Australia’s largest energy utility, Origin Energy, is getting a taste of the changing energy markets, reporting a sharp fall in profits in the 2012/13 financial year from its traditional energy businesses as customers change their habits, change their providers, and regulators struggle to keep up.
Origin Energy, like other utilities, is facing a series of headwinds that threaten to redefine the way that electricity is delivered and produced. The driving forces behind these are falling demand, excess capacity, the mass movement of customers seeking cheaper electricity bills, the growing adoption of rooftop solar and more energy efficient appliances, and moves by customers to simply reduce their consumption.
In the case of Origin Energy, however, it is unclear whether the company sees this as a short-term blip, or as part of a long-term trend that will cause a fundamental re-examination of its electricity business.
Origin Energy is focusing most of its time and resources into the construction of the massive $24.7 billion Australia Pacific LNG plant in Queensland. It expects the revenue generated from this will double its revenues and earnings from around 2015/16. It has bet its future on the success of the international gas market.
In the meantime, the traditional electricity business, which is supposed to be underpinning earnings while the LNG plant is constructed, is struggling. Its underlying earnings fell 20 per cent in the last year as what it says are reduced electricity volumes and compressed margins.
Most of this demand reduction was due to a 9 per cent fall in “mass-market” volumes. A lot of this is due to the loss of customers – which Origin blames mostly on problems caused by the migration to a new billing system. But the customer “churn” rates – the number of customers in the overall market who change electricity retailers each year – are soaring. In Victoria, they are nearing 30 per cent.
The other big factor cited by Origin is the continuing penetration of solar PV and what it calls “subdued demand” as residential customers “continue to closely monitor” energy usage.
Origin says this has resulted in a reduction in average residential usage from the grid per customer – it estimates it at 2 per cent, which is a lot lower than other utilities, who put the reduction in average households consumption at up to 10 per cent.
Indeed, managing director Grant King did not seem to think that solar PV represents that much of a threat to his business, despite recent suggestions from the likes of WA energy Minister Mike Nahan that the industry is “struggling with the phenomena of solar PV”.
King told RenewEconomy on Thursday: “We believe there will be a continued take-up of solar PV, but nowhere near the rate over last five years.” He said many consumers were smart enough to spot a bargain with the generous FiTs, but seems to be satisfied that the takeup will slow considerably.
Many private forecasters have a different take, suggesting that customer frustrations will increase as the price of grid electricity rises, and the cost of solar PV continues to fall. As King noted himself: “Discounting has cost us a lot of money. Because of discounting, our margins are compressed …. they are not sustainable going forward.”
Indeed, the mass movement of customers is one of the biggest headaches for the utilities. King said “It’s a great time to be a customer” given the size of the discounts on offer (although it should be noted that in some states these are subsidised by others).
King, however, is more frustrated with the slow pace of deregulation. He estimates that regulatory decisions in Queensland – which prevent the company passing on wholesale price changes – cost the company at least $100 million in the past year.
Still, Origin is aware of the prevailing trends that can impact its business. In its own list of risks to the business, it cites: “Reductions in energy demand including from prevailing consumer sentiment, technological advancement, mandatory minimum appliance performance standards, and other factors, can reduce the company’s revenues and adversely affect the Company’s future financial performance.”
Two of those “other factors” are the renewable energy target and carbon pricing. King continues to question the government’s renewable energy and carbon pricing strategies on the basis of the cost to consumer.
He was, once again, critical of the state government’s feed-in tariffs, saying they had placed a big burden on those who could not afford them – renters and low income owners – and said the cost of the large-scale renewable energy target till had not been recognised. He wants another review of the RET to “do the job” that it didn’t do in 2012 – which King says is to properly analyse the impact on consumers. (The Climate Change Authority found minimal impact. Other studies have shown that reversing the RET may increase costs).
“(I expect) we will get clarity in respect of carbon and green issues,” he said of the election result.
In response to a question about the mooted rescussiation of the “contracts for closures” program – where some coal generators could be paid to exit the market in response to the overcapacity cited by AGL Energy and AEMO – King said it was more likely that the Coalition’s Direct Action policy would force early closures of coal capacity rather than the current government’s carbon price.
“Under Coalition policy, emission reduction needs to occur in Australia, so you’d have to say that it’s more likely to see closure of carbon intensive capacity under coalition than the (current) government (policy).”
He also noted the resource boom was not over. He said only half of the investment planned for the LNG industry had been made, and the revenue had not even begun. “The revenue boom hasn’t even started,” he said.