Rising power prices boost AGL in market reappraisal
AGL Energy’s reliance on coal has propelled a reassessment by investors, with analysts upgrading recommendations.
AGL Energy’s reliance on coal — rather than its widely proclaimed ambitions to exit the mineral by 2050 — has propelled a reassessment by investors, with a number of analysts upgrading their recommendations and target prices on expectations the out-of-favour generation business will be the biggest beneficiary of rising electricity prices.
AGL shares jumped 2.4 per cent yesterday, their biggest one-day rise since July, as analysts at Ord Minnett seized on a report by the Australian Energy Market Operator that said the risk of blackouts and shortfalls during the summer peak demand season would lead to higher and more volatile prices.
“We see AGL Energy as the biggest beneficiary of higher wholesale prices,” the broker said.
“We expect further upward pressure on wholesale prices to flow through to retail, and see earnings growing further (in the 2019 financial year).”
The comments are likely to add to mounting scrutiny of the nation’s biggest power generator, which has found itself in an intense political tussle over its plans to decommission the Hunter Valley-based Liddell coal-fired power station in five years.
As well as Liddell, AGL operates the Bayswater power stations — bought from the NSW government in 2012 for $1.5bn — and Loy Yang A in Victoria, with a combined capacity of 6850MW.
And while they are slated to close between 2022 and 2050, the three coal generators remain the backbone of the company’s earnings, as well as key contributors to the national grid.
In 2016-17 coal-fired power accounted for $1.54bn of earnings in its wholesale electricity business, or 78.7 per cent of the total.
That was up from $1.38bn a year earlier, an increase accounting for virtually all of the 7.6 per cent increase in earnings to $1.97bn.
In its annual report AGL said it was able to operate the fleet to take advantage of higher wholesale electricity prices, the benefit of which “significantly outweighed” higher prices for coal.
Growth was, however, outstripped by what AGL calls “Eco Markets” where its gross margin of $145 million was up 98.6 per cent as the company continued to ramp up renewable energy generation.
Amid calls this week for the owners of coal generators to consider investing more in their plants to extend their life and give the national market more time to adjust, AGL chief executive Andy Vesey reaffirmed plans to close the Liddell coal plant in 2022, and said there had been no talks about selling the unit.
An American expat hired in 2014, Mr Vesey said in the company annual report: “AGL does not plan to invest new capital in coal plants.
“This reflects Australia’s commitment to the Paris climate accord, the expectations of our customers and the broader community, and our assessment of what is economically sustainable given the rapid development of alternative technologies and the likelihood of a long-term carbon constraint in Australia.”
The company is estimated to have to spend hundreds of millions of dollars to overhaul Liddell if it wanted to extend its life for another five or 10 years but would not have any certainty that electricity prices would stay high.
AGL has estimated the cost of rehabilitation for the Liddell and adjacent Bayswater plants at $898m, including the cost of removing buildings and infrastructure on the sites.
It plans to run a program similar to a public tender over the next 18 months for proposals for the site, including a renewable energy generation facility.
Smaller rival Delta Electricity this week said it was exploring whether to make an offer for the Liddell power station to add another asset to its portfolio, which includes the Vales Point coal-fired generator in the same region of NSW.
AGL operates a fleet of 10 hydro, solar and wind facilities on the eastern seaboard — including the Coopers Gap and Silverton wind farms that are in development — with a combined capacity of 2330MW.
AGL has slated another $2bn for investment in renewable energy sources as it looks to fill the gap created in the market by the closure of Liddell in 2022 and has a joint venture with the $133bn Future Fund to finance some developments.
Analysts at Ord Minnett said the biggest risk for the company was increasing regulatory scrutiny and the possibility of price regulation. Inquiries into retail pricing by the Victorian government and the Australian Competition and Consumer Commission are under way, and the federal government is pushing to improve bill transparency and bring electricity bills down before the next election.
AGL has said sales revenue increased due to higher market prices for Large-scale Generation Certificates that are part of the renewable energy target, with compliance costs increasing at a lower rate. AGL was the second-biggest buyer of LGCs in 2016.
Under the RET, electricity retailers buy LGCs from generators with the energy from renewable sources, and then surrender them to the federal government.
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