Origin warns energy market reform urgently needed after profits jump 23pc

Australia’s largest electricity and gas retailer says market rules must be urgently changed and action taken to address structural gas deficits in order to ensure the country’s grid remain reliable.

Australia’s largest electricity and gas retailer Origin Energy has warned market rules must be changed and action taken quickly to address structural gas deficits and ensure the country’s grid remains reliable.

Origin Energy chief executive Frank Calabria’s grim warning underscores widespread alarm about the trajectory of Australia’s energy transition and the prospect of economic damage.

The Albanese government has set an aggressive target of having renewables generate 82 per cent of the country’s power by 2030, but Mr Calabria on Thursday warned that the country’s rules recognise the important role of gas.

“As we go through this transition it is imperative that the policies focus on energy security and the reason is market design will need to change to be fit for purpose in a world with a high penetration of renewable energy.

“In our view that very strongly requires a capacity mechanism design that does include gas,” he said after the group reported higher than expected interim earnings.

The comments are the latest attempt by Australia’s energy industry to persuade policymakers to create a market mechanism that incentivises the development of new gas power stations.

Australia’s energy industry stresses that gas-fired plants can run for long periods when weather conditions are unsuitable for renewable energy generation.

Market signals have incentivised the development of a spate of new large batteries, but predicting gas usage is difficult. Typically, a gas-fired power station may only be needed for about 5 per cent of the time, and developers say this would not cover construction and other costs.

Instead, the industry has called for gas-fired power stations to be paid for being ready to dispatch power.

Some states are already beginning to move.

South Australia last year said it is now considering holding annual tenders where generators and battery operators can bid for a contract to underwrite a portion of their revenue – a scheme to be called the Firm Energy Reliability Mechanism.

Other states could follow suit, much to the relief of the energy industry, which has increasingly warned that an inability to firm renewables would make the grid vulnerable to periods of adverse weather when wind and solar generation are curtailed.

Mr Calabria’s comments came as Origin increased its dividend payments.

It declared a dividend of 30c a share for the six months to December 31, up 9 per cent from 27.5c a share last year, on the back of a 23 per cent jump in underlying ­profits.

The financial results will soothe any lingering concern about the capacity of Origin to reward shareholders while the company replaces its fossil fuel generation capacity – most notably NSW’s largest coal-fired power station.

Mr Calabria said the results illustrated the enviable position the company was in, having multiple revenue streams.

“It highlights that we have two diverse operating businesses in Australia that can contribute whilst also having the global growth opportunities on technology and energy,” Mr Calabria told The Australian.

Origin Energy CEO Frank Calabria. Picture: John Feder

Underlying profit soared to $924m from $747m. Statutory profit, which includes an array of financial instruments that can be volatile, rose 2 per cent.

The varied structure of Origin was a key reason why some investors rejected a near $20bn offer from Brookfield back in 2023 – a deal widely seen as potentially a catalyst for Australia’s transition to renewable energy.

Brookfield had promised to develop 14GW of renewables – a promise that eventually swayed the Australian Competition & Commission to give the transaction the green light.

The result was driven principally by Origin’s LNG investment – the Australia Pacific LNG joint venture. Origin said revenue from the integrated gas division rose 25 per cent year-on-year.

The jump offset weaker returns from Origin’s energy market business, which supplies electricity to about 4.7 million household and business customers.

Origin’s energy market business has been hit by lower annual bill tariffs, and the future of the division will be determined when the Australian Energy Regulator determines the next bill tariff.

The Default Market Offer, the benchmark on which all retail bills are set, is calculated annually as the AER considers the wholesale cost of electricity, the cost of transporting electricity, and the cost of compliance with government rules and regulations.

Mr Calabria said it was too early to know how the next tariff would be set but noted that wholesale electricity prices – the most important factor when the regulator sets bills – was up slightly on 2024 levels.

Wholesale electricity prices have rallied in recent weeks amid a string of unplanned coal power stations outage – including at Eraring. These outages unfortunately coincided with a spell of hot weather across Australia’s east coast that saw a spike in electricity demand.

Any suggestion of higher retail bills would be politically sensitive. The Albanese government must return to the polls by May, around the time the AER is scheduled to release its draft ruling, and any sign of bill increases would be politically damaging.

Analysts have, however, noted that the watchdog includes wholesale costs over a multi-year period, so even higher wholesale prices in recent months are not guaranteed to lead to higher tariffs when they are reset on July 1. Indeed, the record surge in 2022 could well drop out of the regulator’s calculations.

Origin shares closed down 1.2 per cent at $10.14.