Once were greener: Oz utilities headed for hard times | RenewEconomy

Once were greener: Oz utilities headed for hard times

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Fitch raises concerns over future of utilities, saying they were once focused on greener energy sources, but were now focused on coal. That’s less of a problem under an Abbott government.

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Australia’s energy gentailers are facing tough times ahead, including unprecedented changes in electricity consumption, increasing competitive and regulatory pressures, investment and emissions uncertainty, and margin pressures across their utility businesses, a new report from Fitch Ratings has warned.

The report, published by the ratings agency on Tuesday, said Australian utilities’ credit profiles would continue to face challenges “from a difficult operating environment, reflecting both structural changes as well as high competition.”

Interestingly, it noted that some of the major utilities had once focused more on renewables and cleaner energy sources, but were recently focused on black coal investments. This, in turn, was exposing them to falls in wholesale market prices.

“The Australian retail market is among the most competitive in the world, as evident from high levels of customer switching (churn) across most states,” says the report, listing the margin pressures of the consequent discounts offered by retailers as one of the many pressures affecting the health of the power industry.

But this exposure to competition would hit merchant generators the hardest, said Fitch; along with exposure to pool prices and off-take volumes, uncertainty over emission-related costs, an increasingly complicated operating environment, variability in terms of plant age, type and condition, and the potentially very high cost of unplanned outages.

The profitability of traditional electricity generators has been “adversely affected over the past three years by low pool prices, less volatility in pool prices, declining volumes and the increasing dominance of integrated entities,” says the report.

Fitch notes that declining electricity consumption on the NEM – it fell for the fifth consecutive year in FY13 and was 2.5 per cent lower than FY12 – is likely to continue in the near term, driven by reduced economic activity and increased energy-efficiency and rooftop solar.

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But despite predicting that difficult operating conditions for generators would remain over the near term, there is some obvious near-term upside for Australia’s traditional coal-fired generators, thanks to higher domestic gas prices and the Abbott government’s likely repeal of the carbon pricing scheme.

“Lower emissions-related costs, expected under the new government policy” would give coal-fired generation plants in the NEM a sizeable cost and operational advantage for coal-fired generation over the medium term, says the report, but it warns that this advantage is subject to some uncertainty over the “timing and nature” of any policy changes, including those resulting from the current RET review.

“Investors and utilities are faced with the prospect of a repeal of the (emissions trading) scheme, although its timing remains uncertain,” says the report. “Further, there is also uncertainty in the timing and nature of the new government policy governing future emissions, which adds to the uncertainties in managing ongoing compliance related to individual emissions, and future investment decisions.”

Presumably, this is a reference to the significant longer-term threat facing those energy companies that are heavily exposed to fossil fuel assets, should the Australian economy make a sudden shift towards a decarbonised economy.

As UBS analysts recently noted, the Abbott government’s policy of “delivering lower electricity prices at the expense of environmental policies” might be an opportunity for coal generators in the near term, but “we doubt if it will be a long-lived opportunity and expect ‘decarbonisation’ to become an ever more entrenched concept worldwide.”

This was of particular concern to UBS in the case of AGL Energy, which has blotted its formerly impressive renewables copybook by deciding to treble its exposure to coal-fired generation with the purchase of the Bayswater and Liddell generators in NSW.

AGL also gets a mention in the Fitch report, for, along with Origin, having once “largely focused on greener generation” and therefore benefitting from lower emissions.

But, the report adds, their exposure to emissions abatement costs will increase from coal-fired plant acquisition; noting Origin acquisition of the NSW-based Eraring coal-fired generation plant in August last year, and AGL’s acquisition of Loy Yang A brown coal plant in Victoria in June 2012. EnergyAustralia, it says, remains exposed to sizeable emission costs associated with its brown coal-fired generation plant.

This shouldn’t be a problem under the current Abbott government, however, with Fitch predicting these companies funding profiles to “greatly benefit” from a lower refinancing need in 2014, as well as from lower emission costs, with either a move to an emissions trading scheme in July 2015, or the more likely scenario of no direct emission costs at all, if the scheme is repealed.

Another near-term upside, according to the report, will be the announcement of final guidelines governing rates of return and expenditure assessment – a move that Fitch expects to provide more certainty in terms of investment plans and likely earnings.

The downside, however, is that these guidelines will also result in lower total invested capital returns, and provide greater control and discretion to the national regulator to determine outcomes.

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1 Comment
  1. Chris Fraser 6 years ago

    Perhaps having more certainty in terms of investment plans and likely earnings means there will be less large investment in cleaner energy assets from the big three ? Oh well, i guess they had their chance. An absence of investment from these quarters will still provide an opportunity for somebody else.

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