Retailers’ power choice: Cannibalise or be consumed

Australia’s leading energy analysts have given cautious approval to the belated shift by the big retailers into the rooftop solar market, and their efforts to embrace the incoming battery storage sector.

AGL Energy held an analysts briefing earlier this week, which we reported on here and here, and Origin Energy is scheduled to the same on June 10.

Both companies are focusing on how they can adapt to the rapid transformation of the energy markets, and the emergence of technology that makes their own consumers potential competitors.

AGL, which has established a new energy division that will focus on rooftop solar, battery storage, electric vehicles and smart communications, is winning plaudits for its efforts, even if analysts are not yet convinced how it will turn out, such is the scale of transformation ahead.

“In our view AGL’s new strategy demonstrates the company has taken the first critical step in recognising that the industry is changing, and there is no future in standing still.,” Deutsche Bank’s Hugh Morgan said in a report.

“We remain of the view it is too early to pick winners losers from emerging technologies led by solar PV, interval meters, battery storage and electric cars. However, AGL’s existing 3.8m customers are a strong competitive starting point, and we favour those seeking to innovate over those who choose to follow.

“We can foresee a future where current energy providers are the ones best placed to manage and optimize household energy flow decisions. Will this new source of revenue replace existing generation and retail revenues?

“A difficult question to answer, however if an industry is changing we believe it is better to cannibalise than be consumed.”

Morgan Stanley echoed a similar view, noting in a report that AGL was emerging from the “valleys” (Latrobe Valley, where its big brown coal generator is located) to the “rooftop”, where solar panels are bing installed.

“Since many households will take up solar (and likely batteries) anyway, we think AGL is prudent to take as much market share as it can,” analyst Rob Koh writes.

“AGL acknowledged that its core business (grid electricity) is declining and we endorse its strategy of providing a high-visibility division with a separate culture as part of its longer-term transition.

“We understand that AGL New Energy also includes monitoring of new technologies and business models (threats and opportunities), including providing equity funding and incubation for select start-up businesses. “

But Koh is also cautious, saying his recommendation on the stock remains underweight because it is not yet clear that the utilities can overcome the many industry headwinds.