Power: Right now, it’s all about that base

About the author:

Max Vickerson
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By Max Vickerson
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Date posted:
02 June 2022, 8:00 AM
Sectors Covered:
Industrials, New Energy

  • The squeeze in the wholesale market continues as electricity futures surge to new record highs. Origin Energy's (ASX:ORG) announcement today highlights the difference in its exposure compared to AGL Energy (ASX:AGL) although both coal fleets aren’t running at full capacity.
  • Retail tariffs are jumping in FY23 but prices could continue to climb higher in FY24 which we see as a strong tailwind for AGL’s vertically integrated position.
  • Despite the defeat of its demerger, AGL Energy’s (ASX:AGL) leadership issues could be easier to resolve than ORG’s coal shortage. In our small cap coverage, Genex Power (ASX:GNX) is likely to receive an earnings boost from spot sales at its solar farms.


Baseload power squeeze pushing the market higher

Persistently higher spot prices, at all times of the day, have pushed the FY23 baseload futures price to record highs (> $250/MWh in NSW and QLD, ~$168/MWh in VIC and $194/MWh in SA). Futures remain above $100/MWh in NSW, QLD and SA out to the end of FY25.

High prices are not being driven by short duration surges up to the market cap but instead remain stubbornly and consistently high. In that kind of environment baseload generation is the most effective and fuel efficient method to cover spot market exposures.

AGL’s fixed price NSW coal contracts, better logistics and its integrated mining operation in Victoria will insulate it from the worst of the forces that have driven ORG to withdraw its FY23 Energy Markets guidance.

Retail market is showing signs of stress

The final Default Market Offer (DMO) for FY23 showed a sharp increase in wholesale energy costs (40% – 50% higher than FY22 in NSW and QLD for average retail customers). Retailers like AGL that can cover most of the higher wholesale prices with fixed fuel contracts should see margins expand.

Competition also appears to be constrained as a number of smaller retailers are encouraging their customers to leave to find better prices. Despite the allowance for higher tariffs with the DMO, we expect a number of smaller retailers are struggling to manage their wholesale exposures which will limit a jump in churn.

Uncertainties for both AGL and ORG but one is easier to fix than the other

AGL Energy’s (ASX:AGL) standing has suffered because of the wrangling over the long term direction of the company but the generation assets support stronger margins as consumer prices increase. We expect the leadership issues will be resolved and we retain our ADD rating.

Origin Energy's (ASX:ORG) share price has plunged in reaction to its announcement but we’re wary of wading in too soon. By withdrawing guidance, management has highlighted the risks that can get amplified while spot electricity markets are so unruly.

We retain our HOLD rating and will wait to see how the wholesale market fares during the coming peak winter season.

Figure 1: FY23 baseload electricity futures

Growth stocks have had a choppy ride since the onset of the pandemicSource: Morgans Financial, AEMO

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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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