Spike in power prices may spark AGL Energy back to life

A spike in wholesale electricity prices back to boom-time levels could fatten AGL Energy’s earnings over the next few years.

AGL Energy could cash in over the next few years from its coal plants as power prices bounce higher. Picture: NCA NewsWire/Andrew Henshaw

A spike in wholesale electricity prices back to boom-time levels could fatten AGL Energy’s earnings over the next few years even as broader issues linger over the long-term future of its coal plants, analysts say.

Low prices increased pressure on AGL to move ahead with a planned demerger, a corporate split that aims to grab greater value for the company by breaking it up into a retail and coal-dominated generation business.

After several years of rock bottom prices that have piled pressure on the balance sheets of big utilities including AGL, futures in NSW and Queensland have jumped back beyond $100 per megawatt hour for 2023 and 2024, although Victoria remains at roughly half those levels.

The price recovery could buoy the fortunes of AGL, Morgan Stanley said in a note released on Friday. “NSW pool price forwards have risen $10/MWh to $90-$100/MWh over FY23 and FY24. AGL has said it has limited exposure to market priced coal this year in view of legacy contracts,” Morgan Stanley analyst Rob Koh said.

Rival Origin Energy’s decision to close its Eraring coal plant in NSW as early as mid-2025 and the default market offer saw the broker boost its price target to $7.50 a share, from $6.88.

The two developments “we think are likely to see higher NSW selling prices for AGL for an extended period (perhaps until 2028), partly offset by higher coal costs post the Wilpinjong contract expiry in 2025,” Mr Koh said.

The price of thermal coal on the spot market surged to an all-time record last week following Russia’s invasion of Ukraine, doubling in under a week, but potentially also lifting prices for domestic coal generators.

Both AGL and Origin Energy “have some flexibility to procure lower grades of coal so do not typically pay the full benchmark coal price,” Mr Koh added in the note on Friday, before an increased $8.1bn takeover bid was rejected by AGL. “We think pool prices could remain elevated over the forecast period and, potentially, for the remainder of this decade in view of potential competitor closures. So we think risk skew for AGL has rebalanced.”

The broker laid out a broader vision for how AGL might be able to grab extra shareholder value of up to 25-30 per cent from a “well-funded” and orderly energy transition. It details a $3 share bounce from early coal plant closure, a $1-a-share lift from a scarcity pricing cycle after those closures, $2 a share from a lower cost of capital for AGL and $2 a share from a lower cost of capital on 10GW of additional investment.

A broader debate over AGL’s future looks set to continue simmering given uncertainty over whether the Mike Cannon-Brookes camp revives a takeover for the company and if its proposed demerger will get enough support from investors.

AGL still faces pressure to increase its green plans too, with the Investor Group on Climate Change saying it wants greater action.

“Now that the AGL board has again rejected the Brookfield-Cannon Brookes takeover bid and climate plan, the onus is on the directors to put forward a decarbonisation plan that’s far improved and meets investors’ climate expectations,” IGCC director of corporate engagement Laura Hillis said.

“To start with, AGL’s net zero business plan needs to set science-based emissions targets.”

Shareholders are set to vote on a plan to split it into two companies: a green retailer named AGL Australia seeking to be fully carbon-neutral by 2040, and a coal-dominated generator, Accel Energy, targeting net-zero emissions by 2047.

Originally published as Spike in power prices may spark AGL Energy back to life