Origin profit sinks 98pc amid lower power prices, subdued economy
Origin Energy warned of a difficult time ahead for the energy market after its first-half profit plunged 98pc.
Origin Energy said an accelerating shift to renewables has piled pressure on generators to cut supply, with a solar-led rout in wholesale power prices sparking a 98 per cent plunge in the power giant’s interim profit and predictions of a “messy” period ahead for the market.
Electricity and gas prices have dropped to their lowest levels in six years after a record level of large-scale solar and wind generation entered the power grid last year, data from the Australian Energy Regulator shows.
That sustained price fall has created a fresh headache for the nation’s big power retailers including Origin which expects market turbulence to continue over the next few years, forcing cuts to output from its Eraring coal plant.
“I think it’s actually going to be a pretty messy period of time,” Origin chief executive Frank Calabria said. “And I think you will see us running our generation less at Eraring.”
Average electricity spot prices have halved from a year ago to between $40 to $50 a megawatt hour range in most states as a flood of cheap renewables lowered daytime prices, along with cheaper gas and coal and softer demand amid COVID-19.
Origin predicts an eventual rebalancing of the market as generators cut supply in response to low prices.
“I think that there will be both planned and unplanned considerations with the ongoing supply if the market continues at these prices,” Mr Calabria told The Australian. “I think it’s just unsustainable to see prices at these levels continuing. Without a response, it could be planned or unplanned going forward.”
The federal government’s Energy Security Board warned Australia’s fleet of coal fired power plants face early closure as renewables continue to heap pressure on their profitability during daylight hours.
Origin is being forced to reduce supply from Eraring, Australia’s largest coal plant, raising speculation over whether the facility could even exit the national electricity market before its planned retirement date of 2032.
“There is an acceleration of the transition,” Mr Calabria said. “There’s lots of scenarios that can play out, but there’s no doubt there is an acceleration on.”
Origin saw its first-half net profit plummet by 98 per cent as low electricity, oil and gas prices and a subdued economy from COVID-19 hammered the bottom line.
The energy giant said statutory profit for the six-month period plunged 98 per cent to $13m from $599m a year ago. Meanwhile underlying earnings fell 57 per cent to $224m ahead of consensus of $160m.
Earnings for its energy markets unit fell 12 per cent to $635m, while sharply lower LNG prices resulted in a 38 per cent drop to $566m for its integrated gas division. Origin owns a 37.5 per cent stake in the $25bn APLNG gas export project in Queensland.
“Energy Markets EBITDA was the lowest for a half since 2014, with the lowest Electricity margins for at least 10 years,” Ord Minnett analysts said. “While management is optimistic of better pricing outcomes in Integrated Gas, Origin remains cautious on Energy Markets noting: a mild summer has compounded already weaker demand and reduced volatility, gas supply costs are expected to increase, and wholesale electricity prices remain depressed, particularly as renewable supply continues to come online.”
The board lowered its dividend to 12.5c per share, down 16 per cent on last year’s 15c interim payout, although higher than the 2020 payout of 10c per share.
The Sydney-based company had already downgraded its full-year guidance on February 4, citing subdued energy demand due to the impacts of COVID-19 and a mild summer season and higher gas costs amid a jump in Asian LNG prices.
It expects Energy Market full-year EBITDA to be in the range of $1-1.14bn, compared to previous guidance of $1.150-$1.3bn, a downgrade of 8.6 per cent.
The energy producer outlined a plan in January to develop a giant 700 megawatt battery at Eraring, ranking as the largest storage devices spanning the globe and over four times larger than Elon Musk’s Tesla world-beating battery in South Australia.
Origin shares fell 2.17 per cent to $4.50.
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