Australia’s two biggest energy utilities have been badly hit by the sharp fall in power prices, with AGL announcing a massive $2.7 billion write-off and Origin also downgrading its earnings for the first half of the financial year.
The most dramatic news came from AGL, which said it would write off a net $2.686 billion, including a pre-tax hit of $1.9 billion in “onerous contracts” – mostly relating to long term wind farm off take agreements signed between 2006 and 2012, when the cost of wind energy was significantly higher.
Another $1.12 billion of charges relates to increased provisions for environmental restoration as it prepares to shut down some of its legacy fossil fuel assets, and another $532 million comes from impairments across its generation fleet and gas assets.
Origin flagged that its interim profits are now expected to fall by up to $290 million from last year as a result of falling power prices, increased network charges, and higher gas prices.
Other retailers and power generators are also expected to be hit by the fall in wholesale power prices, which has been far greater than most people expected, largely because they underestimated the amount of new wind and solar, as well as rooftop solar, that would be brought into the system.
The Queensland Audit Office has just released a report which estimates that the value of the state government owned coal and gas generators has fallen by more than $1 billion due to lower prices.
The biggest hit for AGL came from its first forays into wind energy – between 2006 and 2012, and before it changed tack and spent billions to become the country’s biggest coal generator. Those wind farm assets includes what was until recently the country’s biggest wind farm, the 420MW Macarthur facility in Victoria, and Hallett installations in South Australia.
AGL pocketed a lot of development fees by selling its various wind assets it developed to infrastructure investors, and later followed that model with the creation of the Powering Australia Renewables Fund.
The problem came because, in an attempt to secure a higher selling price – agree to locked in high contract prices (estimated at more than $100/MWh) which it now finds are completely out of the money as the higher than expected (at least by AGL and other big utilities) influx of wind and solar projects slashes wholesale power prices across the country. A one-off gain has now become a long-term burden, but will come as a surprise to no one, given that wind energy costs (and contract prices) have fallen by around 60 per cent since then.
See our more detailed explanation: How AGL lost nearly $2 billion from its early push into wind farms
CEO Brett Redman said the company now anticipates a “sustained and material” reduction in wholesale power prices as a result of policy measures to underwrite new build of electricity generation, and lower technology costs, which will lead to increased supply.
“As Australia’s largest energy retailer and largest generator of electricity, we continue to see material opportunities for AGL to participate in the energy transition as customer needs, community expectations and technology evolve,” Redman said in a statement.
“Notwithstanding these charges, our broad and diverse portfolio of electricity generation assets will continue to have a vital role to play in enabling the transition of the energy system.”
The blow to AGL – and others – was predicted by ITK analyst, Renewconomy contributor and Energy Insiders podcast co-host David Leitch in this analysis he wrote way back in 2018, and more recently last December, when he highlighted the potential of wind contract write-downs and the increased remediation costs.
Leitch has also suggested that AGL could be split in two, following the course of big European utilities such as RWE, E.ON, and others, because it is simple too hard to turn around a business so invested in legacy assets (in this case coal) that face a clouded future.
In its update, Origin cited a number of factors that had contributed to an estimated $150 to $160 million fall in expected earnings from its energy business, including lower energy consumption due to combined affects of Covid-19 and a cooler summer due to prevailing La Nina conditions.
Origin told shareholders that it had also taken a $40 million hit due to network expenses, that the company would not be able to recover through network tariffs.
“Electricity gross profit is expected to be down $250-290 million year on year (previous guidance $170-220 million reduction). This reflects lower wholesale prices flowing into retail tariffs and recent business sales recontracted at lower than expected prices, a one-off increase in network costs that could not be recovered in retail tariffs ($40 million, unchanged) as well as the impacts of mild summer conditions on demand and volatility,” Origin said in a statement to the ASX.
For its gas business, Origin also reported lower anticipated profits as the cost of purchasing gas increases as prices in Asian LNG markets begin to recover.
“Higher gas procurement costs are expected in the second half, as a portion of Origin’s supply costs are linked to the JKM index. While this exposure was hedged over the northern hemisphere winter peak , Origin remains exposed to JKM prices in the final quarter of FY2021 and these prices have increased substantially over recent months,” the company said.
The big impact from gas is significant given the federal government’s insistence that its energy policy should be based around an assumed role of gas as a transition fuel, although most in the market say that is not a great idea given the high cost of producing gas, higher gas prices, and competition from cheaper alternatives such as battery storage.