Origin Energy withholds 2023 guidance amid uncertainty

Origin Energy has been forced to defer providing a 2023 earnings guidance as coal supply shortages and volatile electricity markets cloud its profit outlook.

Origin Energy plans to close its Eraring coal power plant by 2025 amid a fast changing transition to renewables in the electricity system.

Origin Energy has been forced to defer providing a 2023 earnings guidance as coal supply shortages and volatile electricity markets cloud its profit outlook.

The company has also rejected calls for the domestic gas trigger to be pulled, as threatened by the federal government, saying producers will free up supplies to dodge a forecast shortfall.

The electricity and gas retailer runs Australia’s largest coal power station, Eraring in NSW, but has struggled to find enough volumes to fill the plant after its supplier Centennial Coal was hit with a series of mine setbacks.

After the power grid was plagued by a quarter of coal supply being knocked out of the system earlier this winter, Origin chief executive Frank Calabria said he wanted to make sure the company had enough fuel to call on should another energy crunch hit.

“We clearly got hurt this year through the shocks of not having physical fuel supply when we needed it,” Mr Calabria said after delivering its annual results. “The reality is that we just need to make sure that those events that occurred this year don‘t occur next year. That’s the key.”

The energy giant originally pulled its guidance on June 1 but the decision to keep any forecasts on ice drew a cool reaction from investors who questioned the lack of visibility from management.

“This earnings season is proving to be one where investors don’t have patience or tolerance for uncertainty, risk or disappointment,” Barrenjoey equities analyst Dale Koenders said.

“For Origin to not be aware of that and to provide very opaque or confusing guidance has resulted in a high level of frustration.”

Origin has been exposed to paying higher wholesale prices to buy alternate supplies to meet customer demand, securing production from other Hunter Valley mines as it limits exposure to Centennial ahead of the expected closure of Eraring in 2025.

Wholesale spot electricity prices more than tripled in the second quarter of 2022 to average $264 per megawatt hour but have since eased to below $150MWh with more coal generation and renewables online. Consumers face a bill of just under $200m to cover costs from the last electricity system failure, the Australian Energy Market Operator said on Thursday, covering reliability interventions and suspension of the spot market.

Origin fell to a $1.4bn statutory annual loss after a $2.2bn non-cash impairment hit revealed at its last quarterly results, while a 30 per cent rise in underlying profit to $407m fell short of $524m analysts’ consensus.

High commodity prices boosted its gas business and helped offset a tougher earnings period for its energy markets business where Origin pointed to “very challenging conditions” in the electricity industry.

As a major Queensland LNG exporter, Origin remains in the crosshairs of government policy measures that could include activation of the gas export trigger to free up more LNG volumes for the local market. The competition watchdog warned cashed-up LNG exporters – including Origin’s APLNG gas export project – they were on notice to plug a 56 peta­joules shortfall or face sweeping regulatory intervention.

Origin Energy, led by Frank Calabria, said conditions remained too volatile to hand down guidance. Picture: John Feder

However, Mr Calabria said there would be no shortage on the east coast. “I will say that I believe that there will not be a shortfall because there will be gas made available and if you saw the ACCC report you will see there was 167 petajoules and that has the opportunity to be directed to the domestic market.”

The Sydney-based company delivered a 4 per cent rise in annual underlying earnings to $2.11bn, compared to a $1.95bn-$2.25bn range, and more than doubled its dividend to 16.5c per share from 7.5c a year ago.

The power operator said 2022 energy market’s underlying earnings plummeted by 62 per cent to $365m after it previously guided to a $310m-$460m range.

Integrated gas earnings, up 62 per cent to $1.83bn, topped a $1.7bn-$1.8bn range given by the company.

Origin said conditions remained too volatile to provide guidance for 2023 although earnings were expected to be higher. It tipped higher earnings from its gas business, while electricity gross profit will remain under pressure.

“Risk of coal under-delivery remains, including due to rail and mine performance. Origin will continue to assess the outlook for the business with a view to providing an update when there is less uncertainty.”

Origin said it expected further growth in underlying earnings in 2024 depending on fuel and energy prices.

The company also rejected speculation a national capacity mechanism was dead, saying a government policy was still needed to incentivise new power generation in the market.

Energy ministers decided last week to take control of the mechanism from the Energy Security Board. The scheme would pay companies for guaranteeing standby supply, avoiding blackouts and helping drive investment in new generation for the grid.

While that raised speculation the mechanism may be killed off, Mr Calabria said it remained on the table.

“It looks like it’s been taken back by governments but I don’t know if that means a capacity mechanism is dead. That would not be my interpretation,” the Origin CEO said.

“I think it will continue because reliable capacity will need to be there. We‘re relying on coal, but coal is going to come out of the market and something’s going to need to replace it.”

Under the mechanism new back-up generation will be provided with extra financial support under the scheme in the form of longer-term contracts, a recognition of the challenges faced by the industry in bringing on new supply amid a highly volatile energy system.

Shares in Origin dropped 2.8 per cent to close at $5.90 on Thursday.

Originally published as Origin Energy withholds 2023 guidance amid uncertainty