Origin Energy has managed to achieve something that its big utility rivals have failed to do – deliver a big increase in profits over the last financial year. So much so that it has begun paying dividends again for the first time in years.
But it is not what it seems. Origin’s improving fortunes are based around a big jump in earnings from the huge APLNG projects that forced it to stop paying dividends in the first place, as it tried to conserve capital.
That move into APLNG is now paying dividends, quite literally, but it’s the underlying utility business – the one that used to underpin the company’s earnings – that is starting to struggle, albeit after record earnings.
And on that aspect, Origin Energy is facing the same troubling headwinds as rivals AGL and EnergyAustralia, and just as a deep-pocketed new player – the oil giant Shell – steps into the market with a bid for ERM power and a longer-term plan to knock the top three off their pedestal and to become the biggest provider of electricity in the world.
Origin’s underlying net profit, thanks to LNG, was $1.2 billion, a 42 per cent increase from $726 million a year ago, and allowed itself to pay an interim dividend of 10c a share and a final dividend of 15c – its first for 3 years, and to promise more in the future. The improved result was based on a 50% lift in earnings from the LNG operations.
But the Australian energy business was static, the gas component did OK but the electricity division was markedly weaker, down 10 per cent to $1.39 billion in gross profits, and it will be even weaker in the coming year as Origin and others battle regulatory price caps, new competitions, and the continuing erosion of demand from rooftop solar.
Origin can see the future – it says it will be decentralised and digitised, it will focus on solar, storage and “connected” customers, but the challenge is how to maintain its market share and/or its profit margins.
In the past year, the introduction of new default tariffs cost it $100 million, the impact of competition cost it $80 million and the impact of lower volumes cost if $40 million. Origin expects a repeat again this financial year, warning of another $180-$200 million fall in electricity sector earnings as it faces those same headwinds again.
This graph below indicates the contraction of market offers since the introduction of the default measures by both the Victoria and federal governments. Consumers have a lot less choice.
Origin will hardly be cheered by the news of Shell snapping up ERM Power, which competes with Origin in the normally lucrative commercial and industrial space, and increased its own volume by 11 per cent last year. What will happen when Shell lays down its financial fire-power?
Origin CEO Frank Calabria told RenewEconomy in an interview after the results that he was not particularly fazed by Shell’s arrival. He is convinced that the market will evolve, but given its own financial resources through APLNG Origin will have the ability to compete, and to mould its business model over time.
“Shell’s views about the integration of electricity and renewables … would be consistent with the way we have set up Origin,” Calabria told RenewEconomy. “We see the same integrated nature of the system.”
For Origin, that means, for the moment, holding on to its Eraring coal fired generator – which has boosted output to record levels over the last two years to make up for problems at other NSW generators. Calabria says the company will exit coal by 2032, maybe before, depending on the state of markets and policy.until 2032.
The increased output from Eraring last year helped Origin record $67 million in revenues lost elsewhere. Gas was the power source squeeze by that increased coal output, more renewables and a greater focus on short term market plays and swaps. Note the share of business customers in its volumes on the right, where it is competing with the likes of ERM/Shell.
Calabria does not see either new coal generators or nuclear as a viable option, so the “dispatchable capacity” needed for the grid will come from pumped hydro (it is considering expanding Shoalhaven in NSW), battery storage (it is considering one at the Mortlake gas generator in Victoria which having problems now), and fast-start aero-derivative gas plants.
As for renewables, Origin says it added 460MW of new capacity over the last year, taking it close to a 20 per cent share of its generation, and the addition of the 540MW Stockyard Hill wind farm in Victoria next year will take it to its stated target of 25 per cent renewables by 2030.
But Calabria has yet to announce any forward target, or whether Origin will be back in the market for more mandates. The company said earlier it was looking at the options being proposed under the federal government’s UNGI (underwriting new generation investment) scheme, and Queensland’s newly-formed CleanCo.
“We continue to assess opportunities all the time. We haven’t set new targets …. but renewables will be the choice of new investment.”
As far as the customer technologies – rooftop solar, battery storage and electric vehicles – Calabria does not seem to be in any rush. The company lifted its own rooftop solar installations to 49MW in the last year (out of a total installation market of more than 1.6GW), and has not yet defined any options for EVs.
“Electric vehicles are something that will shift,” Calabria says. The company is introducing them into its fleet and working through the opportunities and contemplating the various business models that might go with them, including consumer offers.