Origin Energy – unlike its consumers – has enjoyed the benefits of soaring international gas prices, helping it deliver an improved underlying profit last year, despite major problems as its Eraring coal plant and a massive unrealised paper loss stemming from volatile markets.
The LNG business – focused on the export market – delivered a cash windfall of $1.6 billion in the last financial year, papering over a 63 per cent slump in its energy market earnings, which was driven primarily by problems at Eraring, the country’s biggest coal generator which is due to close in three years time.
The declared net loss of $1.43 billion looks bad for the company, but take away the unrealised losses of more than $2 billion the reality is that despite, or even because of, the chaos in global energy markets, its key metrics – underlying profit, cash flow and dividend payments – did well.
That’s good news for shareholders. The bigger question for the market, its customers and the broader community is how the country’s biggest energy retailer will manage the green energy transition, which it says is accelerating, and for which it insists it is well placed.
The question of LNG is unlikely to addressed anytime soon until its major international customers find alternative sources, such as green hydrogen, although it is going to be interesting to see how Origin treats this in its upcoming climate report, which will look at its role in a 1.5°C target.
For now, the focus is on the domestic operations, and the big item there is the planned closure of the 2.8GW Eraring plant, now set for late 2025.
In the last financial year, Eraring enjoyed a doubling in its price per megawatt hour to $152/MWh – thanks to the surging wholesale electricity prices – but suffered a 15 per cent slump in output because it couldn’t get enough coal.
That forced Origin to pay top dollar for both coal and power in the spot market to meet its retailing commitments, and the result would have been even worse were it not for the increased output from renewables, including the much delayed Stockyard Hill wind project in Victoria.
That wind farm will be the biggest in the country when complete – at least until the gigawatt scale McIntyre project in Queensland is built – and also one of the lowest cost, with a bundled fixed price in the low $50s/MWh, a fraction of the price Origin had to pay to buy electricity from other sources on the spot market in the past year.
Sourcing coal for Eraring – which is still due to close in late 2025 – remains a problem.
So far the company has locked in only four million tonnes and needs another 1.6 million tonnes for the current financial year. The price of coal has fallen dramatically from its recent peaks of more than $400/tonne, but the uncertainty in the market is so great Origin has declined to put out an energy market profit forecast.
Origin sees itself as a “leader” in the energy transition but is yet to deliver hard evidence of actually being that, and building and contracting the bulk wind and solar and storage needed to replace the assets it and others are closing.
It is, however, starting to make the right moves.
It has flagged the 700MW (and up to four hour) Eraring battery that will partially replace the coal generator, and is currently going through a tender process with suppliers, although it says it is clear that rises in lithium and nickel prices is inflating the cost of the technology.
It is yet to be seen in what way that complicates its plans for the battery. A proposal to the board on the first stage of the project – likely to be around 460MW – is expected within the next few months.
On the issue of bulk renewables, Origin has recently bought the Yarrabee and Carisbrook solar farms, with a potential combined capacity of nearly1GW, and says its solar pipeline has now grown to 1.3GW. But there is as yet no final commitment to move forward with either project.
It is also a bidder for CWP Renewables, now chaired by former CEO Grant King, which has a sizeable portfolio of more than 1GW of assets in operation and under construction, and another couple of gigawatts in the pipeline. CWP is currently going through an auction process, with QIC and Iberdrola also likely bidders.
“We will deploy capital wisely, and one way you’ll see evidence of that, is we said we would partner with third parties in terms of funding renewables investment, and you can see, it’s been publicised as to who we’re partnering with in relation to the CWP process, as an example,” CEO Frank Calabria told analysts.
“We’ve already acquired 1,300 MW of late stage solar development projects this year (Yarabee, Carisbrook, Yanco etc).
“You should think about us delivering against our strategy through a combination of building, contracting and buying renewables assets, including working with third parties to make sure we manage our capital effectively.”
The good news for Origin is that the market is starting to resume what could be described as its normal pattern, with moderating fossil fuel prices, the growing influence of renewables, and unreliable ageing coal generators falling over and adding to the price volatility, which Origin is planning for.
“We see no let up in renewables coming into the system, we’ve seen some large wind farms being committed. … built and allowed to come into the system,” head of markets Greg Jarvis told analysts.
“We’ve seen that with our own Stockyard Hill wind projects in Victoria, and we’re not seeing any let up in rooftop solar as well.”
That means that rooftop solar is continuing to carve up and hollow out the market in the middle of the day, putting extra pressure on coal generators that don’t like to ramp up and down.
“We’re seeing quite low prices in the middle of the day. So the key to this market is storage, to be ready for these events, and that’s where we are well positioned.”
