AGL Energy, Origin Energy face ‘challenging’ market conditions
AGL and Origin have suffered hits sparked by weaker electricity prices that are likely to extend into the 2022 financial year.
Australia’s two biggest electricity operators have warned that challenging market conditions may last for several years, with rock-bottom power prices forcing AGL Energy into a shock $2.7bn writedown driven by unprofitable wind-farm deals while Origin Energy was forced to slash its annual profit guidance.
The twin hits were sparked by weaker electricity prices that are likely to extend into the 2022 financial year and raise the prospect of a prolonged period of lower earnings for the nation’s dominant power retailers. On the flip side, households can expect lower bills and greater competition among retailers after enduring sky-high tariffs in the past few years.
AGL, which issued a profit warning days before Christmas, took a $1.92bn hit from investments in wind farms struck between 2006 and 2012 that are now out of the money.
The power giant signed deals to buy supplies from the renewable facilities for more than $100 per megawatt hour compared with current prices of at least half that level for new wind farms coming online. A further $1.1bn charge was recorded on the environmental restoration of coal and gas sites and $532m dusted on the value of its legacy power stations.
AGL blamed an “accelerated deterioration” in long-term market forecasts on government measures to underwrite new electricity generation along with lower renewable costs. Its chief executive, Brett Redman, has been among critics of the Morrison and NSW governments after they hatched plans to intervene in the market to ensure enough generation gets build as coal plants retire this decade.
“As a result, the long-term outlook for wholesale electricity and renewable energy certificates now indicates a sustained and material reduction in prices,” AGL said in a statement. It maintained underlying annual profit guidance of $500m-$580m.
NSW Energy Minister Matt Kean said the state’s energy blueprint would lower prices.
“I’m on the side of NSW families and businesses and that’s why my priority is creating the policy that delivers cheap, affordable electricity for NSW consumers,” Mr Kean said.
Average electricity spot prices have halved from a year ago to between $40/MWh and $45/MWh in most states as a flood of cheap renewables lowered daytime prices along with cheaper gas and coal and softer demand amid COVID-19.
AGL’s price warning was a bearish signal for investors looking to pick the bottom of the market, RBC said.
Some investors have questioned whether the big fall in wholesale prices is sustainable given predictions baseload coal plants may need to further cut production to survive, tightening the market and leading to prices rising again.
But RBC said the structure of the market may have changed amid underwriting moves.
“What was noticeable was AGL’s view that the outlook for wholesale electricity and renewable energy certificates indicated a sustained and material reduction to prices. This is a change from AGL previously talking to a weak shorter term pricing and an expectation that wholesale electricity prices will have to recover to attract new generation,” RBC analyst James Nevin said.
It was “hard to see a rebound in prices due to the structural change in wholesale electricity and the continued underwriting of new generation with contracts outside of the spot and futures market in the national electricity market that means additional supply would continue to come online despite low spot and futures prices”.
Pressure will now mount on Mr Redman to fast-track a move into new markets such as mobile phones and broadband as it seeks to grow alternate sources of income. The AGL chief walked away from a $3bn takeover of telco Vocus some 18 months ago, but a push for a big-ticket deal may intensify given dwindling earnings from its mainstay business. AGL shares fell 3.6 per cent to $11.42.
Origin also followed AGL in issuing its own downgrade to full year guidance, citing subdued energy demand from COVID-19, a mild summer season and higher gas costs amid a jump in Asian LNG prices.
The energy company now expects its energy market full-year earnings to be in the range of $1bn-$1.14bn, compared to previous guidance of $1.15bn-$1.3bn, a downgrade of 8.6 per cent.
Electricity gross profit is now expected to fall $250m-$290m year on year, compared to the previous expected fall of $170m-$220m.
Origin shareholder Allan Gray said there were questions about whether the two energy players would commit to new generation given low wholesale prices.
“It does suggest that current wholesale electricity prices are too low to incentivise new generation of the type that these two companies have got,” Allan Gray managing director Simon Mawhinney said.
“And they are actually probably way too low for renewable generation to make an economic return as well, absent handouts for government support. It’s certainly a little bit precarious.”
Origin shares fell 6.85 per cent to $4.62.
Power prices averaged $44/MWh across most states in the December quarter, 38 per cent less than the same quarter in 2019 and the lowest December quarter wholesale price since 2014, with only NSW bucking the trend.
Electricity futures point to subdued conditions extending through this year and into 2022 with prices in the low $50MWh range, signalling a tough period ahead for the nation‘s big utilities.
Origin upgraded its LNG production and cash distribution break-even point and issued new guidance on expected earnings. Production through its Australian Pacific LNG business is now forecast to be in the range of 685-705 petajoules, up 0.7 per cent from the previous guidance of 675-705PJ.
The distribution break-even point is now $US24-$US28 per barrel of oil equivalent, down from $US25-$US29 per boe.
This means the company is predicting cash earnings of $575m-$675m from its LNG business, but natural gas profit is still projected to fall $200m-$250m year on year compared to previous expectations of a $100m-$150m decline.
This reflects the roll off of legacy sales contracts, the repricing of tariffs and lower sales volumes to businesses.
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