Origin Energy to unveil transition plan funding as investors demand returns

Origin Energy must develop a pipeline of renewable energy, but some investors are angling for more money via dividends – making for an interesting upcoming investor day session.

Origin Energy will within weeks unveil how much renewable energy it intends to develop and how it will fund the pipeline, as Australia’s largest energy company moves to demonstrate it can deliver a transition away from fossil fuels while rewarding shareholders.

Origin in February said it would reassess its renewable energy plans, which calls on the company to develop at least 4GW of zero emission generation capacity after the collapse of the near $20bn acquisition by Brookfield and EIG Partners.

Frank Calabria, chief executive of Origin, said the company will unveil its strategy around capital allocation and renewable energy pipeline next month when it holds its annual investor meeting.

“We will have an investor day in June … that day will essentially be a capital allocation policy and distribution,” said Mr Calabria.

Origin has a policy of paying out between 30 per cent and 50 per cent of free cash flow in dividends, but some investors are angling for higher returns – which could stymie the capacity of the company to pay for new renewable energy capacity.

Some investors have insisted Origin should lift the policy to between 65 per cent and 75 per cent.

But renewable energy development is expensive and other shareholders have called on the company to prioritise and increase their transition ambition.

Origin will, however, not have to fund all of its renewable pipeline, and Mr Calabria said the company will predominantly fund storage projects.

“We have made some investment in batteries on balance sheet,” Mr Calabria told The Australian.

Origin and AGL Energy have adopted a largely similar strategy that sees both develop large-scale batteries that allows them to capture and profit from Australia’s volatile wholesale electricity market.

Australia’s wholesale electricity price – the cost of generating electricity – can swing wildly throughout the day, primarily due to the country’s high uptake of rooftop solar.

During sunny days, the wholesale price is often zero and can sometimes be negative. A battery could be charged during this period and an operator receives a fee for doing so.

The battery would then be discharged when the sun sets and the cost of wholesale electricity rises.

In contrast, renewable energy generation projects produce throughout the day and do not allow owners to capitalise on wholesale volatility.

Although likely lower, such assets generate consistent earnings – potentially appealing to the likes of superannuation investors.

Renewable energy projects are also set to be underwritten by the government after the federal Labor government drastically increased the size of the so-called capacity investment scheme.

The scheme sees developers guaranteed a minimum return on new solar and wind projects. Under the scheme, should the wholesale electricity price fall below an agreed threshold – taxpayers will compensate the renewable energy project. Should the wholesale electricity price exceed a metric, developers pay the government – a design that removes revenue risk from developers and accelerates much-needed investment.

AustralianSuper – Origin’s largest investor and a key blocker to the Brookfield deal – has indicated it could be prepared to back the Australia’s largest electricity and gas retailer with a range of capital options including co-investments, capital raisings or taking equity stakes in associated investments.

Still, some Australian energy industry executives remain sceptical about the commitment of superannuation companies to fund the transition as it generates lower returns than what could be achieved via other investments.

Renewable energy projects and necessary infrastructure are also proving challenging to build amid opposition from some quarters, which say projects will uproot their regional communities and damage property values.

The reporter travelled to London as a guest of Origin Energy