss construction materials giant now called LafargeHolcim, kicking off his career in construction and building materials.
Maycock, his wife and their two sons later moved to Brisbane so he could run the Southeast Asian operations of LafargeHolcim, giving him more experience that would prove valuable as a director.
As part of his role, Maycock was overseeing several companies in Asia. Many of his responsibilities were more akin to non-executive roles because of the fly-in, fly-out nature of the job. He learned the importance of having good managers on the ground and getting the best out of them. “That started me on the governance track, especially as two of the companies were publicly listed,” he says.
“I actually enjoyed it, but I learnt pretty quickly that you had to get a few things right. You had to appoint the right management teams and then you had to know when to take your hands off the controls and let management teams get on with it. But it was very satisfying when you got it right.”
He then joined the now-defunct Hastie Group before making the slight, but significant shift from construction materials to building materials when he joined CSR in 2007. He left in 2010 to become a full-time director and chair of AGL, which he had joined in 2006.
Maycock does not consider himself an interventionist chair, preferring to give management teams a lot of room to run the show so long as he is satisfied that the business plan is robust and the execution against it is credible.
He considers it important that the board doesn’t get involved with execution, because lines of accountability get confused and management can question how they can be held accountable if the board is intervening.
The coal challenge
Maycock says change in the energy sector is inevitable and is being driven by climate change, because it is very hard to mitigate carbon dioxide (CO2) emissions from coal power stations. While there is interest in sequestration (the capture and long-term storage of CO2), “that’s nowhere near being commercial,” he says.
The cost of solar power in particular, but also of wind power, is coming down, and the time is rapidly approaching when it will be cheaper to build a greenfields renewable electricity plant than a high-tech coal plant. “In a way, the demise of coal – while triggered perhaps by climate change concerns – is also going to be exacerbated by technology and the increasingly competitive nature of renewables,” he says.
But the reliability of renewable energy remains a major problem, because large-scale electricity storage is not yet viable.
Maycock and AGL advocate three policy changes. Firstly, the government and the generation sector need to agree on a process for orderly retirement of the coal-fired generation. AGL has already committed to retiring all of its coal-fired power stations by 2050, but other generators have not followed its lead.
It is in the national interest that a timetable across the industry be agreed to provide the certainty that will allow generators to plan for their replacement, Maycock says. Currently they risk building replacement capacity too early and making a loss, or leaving it too late, causing power spikes in the market.
Secondly, AGL would like to see action on climate change. “In terms of climate change policy, we really have been all over the place in Australia,” he says.
AGL advocates an emissions intensity scheme, which Maycock says would not add to the cost of electricity to the end user.
Known as a baseline and credit scheme, it would be a transfer of value from the highest emitters to the lowest emitters. Generators that emit CO2 at a level higher than average would pay something into the pot, while those that emit less would receive credit, incentivising generators to move towards the lower emissions plants. “We think a combination of [a scheme] and some clarity around the retirement of the big fossil fuel power stations would be helpful investment signals to the market,” Maycock says.
Finally, Maycock would like to see some changes to the energy market. Australia has an “energy-only” market, where generators are paid only for the energy they actually dispatch into the system. While on face value this may seem reasonable, Maycock says this does not give any credit for reliability and the ability to supply power continuously.
Thus, under the current system, a generator that builds a wind farm is not required to guarantee it can operate 24 hours a day, seven days a week, which with wind power is obviously impossible. If this wind farm displaces a coal-fired generator which can operate around the clock then it is compromising the security of the power system.
One solution could be to require builders of large-scale renewable energy assets to ensure the renewable power is accompanied by some form of storage or means of dealing with the reliability question. “It’s going to become more and more likely that to get permits to build solar or wind in the future, you will have to bring with it storage or some other means of guaranteeing supply, dispatchable when the sun isn’t shining or the wind isn’t blowing,” Maycock says. “Otherwise, the system security will just be too hard to manage.”
Maycock says householders and businesses need to be given more incentives to install small-scale rooftop solar generation capacity and batteries, but without subsidies. Genuine value creation opportunities are the answer, and this would require a change in the market rules to allow people to buy and sell electricity on the local, small scale.
“At the moment, you have very limited ability to sell peer-to-peer, for example,” Maycock says. But as battery storage technology and information technology develop, consumers will have the ability to turn electricity into a tradable commodity.
With the current rules and technology, electricity is like an airline seat – you can sell a seat for whatever the market will pay until the plane takes off, then it’s worth nothing. “Electricity is similar at the moment. But, if I have a battery and I have spare power, why can’t I choose to store and sell power to my neighbour or to somebody else at a time and price of my choosing?” he says.
With more people generating more of their own power, AGL’s role will change, says Maycock.
The company will still be invested in large-scale generation and probably in large-scale storage, but will also be offering products and services to its more than three million customers to enable them to install rooftop solar and battery storage. “Someone needs to be able to supply the kit and the software to make all that work. We’re trying to position AGL as one of the key contenders,” he says.
Maycock was speaking only a few days after the Turnbull Government announced the $6.3 billion bank levy in this year’s budget, which he described as a “concern”.
“I certainly think it’s the thin end of a potentially quite fat wedge. Extrapolated to an extreme, it really begs the question as to what is the role of government to participate in private enterprise and where does sensible regulation start and stop,” he says. “I think we should be thoughtful about this because the private model, the private capital model has been pretty successful by and large in the Western world. We have seen many cases where government participates in markets and it’s relatively rare that it ends well for taxpayers.”
Executive pay is another area where governments should be cautious about intervening, he says.
Last year AGL suffered a “first strike” as 37 per cent of shareholders voted against accepting the company’s remuneration report, which showed CEO Andy Vesey’s take home pay had surged more than 50 per cent from $4.4 million to $6.9 million. This came after AGL swung to a loss of $418 million in 2016 as natural gas impairments of $795 million weighed on the bottom line.
Maycock said boards need to do a better job explaining their executive remuneration, and AGL is no exception. “Societal expectations are evolving. Boards have to listen to that and have to understand that. You know, they are running – in some cases – large complex organisations that need very highly skilled people to do it. But, at the end of the day, they also need to protect their social licenses and that equation has to be carefully considered by boards.”
Shareholders also objected to the use of non-financial targets such as “team effectiveness” and “individual effectiveness” in Vesey’s bonus structure, but Maycock defends their use.
“It is really dumb to believe that you can incentivise managers solely on short-term financial measures. There are so many facets of running a company successfully for the long term which are not just based or not just measured by short-term financial results,” he says.
But he says they shouldn’t be “soft” targets. Non-financial targets need to be quantifiable and need to contribute to value in the organisation over time.
Maycock is also chair of the Port of Brisbane and a director of the Smith Family, Australia’s largest charity supporting disadvantaged children through education.
He had always supported the Smith Family and joined the board after he sat next to their former CEO at a business dinner and asked if there was anything he could do to help. Despite not having experience in the not-for-profit or education sectors (aside from sitting on the board of his sons’ school) the Smith Family sought out his strategic and business acumen.
“I find it absolutely fantastic. A highly-motivated bunch of people work there under CEO Dr Lisa O’Brien. We have a very clear strategy. It’s working. It’s actually very, very satisfying to see it working,” he says.
Away from the boardroom, he spends time with his family, and he and his wife both play golf. He also has a weakness for classic cars and is currently restoring a 1972 E-type Jaguar, which is “taking more hours and probably more dollars than I care to add up,” he says. “But I really enjoy it.”
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