AGL sees little power price relief amid $1.26bn loss

AGL Energy believes power prices will remain at high levels over the next two years as the industry grapples with a shift to renewables.

AGL Energy said power prices would remain at high levels over the next two years as the industry grapples with a shift to renewables, with the Mike Cannon Brookes-backed utility pushing ahead with a move away from coal to green energy.

Prices have fallen from record highs experienced in 2022, but chief executive Damien Nicks said current indicators show little relief between 2024 and 2025 – though he cautioned there was significant uncertainty.

“The wholesale electricity prices – which are part of the retail customer pricing – are consistent year-on-year. But there’s still a long way [to go],” Mr Nicks said.

Wholesale prices are the biggest component in determining how much household and businesses bills will rise by in 2025, and energy prices have been a major driver in Australia’s surging inflation levels.

UBS analyst Tom Allen cautioned the indicators cited by AGL can be questioned with the market still to price in the impact of the potential closure of Eraring in 2025, Australia’s largest coal power plant.

“Futures will not reflect until after January 2024 the impact of all or some of Eraring power station capacity retiring in August 2025 which could set futures structurally higher from next year,” Mr Allen said.

Origin Energy, AGL’s chief rival, is scheduled to close Eraring in mid 2025 which would likely leave NSW facing a material shortfall in generation capacity and pile pressure on wholesale prices.

AGL on Thursday posted annual underlying profit after tax of $281m, up by nearly a quarter from the previous year.

The result, however, was masked by a statutory annual net loss of $1.26bn, down on the $860m profit the company made a year earlier as it incurred losses linked to the valuation of derivatives and writedowns from the early closure of a coal power station.

Much of the annual loss was driven by a near $700m writedown from accelerating the closure of Loy Yang A coal power station, Victoria’s biggest emitting generator, by up to a decade. It also recorded an accounting loss of nearly $900m on the value of derivative contracts — financial instruments used by AGL and other energy companies to hedge its exposure to the wholesale price of electricity.

The underlying profit performance has stirred expectation that AGL has turned its corporate fortunes around after a turbulent few years that saw a shareholder revolt, the embarrassing scrapping of a demerger plan and the ousting of the executive team.

Mr Nicks said the result was “strong” in the face of volatile market conditions.

AGL chief executive Damien Nicks. Picture: Jane Dempster

“The statutory loss of the $1.26bn is not unexpected. It was exactly what we said at the half-year, and it ties to what we said when we refreshed our strategy back in September, driven by the earlier closure of Loy Yang. But what is important for me is the underlying performance and that was much stronger in the second half compared to the first half and that was driven by plant availability,” Mr Nicks told The Australian.

“We expect this positive momentum to continue into FY24, as indicated by our earnings guidance, which is unchanged from our announcement in June 2023.”

The underlying profit after tax figure has been foreshadowed by AGL in its investor day briefing in June, but the $281m figure was at the top end of that guidance.

AGL left its 2024 financial year guidance unchanged at between $580m to $780m. If it reaches that guidance, it would be the largest annual profit since the 2021 financial year.

The strength of AGL’s 2024 result is likely to predominantly driven by recent increases in household and business bills. The Australian Energy Regulator in May approved price raises for households and businesses for much of the country by around 25, which are now being passed through.

The increases have stoked anger and intensified pressure on the federal Labor government, which in May offered some 5 million households bill relief.

Australia’s fleet of coal power stations are under mounting social and economic pressure, and companies like AGL are grappling with how to transition its electricity generation mix without disrupting its profitability.

AGL in 2022 pledged to spend $20bn to develop 12 gigawatts worth of zero emission generation capacity after bowing to mounting pressure from shareholders and activists such as billionaire Mike Cannon-Brookes.

AGL will close its Loy Yang A coal power station by 2035, and is targeting the closure of Bayswater in NSW between 2030 and 2033.

While investors have welcomed the plan, AGL is under pressure to fund the transition without damaging its balance sheet.

To achieve its aims, AGL said in June it will adjust its dividend policy and will now target dividend payments of between 50-75 per cent of profits. AGL previously targeted a dividend ratio of 75 per cent.

AGL on Thursday declared a total dividend of 31c per share, which was also a two-year high. The company’s shares fell 3.1 per cent or 36c to $11.22.

Originally published as AGL sees little power price relief amid $1.26bn loss