Energy crisis – picking the winners from a debacle

Energy crisis – picking the winners from a debacle. What to do when a director starts trading shares in their own company. The secrets the rich want to keep hidden…from miners.

Also covered:

  • The charitable fight between miners and Australia’s richest people
  • Decoding the week’s GDP data (LNG is gassing the figures)
  • Commonwealth Bank: class actions are regularly no good for shareholders
  • What to do when a director starts cashing out of their own company.
  • Aldi’s fresh food sortie signals a looming price war 


Hi, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

Well, Alan we have a full agenda I must say looking at this week.  There’s a couple of very large stories dominating the headlines and they have political dimensions, these stories, particularly energy, but we’ll kick off with that and we might also talk about those GDP figures, were they good, were they bad…?  Because they seem to be so sort of even, it’s even Steven on that.  Also we have some issues to do with the Commonwealth Bank, charities and we have very interesting questions also about Commonwealth Bank and about driverless cars.  But first, Alan, the energy what?  The energy crisis?  The energy debacle?  The energy situation?  How would you describe it?

Well it’s debacle-ish.

It is isn’t it?  It wasn’t necessary.

Well, to be honest I’ve been wondering about that and everyone’s saying, you know, that 10 years of policy uncertainty has led to under-investment and that’s true, except that there has actually been a boom in renewable energy installations.  I mean, a huge amount of solar and wind is being…

But not enough to see us through a heatwave summer.

Not yet.

Not yet.  But not enough to see us through this summer. 

But the thing is that the only piece of bipartisan policy – I’ve been thinking about this, this is quite interesting if you think about it.  I mean there has been policy uncertainty in relation to price of carbon, right?  Because the coalition repealed the emissions trading scheme legislation in July 2014 and you know, really leading up to that and since then there’s been no kind of certainty on that score.  But the thing that there has been certainty about is the renewable energy target which has setup the separate market, so we’ve got the NEM, the National Energy Market, which is the electricity market, separate to that there’s a market that has been and still is a market for renewable energy certificates. 

And that has subsidised renewable energy.  And so there has as a result of that been a lot of renewable energy.  What there hasn’t been is that much coal.  But the thing is, I think it’s an open question as to whether there’s been no coal investment because nobody wants to do it, all because there’s policy uncertainty.

Well, banks won’t even bankroll it.

That’s right.  So, I wonder whether actually the policy uncertainty would’ve resulted in coal powered stations being built and I think that it probably wouldn’t have.

Yes.

And so now AGL is talking about closing Liddell.

And I think we must explain clearly what’s happening here.  So, it would seem that the energy supply is so delicately poised that the closure of one little coal station in New South Wales in five years’ time is jeopardising the future energy security of the country, is that the situation?

Well that’s what’s being proposed.  I think it’s absolute rubbish to be honest.

You think it’s rubbish that it jeopardises the energy security?

Yes, of course it is.  I mean, heavens above!  What the energy market operator is talking about is what are we going to do this summer?  And they’re saying we need to have strategic reserves of power this summer, we’ve got to do something this summer and that’s probably correct, but certainly closing Liddell in five years’ time makes no difference to that.

So, why did the Prime Minister intervene and try and tell a stock market listed company to keep a 50 year old coal station going beyond 2022, which is Liddell?

Because there’s this political craziness about coal, which seems to become a totem for the right, as if you’re a right-winger you have to be in favour of coal and you have to say it. 

Yeah, so it seems.  But the interesting thing is, I was just looking at the possible buyer of the supposed alleged only possible buyer we’ve heard of.

What’s the name of it?

The name of it Delphi?

Delta?

Delta.  I’m sorry, Delta.  Now, Delta believe it or not just owns one power station and it’s a coal station and it’s also in New South Wales.  And the first thing they have said is, ‘We might be a potential buyer.’  And the second thing they’ve said is, ‘But you’ll have to give us some money to buy it.’  And I mentioned this to point out one thing, that the key person behind Delta is Brian Flannery, who in turn is a coal baron, right?  But if you look at what he’s actually doing in recent times he’s diversifying away from coal, he’s putting a lot of money into Uranium and Nuclear energy and he’s putting money into electric cars.  So, even the coal barons don’t believe in coal as the total answer.

Yep, I mean I just think the whole thing is so ridiculous!

It is.  Well, it’s politically absurd but there’s two things to talk about.  One is the actual supply of electricity and the second thing is, as an investor in Australia, what way do you look, I mean what way is it going to go?  Because if the political powers are actively against renewables or at least if they’re a pro fossil fuel and they clearly are, some factions are, what does an investor do?

Well, clearly where the investment money is going is into renewables and so there’s a huge amount of investment going on in renewables, zero investment in coal…

Who can you invest in though?  Where are the great renewable companies? 

That is true that there’s not that many.  There’s Infigen, which is a wind business.  There’s Carnegie Clean Energy which is a solar business.  There’s Silex Systems, which is solar…

But they’re small caps, right?  I mean, they’re small.

They’re pretty small, that’s true.  But Origin and AGL are becoming renewable companies.

Yeah, they’re shifting.

And that’s what the whole thing is to some extent about.  AGL has announced – I mean it was interesting because they bought the Liddell Power Station in 2014 from the New South Wales government and one year later they announced that it’s closing. 

And one year later they announced it was closing in five years’ time.

Yep.  So, I rang them up and said, ‘What happened?  What changed between 2014 and 15?’  And the answer was, ‘Our greenhouse gas policy changed, that’s what happened.’  And I looked back and there it was in April 2015, which happened to be three months after the new CEO started, Andrew Vesey, who came from an American business where he’d been for 11 years.  Anyway, he starts in February, a couple of months later, April – greenhouse gas policy where they said, ‘We are becoming a renewables business and we’re getting out of coal.’ 

Well, no wonder he was surprised that the PM called him up and said could he keep a coal station going then?

And he said absolutely not because…

He went on Twitter straight away, fair enough, he went on and said, ‘You must be kidding.’

And for Andy Vesey it’s like an election promise, right?  He’s put out this policy saying we’re getting out of coal and we will not extend the life of existing coal fired power stations.’  And so that’s it.  And I reckon your Delta, your man Flannery, nothing but a main chanter.  All he wants is a handout from the government.

Of course he does.  And he’ll say, ‘Hey, you know what?  I know where you can make money out of coal.’

Well, you can have it, you pay us.

Yeah, there is a way to make money out of coal, you get a cheque from the government to keep a 50 year old station going for another year.  Okay, well it is absurd and it’s evolving and it’s not very impressive.  But we must talk about other things.

Now listen, you wrote a story which I want you to talk about, about charities and miners.

Oh yes, while we’re talking about miners, a fascinating little story – not even a little story because it turns out that inside the treasury at the moment they’re going to review charities.  Specifically they’re going to review the nature of tax deductable charities of which there are about 20,000 in the country.  It is a big deal across society, however the mining lobby and the Mineral Council of Australia are furious that tax deductable charities like Green Peace, Lock the Gate particularly, and other ones – there’s several of them – are campaigning against miners.  So, this review of this discussion paper has been put out by treasury and they’ve asked everyone to put out their views.  The Minerals Council come out and said, ‘Well, we’ve got to review charities, we’ve got to clamp down on how they’re…’

Not that they ever have tax deductions themselves.  They wouldn’t dream of having a tax deduction. 

Well, this is the thing.  Anyway, so they say, number one, clamp down on charities, tighten up the rules.  Number two, people who make donations should not be allowed to be anonymous – very, very big one, that.  And the third one which is a screamer, is that up to 50% of charities’ budget must be spent on remediation work.  In other words, environmental charities like Green Peace cannot spend more than 50% of their money on advocacy.  So, they actually want to mandate the government to tell charities you can’t go sending your money protesting against miners or whatever else you want to protest against.  So, that’s out there and all the charities were putting in their little submissions, you know, this charity and that charity were putting in little earnest submissions and then out of the blue comes this monster submission from Arnold Bloch Leibler. 

Arnold Bloch Leibler?

The go-to tax adviser to the richest people in Australia.  Frank Lowy, Solomon Lew, Lindsay Fox…  You can name them, everyone knows this.

So, do you think ABL is in a sense representing their clients?  I suppose you’d have to think they would be.

Of course they are, what else would they be doing?

And the richest families are all big donors to these charities.

But they like to be private when they want to be. They want to make private donations and not be showing off – at their very best they do – and Arnold Bloch Leibler have absolutely lambasted this idea and cut it to shreds I think, and even brought up the notion of constitutional legality.  So, there you go, what can you say, the richest people in the country versus the miners.  We’ll see where it goes.

I’m putting my money on the richest people in the country.

The miners are pretty good lobbyists too.  But I think on this occasion they are not going to win, that is the miners aren’t going to win.  What else have we got?  GDP.

GDP.  So, it was so-so, don’t you think?  I mean it was 0.8% for the quarter, market expected 0.9%.  It was 0.3% March quarter, so better than March.

Better than March and in fact, way better than March.  But at the end of the day, you know, less than 2%, 1.7% or so annualised.  And so the million dollar question is, is it so-so that it’s not bringing us anywhere or is it actually the case that things are getting better because I was surprised to see both ANZ and HSBC, Paul Bloxham, peeling back their expectations about interest rates and saying that interest rate increases might come sooner than we think, because they thought the drag from mining investment was virtually evaporated now and that there was a momentum building in the economy.

Well, I think there’s a couple of things to note.  One is that the GDP number was actually supported by public investment and public spending, right?

I know.

And so, the reason the economy is growing or coming back in a way is because the governments had given up on fiscal consolidation, right?  So, government spending has gone from zero to +4% which is a huge turnaround and thank goodness for that is all I can say.  I mean, ironically… 

Yeah, but it’s just a moment in time.  

Well it’s all a moment in time isn’t it mate?

I know that.  What I’m saying is we’re not really saying the entire economy is ticking away because the government’s spending more.

Well it did in that quarter.

There was some improvement in exports, net exports. 

Yes, that’s true.

And a few other positive figures as well.  So, I just thought it was worth noting that some of the key economists aren’t talking about interest rate lifts way off in the future, they’re saying they could be earlier than we thought and the dollar fell. 

The other thing worth noting is, as you say, the exports are there and a lot of that is this LNG exports.  Now because all these LNG plants that were built are going on stream now, and so that is adding now at least half up to 1% to GDP.  But that is kind of zero jobs, like there’s no jobs in that.  And also, the companies that are doing the exporting of the LNG are making no money, right?

At the moment.

Yeah, there’s this whopping addition to GDP caused by the volume of LNG that they’re exporting, but they’re making no money and they’re not employing anyone.

Yeah, okay, that’s true, but we’re talking about GDP I suppose and on that strict basis it’s a possibility that the figures were a little bit better.  Now, we don’t want to go as far as Scott Morrison saying they were a strong set of figures, but there is some evidence that they were better than they seemed at first glance. 

Hey, why don’t we talk about Commonwealth Bank because we have a question this week and we also wanted to make the point, everyone, that we’ve talked in recent times in a sort of gleeful manner about the fact that if there is a class action on Commonwealth Bank, the irony is Commonwealth Bank shareholders would be suing themselves. 

And yesterday it was formalised because IMF have confirmed they will back a class action.  And anyone who invested in Commonwealth Bank over a two year period is in unless they opt out.  And I expect that includes DRP right?  So, if you even had shares and you had reinvested dividend, that means you invested in them, that means you’re in the class action.  And I wonder would anyone even go so far as to say, ‘I don’t want to be in a class action that pulls money out of my bank.’  Will they opt out.

I think that’s what we discussed.  The insurance company will pay.

Yeah, but there’ll be a what you call it, at the start. What do you call it a…

An excess?

An excess yes, they’ll have to pay for that.

Well, actually I don’t know that there will be but certainly the premium will go up, that’s true.

Yeah, it will go through the roof.   So, no one wins here really.  I mean, the directors and the CEO, they don’t get penalised.  They get their bonuses cut.  They’re on massive salaries and the shareholders – it’s lose-lose.  If the class action gets up they lose money and if it doesn’t get up…

Yeah, but the money goes to them, so it’s okay.  It’s like a dividend.

But it only goes to the strata of shareholders who are in that timeframe.

But isn’t that all the more reason to be in it?

Well, I think everyone’s going to be in it because I presume just about everyone’s in the dividend reinvestment program anyway.

Well, there you are, so everyone will be in it.

800,000 shareholders.  It’s no good.

Oh, you’re against it?

I am against it, yeah, and I think class actions are regularly ultimately no good for shareholders.

It happens all the time, it’s not just the Commonwealth.

And everyone takes a cost.

It happens all the time that shareholders sue themselves effectively.

This is just the biggest one ever.

Yeah, that’s right.

What was the question on CBA from our listener?

Well it wasn’t exactly on CBA, but it was a person named Ted had stumbled upon an announcement within Commsec, which is owned by CBA, notices regarding directors’ purchase and sale of shares in companies was interesting reading.  I get that a sale of shares could be for all sorts of reasons, but surely a director putting their own cash forward to buy shares is a pretty good buy signal, do you think that’s true?  

Yes, I do.   This was named Ted, did you say?

Ted.

Ted, if you look at Fortescue there is the woman there who’s the Chief Financial Officer, she’s American, she came in about a year ago, she bought half a million dollars’ worth of Fortescue shares the other day. Which I must say…

The other day?

The other day, yeah, after the results, which I must say, I don’t know what this woman’s on.  I looked at her package on the annual report and it’s very hard to figure out because they’ve got so much going on.  But let’s say she’s on a million and a bit basic and could make up to $3m.  Whatever way you add it up, she spent up to half her salary buying shares in her own company.  I think that’s a real signal.  Not just that case, but yes I do, I think it is a great signal.

And would you say it’s the reverse as well that when they sell it’s a sell signal? 

Invariably, but not completely, because there are times.  If someone’s in a company for 30 years, now and again they have to cash out a little, what do you reckon?

Yeah, well you know, you’ve got to know whether they’re getting divorced or not, that’s the thing.

Yeah, whether they’re getting divorced? And if they say to pay down some loans, that is not a good enough explanation which is often the explanation.

That’s it.

What was the other question from Ted?

Ted’s got two questions.  Ted is an inquisitive person, the other question’s very interesting.  I’ve been thinking that one of the changes associated with the introduction of driverless cars will be that houses will be built without garages in future.  I wonder if all the current brick houses with double garages may be used to solve the housing affordability crisis for our kids and what other impact this disruptive technology may have.  Well, my parents lived in the garage when I was born.  

Why?  Because they were building the house?

Because dad was building the house.

Yeah, right. 

And he made the bricks.

Wow!

And then built the house while I, we, were living in the garage.

But you don’t remember.

I don’t remember.

It’d probably be illegal now.  You could do anything you like in them days.

Well that’s it.  But yes, I’m with you, Ted, I reckon all these young – how can I put it?  People complaining about housing affordability should be forced to live in a garage.

For a while.

It was good enough for me and my parents.  They could go and live in the garage.

And then they’d really appreciate the value of their home.  But on the wider point of empty garages, he’s really onto something, it’s true isn’t it?  Main roads may not have a discount anymore because they could be quiet.  There’s all sorts of ramifications.

I think that’s a good one.

It’s a fascinating one, I don’t know if it’s true. 

Well, I reckon it’s a long way off, but it’s not driverless – the main roads thing is to do with electric cars driven by people – so at some point they’ll get quiet.  So, buy on Punt Road or Hoddle Street everybody, or whatever the equivalent is where you are.

Yes indeed.

And you’ll get an uplift.

You might be on a winner.  We’ll finish with one last thing which you wanted to mention, Aldi.

Oh, I just wanted to point out that…

What don’t we know about them?

Well, no, I’d been reading some stuff that Aldi is increasing the proportion of their store devoted to fresh food from 15% to 25%.

The physical proportion of the store?

Yes, which is leading to – wherever they do it, it leads to an uplift in their market share significantly.  So, they’re coming after Coles and Woolworths big time with the increase in fresh food and the amount of the store devoted to fresh food.

Another front against Coles and Woolies stocks.

It was a report from a stockbroker and they said that there’s bound to be another big price war coming up soon like the dollar milk thing that Coles did because they’re going to have to defend in some way against Aldi.  So, that’s one to watch everybody.

Yes, indeed, well we’ll keep an eye on that too.  All right, well we better leave it there for the week, Alan, we’re running out of time.  But don’t forget everybody, you can subscribe to the money café on Apple podcast or your apple choice and while you’re there it’s great if you could leave a review.  Do please leave a review, it would really make a difference to us and of course it helps listeners find the show.  Until next week, I’m James Kirby, Wealth Editor of The Australian

And I’m Alan Kohler, publisher of the Constant Investor.

Thank you and see you next week.