Origin Energy may hold off on investments in new wind, solar and storage projects, suggesting that a fall in wholesale electricity prices and the lack of clear policy has made such projects marginal investments.
The advice came as Origin reported a stable operating profit of $1.023 billion for the 2019-20 financial year, but found its net earnings almost entirely wiped out by write-downs the company announced on the value of two of its gas projects.
These include a $1.2 billion in impairments to the US-based Cameron LNG and the Australia Pacific LNG joint venture due to a collapse in global gas prices. Taking the final impairments into account, Origin Energy recorded a statutory profit of just $83 million.
Origin operates one of Australia’s largest generation businesses, owning Australia’s largest coal-fired generator, the 2,880MW Eraring power station, as well as serving as one of Australia’s largest electricity retailers.
Both sides of the businesses took a hit in the 2019-20 financial year, with wholesale electricity prices falling substantially over the year, as well as smaller retailer profit margins that are starting to get squeezed following the introduction of default market offers designed to limit the ability of electricity retailers taking advantage of customers stuck on exorbitant tariffs.
Origin cited the introduction of the default market offers, which effectively places a regulated price cap on tariffs charged to customers by electricity retailers and has evidently seen Origin Energy shift customers to less profitable tariffs.
Origin observed that current wholesale electricity prices, which have fallen over the last year after a period of record high prices, and have now fallen below the levelised cost of all new generation technologies. (See graph below).
Based on this market signal, the company said it would instead be exploring investment options at its existing ‘brownfield’ sites, including increased investments in its gas and pumped hydro storage portfolio, and may hold off from investing in new wind and solar projects.
CFO Lawrie Tremaine also said that the company would be ready to invest in big batteries when the market was right and that FCAS markets were likely to be the first target market. He saw Victoria, which already has two big batteries, as the most prospective market.
Origin said that government policies that provide incentives to invest in firming capacity may be necessary to spur more storage projects. It was an almost identical message to that provided by AGL Energy last week, which also said it will focus firming infrastructure, and will reduce investments in new wind and solar generation capacity.
Tremaine added that it would also likely make sense to invest in new battery projects as coal continued to exit the market, but that the company expected that investments in a larger gas generation portfolio would serve as the main replacement to coal generation.
Origin also put plans to develop the controversial Beetaloo Basin gas project in the Northern Territory that has been put on hold, following disruptions related to Covid-19, but the company now expects the project to recommence development activities in the second half of 2020.
Origin announced that it had increased its ownership stake in the Beetaloo Basin gas project, to 77.5 per cent, up from a previous 70 per cent stake. It expects to spend $65 to $80 million for exploration and appraisal in the Beetaloo Basin over the next year.
The project has faced immense opposition from environmental groups, who argue the project will place areas of high ecological value at risk, as well as further contributing to surging greenhouse gas emissions from Australia’s gas industry.
Origin will also face a shareholder resolution, scheduled for October, calling for an independent review of consents provide by impacted Native Title holders.
One silver lining emerging from the cuts on electricity and gas was the resulting fall in Origin’s greenhouse gas emissions. Origin announced that it would aim to reduce its scope 1 emissions by 10 per cent over the next couple of years, to try and ensure the recent falls were not a one-off event.
“This year, we made further progress on our decarbonisation journey, reducing Scope 1 and 2 emissions by 9 per cent. Today we have also committed to a new short-term target to reduce our Scope 1 emissions by 10 per cent on average over FY2021 to FY2023,” Calabria said.
Despite this, Origin Energy CEO Frank Calabria was optimistic about the financial results received by the company in what had a challenging time for both the company as well as its customers.
“We have faced significant challenges as a community this year amid bushfires, ongoing drought, and the COVID-19 pandemic. Throughout, our focus has been on maintaining reliable energy supply, keeping our people safe, supporting our customers who have been financially impacted, as well as supporting the broader community,” Calabria said.
Origin said that it expects to report a similar underlying profit between $1.15 and $1.3 billion for the 2020-21 financial year.