Origin profit hit by outages and solar uptake, battery plans hostage to UNGI

Origin Energy has reported a sharp fall in earnings from its Australian electricity business – due to the combined impact of unplanned generator outages, price controls and lower volumes – but confirmed it is looking at opportunities to expand its portfolio in Victoria that could include its first big battery.

Origin has been hit by a long-term outage at its Mortlake gas generator in Victoria, and at its Eraring coal generator in NSW. These outages alone slashed $44 million from its first half earnings, while a 7 per cent slump in volumes due to the growth of rooftop solar and expired business contracts cut profits by $46 million, and price controls in Victoria and federally cost another $55 million.

All that contributed to a total $170 million decline in electricity earnings, a fall of around 22 per cent, which was only partially offset by a gain in its APLNG business and resulted in an overall drop of 11 per cent in underlying earnings for the December half.

Origin Energy, as it revealed in its investor day briefing late last year, is considering investments in up to five big batteries around the main National Electricity Market, but indicated on Thursday that any new investment could be held hostage by the federal government market intervention, and particularly its controversial, and secretive, Underwriting New Generation Investment scheme.

Origin’s most advanced battery option appears to be at Mortlake, next to the existing combined cycle gas units where it is also considering new fast-start units due to need for more flexible generation as the share of renewables increases.

But CEO Frank Calabria says the company will “exercise some caution” over those decisions, particularly in light of the federal government “playing role in terms of underwriting” new investments. “We have to make sure we have a clear line of sight in terms of customers and economics,” Calabria said.

Calabria’s comments are the latest from major utilities and other investors that highlight the perverse impact of energy minister Angus Taylor’s intervention into the market with the UNGI scheme, which shortlisted one year ago 12 different “dispatchable” energy projects for possibly government funding.

Rather than encouraging new investment, it appears to have had the opposite effect, because the nature and extent of that funding, and the timing, is not known. Taylor announced on Christmas Eve that two of the 12 projects, fast-start generators in Dandenong, Victoria, and in Queensland could be the first two off the rank, but there is still no word on the nature or scope of the support or the timing of the investment.

The Dandenong project, put forward by gas infrastructure giant APA, is the one that will weigh most heavily on Origin’s decision on new investment on Mortlake, and if there is still a market gap.

But it will not move forward on the battery idea until there is some clarity over the UNGI scheme, and the fate of Dandenong.

Taylor, who initially pushed forward UNGI as a matter of urgency in the months before the Coalition government was expected to lose the election last May, has since done little to push it forward, apart from agreeing with the NSW government to support three projects in that state, including Trevor St Baker’s proposed Vales Point coal generator upgrade.

Asked about the status of the other battery possibilities, potentially located at Eraring, Uranquinty, Darling Downs and Morgans in South Australia, Origin said it is considering a number of investments in firming capacity to support the market’s move towards greater renewables, including at Shoalhaven and Mortlake.

“We’ll assess these projects in line with the market, including the prevailing regulatory environment,” a spokesperson said. However, the planned expansion of Shoalhaven pumped hydro has hit problems because a pre-feasibility study found that the cost of tunnelling was higher than expected.

Origin’s briefing was focused mostly on its APLNG projects, the declining cost of gas in Australia as the export market loses steam, and its controversial plans for extracting gas from the Beetaloo Basin in the Northern Territory.

Calabria says the electricity market is clearly changing, with forward prices down significantly due to the impact of renewables (graph on left above), but volatility increasing (middle graph), and aided by filing gas prices (right graph).

Those price falls, and the increase in volatility, particularly the hollowing out of prices in the middle of the day, will provide the market signals for new flexible generation, Calabria said.

This view is shared by the market overall, but it won’t invest until there is some clarity about Taylor’s UNGI plans.

Origin, meanwhile, expects its 530MW Stockyard Hill wind farm in Victoria to be completed by the end of 2020, where its connection directly into a 500kV transmission line means it should dodge the restrictions placed on other projects to the north and west in Victoria, and in south west New South Wales.

Stockyard Hill will take the share of Origin Energy’s renewable portfolio – either owned or contracted – in its wholesale markets from around 19 per cent to 25 per cent. It plans to retire Eraring, its biggest generator in terms of production, by 2032.

The growth of rooftop solar PV and energy efficiency took $14 million out of Origin’s electricity earnings in the first half, while another $17 million came from “lower customer numbers and mix”.

Origin says the uptake of rooftop solar will continue to offset growth in electrification. It says it is more “leveraged” to solar due to its incumbency in areas where penetration rates are lower and properties are well suited to solar.