Energy retailers: Don't worry the Feds are here to help

About the author:

Max Vickerson
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By Max Vickerson
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Date posted:
21 September 2020, 8:50 AM
Sectors Covered:
Industrials, New Energy

  • Further pressure is being added to AGL Energy (AGL) and Origin's (ORG) electricity businesses with threats by the Federal Government to intervene in the generation market.
  • Electricity futures remain weak and the draft decision on default retail prices in Victoria points to tighter margins in 2H21.
  • The government is looking to extend the heads of agreement with LNG producers designed to increase gas supply to the domestic market.
  • New plans are also underway to accelerate the development of frontier gas like the Beetaloo basin in the NT which could benefit ORG.

1000MW of dispatchable power or else

The Federal Government has said that it wants 1000MW of new dispatchable generation capacity in the NSW market to partially offset the closure of AGL's 2000MW Liddell plant in FY23.

The government has given the market a deadline of April 2021 to announce projects that must collectively announce 1000MW of capacity or it will go ahead with its own gas-fired plant via its ownership of Snowy Hydro, presumably in addition to the Snowy 2.0 pumped hydro project (2000MW capacity / 350GWh storage).

We don't think current market prices are sending strong signals for private industry to invest despite AGL considering a 250MW plant at Newcastle and reports of EnergyAustralia considering a 300MW expansion at its Tallawarra site.

CY20 Victorian Default Offer likely to put pressure on margins

The draft decision on the FY21 Victorian Default Offer (VDO) has been released which will reduce retail prices by 7% compared to FY20's VDO. The wholesale energy price component is estimated to fall 21% which will put pressure on retail margins. Estimated network costs were kept stable which are also a cost for retailers so this won't help their margins. The final decision on the VDO is due by 25 November 2020.

Tipping the scales in the gas market

The Federal Government announced a range of initiatives to lower the cost of gas. It intends to maintain pressure on LNG producers to offer gas to the local market before it is exported by extending the existing heads of agreement. Additionally the government wants to draft plans to develop the Beetaloo, North Bowen and Galilee basins as well as increasing the importance of the Wallumbilla hub for gas pricing.

It's possible that the government could offer to underwrite pipeline developments and initial contracts with suppliers to give producers confidence to make investment decisions. Specific details on how this would happen are not yet clear though.

Investment view

While the Federal Government announcements have gathered plenty of media attention, they don't really change our views on AGL and ORG. Both companies' electricity businesses will continue to be challenged with weak wholesale prices.

We think ORG will eventually be able to take advantage of a recovery in commodity prices but investors will need to be patient.

We maintain our HOLD rating on AGL with 12-month potential TSR of 9% and reduce our price target. Morgans clients login to view.

We also maintain our Add rating on ORG with 12-month potential TSR of 38% and increase our price target. Morgans clients login to view.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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