Origin Energy withdraws profit guidance on volatility, coal shortage

Origin Energy has called for both government and industry action to help resuscitate the ailing coal sector amid fears over spiralling wholesale electricity prices.

Origin Energy faces a tough winter ahead as coal supply issues blight its Erarning power station in NSW. Picture: Nick Cubbin

Origin Energy has called for both government and industry action to help resuscitate the ailing coal sector with a string of major generators broken down or not operating at full capacity amid fears over spiralling wholesale electricity prices.

The power giant slashed its energy markets earnings forecast for 2022 by a quarter on Wednesday and withdrew earnings guidance for the 2023 financial year amid huge volatility in electricity markets and coal supply problems at its Eraring plant in NSW.

“The key matter which I think industry and governments need to work through is how they actually lift the output of the coal generation capacity here,” Origin chief executive Frank Calabria said.

“The reality is, a lot of people are highlighting it to be a gas matter and we would see more of the root cause right now coming from the power sector.”

A series of coal outages spanning Victoria, NSW and Queensland have contributed to big jumps in power prices with electricity stations including AGL Energy’s Loy Yang A, NSW’s Vales Point and Queensland’s Callide all running below capacity in the past few months.

A spike in coal and gas prices, exacerbated by tight global markets following Russia’s invasion of Ukraine, have also contributed to price pressures.

Australia’s electricity industry faces the risk of following the experience in the UK, where 30 retailers collapsed due to soaring wholesale energy prices, according to Mr Calabria.

“You’re seeing a market now where the wholesale price is orders of magnitude above what can be recovered through the default market offer,” Mr Calabria said, referring to a standing offer that has just surged by up to 18 per cent.

Origin’s downgrade follows a cap being imposed on gas markets in Sydney, Melbourne and Brisbane after wholesale prices soared 80 times above normal levels following a cold snap and the collapse of Weston Energy last week, with the surge described as “apocalyptic” by the Ai Group.

The power operator said energy markets’ underlying earnings would fall by 26 per cent at the mid-range to $310m-$460m, from the original guidance of $450m-$600m.

Origin Energy CEO Frank Calabria. Picture: AAP

It blamed a series of coal supply problems at Eraring, the nation’s largest coal station, which it plans to shut as soon as mid-2025.

Origin shares slumped 13.7 per cent to $5.91 on Wednesday.

Group underlying earnings are forecast at the mid-point of the original $1.95bn-$2.25bn range, due to Origin’s gas business running hot. It now expects integrated gas earnings of $1.7bn-$1.8bn, from the original $1.5bn-$1.65bn range.

The problems with its energy markets business have in part been caused by issues with its supplier, Centennial Coal, which is struggling with production constraints at its Mandalong mine, with the situation deteriorating significantly in recent weeks, ­according to Origin.

That means the company is exposed to paying higher wholesale prices to buy alternate supplies to meet customer demand.

“The recent material under-delivery of coal to Eraring results in lower output from the plant, additional replacement coal purchases at significantly higher prices, and is being exacerbated by coal delivery constraints via rail,” Origin said. “Despite ­positioning the year with a relatively low short position across all states, the lower output from Eraring results in a greater exposure to the purchase of electricity at current high spot prices in order to meet customer demand.”

Deliveries from the Mandalong mine are expected to be interrupted during the remainder of this financial year and into the first half of the 2023 ­financial year. Equipment supply chain delays are also expected to affect coal deliveries in the 2023 financial year.

Problems with Eraring are seen extending into the 2023 ­financial year, which along with broader volatility saw the company pull its guidance.

Origin had previously provided guidance for Energy Markets’ underlying EBITDA for the 2023 financial year of $600m-$850m. It expects to pay more for coal given soaring thermal coal prices in the market and said there were limitations for securing additional supplies by rail.

“Origin will continue to assess the outlook, with a view to providing an update at full year results in August,” Origin said.

With a shadow gas price leaping to as much as $800 a ­gigajoule on Tuesday, the Australian Energy Market Operator was forced to intervene and set a $40 a gigajoule price cap, which is still more than four times average prices.

Experts say it marks the first time the price cap has been used in the past decade, with the $800 price showing the level markets would have reached if the intervention had not occurred. Electricity prices have also soared with wholesale futures for the third quarter trading at all-time records.

Wholesale electricity prices jumped 141 per cent in the March quarter from the same period a year earlier. A series of coal outages spanning Victoria, NSW and Queensland have contributed to pressures.

Electricity and gas markets have surged in April and May with NSW prices on track to finish the June quarter twice as high as the previous record, ­according to experts.

The hit to households is also now becoming clearer with power bills rising by hundreds of dollars for some customers after the national regulator announced increases of up to 18 per cent on standing offers from July 1.

Originally published as Origin Energy withdraws profit guidance on volatility, coal shortage