Origin Energy hit with downgrade after Eraring coal station early closure
Origin has been hit with a downgrade by a top broker, but analysts said a battery to be installed at the site would provide solid returns.
Origin Energy was hit with a downgrade after its decision to close the huge Eraring coal plant early, even as most analysts said the move to accelerate its retirement was the correct decision.
JP Morgan downgraded Origin to underweight from neutral, saying it sees less value in the stock and concerns over improvements in its retail business in the next few years.
“The extension of a weak contribution from energy markets has resulted in downgrades to earnings forecasts while the earlier closure of Eraring has impacted net present value by 9 per cent,” JP Morgan analyst Mark Busuttil said.
“While the announcement does follow AGL’s plans to demerge its business, we now question what competitive advantage Origin has in retailing.”
Still, its move to shutter it early is a clear signal of fast eroding value in the coal station, and may explain why it has declined so far to sell it to a new investor.
“To close the plant rather than sell it suggests it is making limited profit even at current wholesale prices.”
Origin shares fell 7.8 per cent to $5.68 on Friday.
Origin has kept the door ajar to a sale as it winds down the plant over the next three and a half years although the company‘s fixed costs of $200m-$250m a year to run the facility may dampen buyer interest.
Bringing forward the closure by seven years was a surprise, Macquarie said, and it suggested the potential mid-2025 closure date may slip given not all of the replacement generation is likely to be ready in time.
“An early Eraring closure is not a surprise, albeit CY25 is earlier than anticipated. It is dependent upon the NSW Roadmap construction, transmission lines, and gas peakers in NSW,” Macquarie analysts said.
“With risk of slippage, Eraring may stay open longer. Reality is that its profit contribution was disappearing with the end of the legacy coal contract and household solar carving out the middle of the day.”
Origin said on Thursday that committed and expected power supply across the sector would be in place by the summer of 2026 including its own giant 700 megawatt battery planned for the Eraring site, more than covering the coal plant‘s shuttered capacity.
Origin’s big battery may prove a lucrative earnings driver, UBS said, offsetting the loss of Eraring from the portfolio.
“The battery proposal could add ~$110m EBITDA annually to the electricity portfolio and reduce Origin’s future spend on capacity hedges and coal supply which neutralises the impact to our valuation of Eraring exiting the portfolio,” UBS analyst Tom Allen said.
“With battery costs continuing to fall, we estimate the battery could generate a post tax unlevered internal rate of return of ~13 per cent and note that Origin may seek a partner to fund the upfront capital expenditure in return for an infrastructure return.”
Origin’s 700MW battery, which can send power into the grid for up to four hours, will be developed in three phases with the initial capacity expected online by late 2022. An expression of interest for its supply and installation was issued to industry players a year ago but plans for the facility are said to be well advanced. The battery is the largest under consideration in Australia but still requires sign-off from Origin’s board.