AGL Energy says it is confident that the recent fall in household demand, and the take-up of rooftop solar will moderate as the cost of carbon and network charges fall, and as solar subsidies are wound back.
The fall in household demand has been a feature of the electicity markets in the last few years – caused by soaring grid costs, tumbling solar prices and generous incentives, and increased efficiency.
It’s also been having an impact on the returns of the major utilities. AGL was the only one of the major electricity retailers to actually lift its earnings, although its resulted were largely boosted by huge profits from the Loy Yang A coal fired power stations.
AGL has cited the adoption of rooftop solar PV as one of the main reasons for falling demand in recent years. As this graph below shows, household demand fell 7.6% in Queensland, the country’s most vibrant solar market in the past 12 months. Demand has also been affected by the mild winter.
Managing director Michael Fraser said AGL Energy expected a slowing in the adoption of solar installations, as feed in tariffs were wound back. AGL executives said adoption rates were finely calibrated with payback assumptions. A lot would depend on the future of module prices and tariffs.
Electricity charges could soften if the carbon price was removed or diluted, and if network costs were stabilized. Much would also depend on the form of tariffs.
“It all depends where network charges go,” Fraser said. “If they are restructured towards a capacity basis, that may impact it.”
Fraser said that the reduction in electricity pricing pressure could see demand from households resume their normal growth. A price shock in South Australia in the early 2000s had caused a big demand side response, but this went back to normal when price rises returned to track inflation. (Although it should be noted that one in five homes in South Australia now have rooftop solar).
Despite the moderating electricity volumes, AGL was able to post a lift in its retail earnings because higher electricity margins offset a fall in demand, and its retail gas operations delivered a strong profit. Its profit margins per customer rose to $200 each – a record.
However, AGL said its overall underlying profit had jumped 24.1 per cent to $598 million – thanks mostly to the huge cash flows it was receiving from the Loy Yang A brown coal power station in Victoria, the biggest single emitter in the country that it bought last year.
AGL says Loy Yang’s profits were boosted by the compensation package for the carbon price, but the fact the carbon price was likely to fall sharply under Labor’s planned moved to a traded price, or be removed althogether under a Coalition government, meant it would earn even more money in the years ahead.
As this graph to the right shows, AGL assumed a much higher carbon price when it bought it cheaply after one of the major shareholders, Tepco, was forced to sell after the Fukushima nuclear disaster. Fraser said this would significantly lift the value of the asset.
The purchase of Loy Yang has meant that AGL’s generation portfolio – based on output – is more than three quarters coal, as this graph shows here. The company is also expected to take part in the sale of the Macquarie Generation assets owned by the NSW government, which includes the largest black coal generators in the country.
Elsewhere in its report, AGL said that the changing dynamics in the wholesale market – it has previously said that as much as 9GW of baseload power is surplus to requirements – it has written off a number of development projects, both gas and renewables, at a cost of $41 million. Fraser said this did not reflect the company’s views about the fate of the renewable energy target.
“There are a number of projects we’ve been working on for some time, and in short, we don’t see those being developed any time soon,” Fraser told Bloomberg. “There’s plenty of generation capacity around.” AGL also wrote down the value of gas developments in NSW, gas generation projects such as the Leafs Gully power station in New South Wales and wind farms in South Australia.
