A recovery in wholesale electricity prices is improving the outlook for AGL and Origin Energy, the nation’s two largest generators, after enduring months of pressure from cheap renewable energy flooding into the grid and hammering their earnings.
Rallying global commodity prices are pushing up the cost of fuelling Australia’s black coal-burning power stations and feeding into higher wholesale prices across the east-coast electricity market, with average spot prices rising 23 per cent in January to $92 per megawatt hour.
AGL’s Liddell and Bayswater power stations in the Hunter.Credit:Dominic Lorrimer
Forward prices have also increased 9 per cent this month, according to JP Morgan, and are almost double what they were 12 months ago.
Morgan Stanley said the impact of rebounding forward wholesale prices across the National Electricity Market (NEM) would be a focal point when AGL and Origin report their half-year results and earnings guidance later this month.
“Both stocks benefit from the rising forward wholesale electricity prices, and face generation flexibility and retail competition risks,” analyst Rob Koh said.
Origin and AGL have been investing heavily in developing more renewable energy generators and batteries, but have been hit hard by the accelerating pace of the transition rattling the market and slashing wholesale prices. In the past 12 months, an influx of wind and solar farms and ongoing uptake of rooftop solar panels have pushed daytime wholesale electricity prices down to levels where coal-burning generators that supply more than half of Australia’s electricity mix are struggling to compete.
In a report last week, the Australian Energy Market Operator (AEMO) revealed the changing power-generation mix helped push wholesale prices below $0 more than 11 per cent of the time in 2021, doubling the previous year’s average.
AGL, which sunk to a $2.06 billion full-year loss, declared the “winds of change” had swept the industry much faster than anticipated, prompting it to embark on plans for a historic demerger of its coal assets from its wider retailing business.
AGL’s proposed split includes forming a new company, Accel Energy, to own its fleet of large power plants, while the other company, AGL Australia, would hold its electricity, gas and telecommunications retailing business along with some cleaner generation assets. Following the demerger, Accel would retain a 15 per cent to 20 per cent shareholding in AGL Australia.
JP Morgan last month said the recent uplift in forward electricity prices had led to a revision in earnings estimates making the Accel business a “much more palatable” entity than previously thought.
Analysts are widely predicting the 2022 financial year to be the “low point” for Origin and AGL’s energy businesses as wholesale prices begin to recover.
Origin Energy is considered to have a more flexible power-generation portfolio than AGL, enabling it to better respond to wholesale price changes. It also has significant exposure to the unprecedented global rally in liquefied natural gas (LNG) via its stake in the Australia Pacific LNG business in Queensland.
LNG prices including S&P Global Platts’ Japan-Korea Marker, the benchmark for spot LNG in North Asia, passed an unprecedented $US50 per million British thermal units last year and remain elevated this year amid concerns about a possible Russian invasion of Ukraine.
In the final three months of 2021, revenue from Origin’s jointly owned LNG venture rose 33 per cent from the previous quarter and was 91 per cent higher than the same time last year.
Tom Allen, an analyst with investment bank UBS, said he expected rising wholesale electricity prices coupled with rising LNG prices to support 10-15 per cent growth in Origin’s underlying earnings over the coming two years.
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