Why Telstra could make $20 billion play in Australia energy markets

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Analysts say Telstra may spend $20 billion to enter Australia’s energy markets as it looks to boost earnings and take on the incumbent utilities. Some smaller retailers have shown the path forward.

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Will Australia’s telecommunications giant Telstra finally make good on a plan to challenge Australia’s incumbent energy utilities and launch a major charge into the energy market?

It’s an idea that has been talked about ever since analysts and consultants first thought of how telcos could bring about a “Kodak” moment for energy utilities as new technologies such as rooftop solar and distributed battery storage upended decades-old business models.

And the idea seemed to have greater currency when Telstra, the dominant telco in Australia, snapped up Ben Burge, the feisty former head of Powershop who was hired in early 2016 to launch a team that would look at offering home energy services to millions of consumers.

It’s been just over two years since the Burge hiring was announced – and apart from some important and ground-breaking contracts for big solar and wind farms, and a plan to offer its considerable battery storage for use in the grid – the retail push has since been downplayed.

You could put the blame on the complexity – business, economic, technical and cultural – in encouraging an industry monolith to turn around and challenge other giants in a new market.

But analysts say it still makes sense, and they suggest that Telstra could be well advised to invest up to $20 billion in Australia’s energy market, in what would be the most dramatic intervention in the top end of the industry for decades.

In a new report, telco and energy market analysts at Morgan Stanley look at Telstra’s likely choices, and conclude that combining telecommunications and energy retailing – as some smaller players have already done – could be much more attractive than other options.

“We think the energy idea could have merit for (Telstra) too … potentially on a much larger scale,” the Morgan Stanley analysts write.

“(Telstra) could employ various strategies, ranging from a low-risk approach, becoming a retail reseller of energy … or a bigger and bolder move to become an outright owner and operator of integrated energy assets.”

Morgan Stanley notes there is some pressure on the Telstra board to act soon. By 2020, its “one-off” payments (worth $1.4 to $1.9 billion) from the rollout of the NBN will come to an end.

That will leave a significant gap in earnings from which to make dividend payments. The options are expanding overseas, investing in “new technologies” – both considered risky – or the energy option.

Morgan Stanley insists that its report is “speculative and exploratory”, but it says Telstra needs to do something, because it is facing rising competition in key core markets, particularly mobiles.

“As a precedent, the junior telcos in Australia, such as Vocus (VOC) and Amaysim (AYS), have already acquired energy retailing businesses of their own,” the analysts note.

“They talk positively of the strategic merits in cross-marketing energy products to their telco client base, and vice versa. We think the same logic could apply to TLS and its 5.1 million household customers (and retail client base of 17.6 million Australians).”

It notes that one key difference is that Telstra is obviously a substantially larger company than either Vocus or Amaysim. So, to fill in its post-NBN gap in core earnings of around $1 billion to $2 billion, Telstra may have to spend capital of up $10-20 billion.

“Owning energy assets vs. undertaking new tech investments/acquisitions may not sound as exciting,” the analysts say. But, energy’s intrinsically secure long-term cash flows could not only underpin the company’s existing dividend payment, “but also provide potential for dividend upside.”

Would they? Could they?

Morgan Stanley admits that its interest was piqued by the series of smaller-scale announcements already undertaken by Telstra. But all were relatively significant.

The first was contracting to take the output from the new 68MW Emerald solar farm in Queensland, the first major corporate power purchase agreement signed by a big Australian company (although zinc refiner Sun Metals is building its own 116MW solar farm).

The second came in December when Telstra led a consortium that agreed to buy the output of the 226MW first stage of the Murra Warra Wind Farm near Horsham in western Victoria, which has a total permitted capacity of 429MW.

Telstra has said that this is just the start of its solar and wind farm plans.

And the third was an indication that Telstra was looking to use its near 1GW of battery storage capacity to offer emergency back-up for the grid, ensuring it could meet critical peaks in the middle of the heatwaves.

Telstra is one of the country’s biggest energy users – accounting for around 1 per cent of total consumption. It is one thing to look after its own energy needs, quite another to supply energy to others. But the consortium it put together for Murra Warra suggests such conversations are happening.

It notes that while Testra could be outmuscled by the likes of Facebook, Google and Amazon on a global scale, it has considerable weight in the domestic economy.

And energy retailing is a 2.5 times bigger market in Australia than the telco market – notwithstanding its regulatory and policy risks and uncertainties. (See table above).

Morgan Stanley says that Telstra would be able to offer a competitive bundle of mobile + broadband + pay TV + energy.

“Consumers would benefit from price discounts and the convenience of dealing with one provider,” the analysts say.

“Importantly, we also believe that bundled products can drive lower churn. For example, (New Zealand’s) TrustPower , which offers bundled products (power + gas + broadband + phone) has observed churn rates up to 37 per cent lower for bundle customers.”

They suggest a number of possible scenarios for a push into energy.

One is building on the two PPAs – Emerald and Murray Warra – (Telstra has signalled that this is just the start of its wind and solar plants) and retail excess power to others, which would mean obtaining a retail licence to do so.

Another could be becoming a standalone retailer or reseller, buying electricity and or gas from wholesale markets and selling them on to retail customers. This is the model adopted by Amaysim when it bought Click Energy.

The other alternatives are entering a joint venture or partnership with an existing integrated energy player, which would involve less risk (if they could find a suitable partner), or they could merge with one of those companies (higher risk, potentially higher reward).

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22 Comments
  1. Patrick Comerford 1 year ago

    Surely it’s enough to be ripped off by the current “big” energy providers why on earth would anyone sign up for Telstra to provide their energy needs with their form for ripping off customers and the public.

    • handbaskets'r'us 1 year ago

      I agree. Telstra has an appalling record of lousy customer service and general ripoffery. -Ever tried getting overpaid bills back?
      Pay in advance for your power and forfeit the balance if you don’t use it all?
      Somehow can’t see it resulting in lower energy prices.
      ‘I HATE TELSTRA’ bumper stickers anyone?

    • trackdaze 1 year ago

      Great, its not enough your $40 phone plan somehow costs $100 a month.

  2. The Awul Truth 1 year ago

    A few thoughts:

    – Stapled security structures in the renewables space have a lot of tax losses (particularly Infigen and Tilt) which Telstra could utilize quickly. Telstra could also potentially sell in its towers and other key infrastructure into a stapled structure for tax advantages.
    – Telstra is already a big buyer of energy storage for towers etc. Building that into a network of storage for trading and FCAS would seem to be a pretty clear cut adjacency. The costs are sunk as is.
    – Telstra could lobby to be able to contest grid connection pricing for new renewables. They lay a lot of cables as is.
    – The cross selling of power and communications is a bit of a no brainer especially if you can get customers quickly with an all-green offering.
    – Renewables are very much a cost of capital game and Telstra is a large investment grade borrower.

  3. Hettie 1 year ago

    The mere idea of Telstra in the energy market fills me with horror.
    The biggest ripoff industry in the country, coupled with a company that could well be rebadged as “Ripoffs R Us” ?
    Please, NO.

  4. John Saint-Smith 1 year ago

    With due respect to the knee-jerk haters, Telstra’s record for customer rip-off is no worse than that of most of our larger service retailers. I challenge anyone to show how Telstra’s behaviour could top the gargantuan rip-offs we have seen in the electricity, banking, medical insurance and petroleum sectors. The telcos are just minor players. Locking Telstra out of this synergistic market sector won’t protect us regularly basted chickens from some other fox tellers.

    It is an idea that bears thinking about without hysteria.

    • Jon 1 year ago

      I agree Telstra is no worse than the deal people have been getting with our current electricity retailers.

      Another player in the market of a reasonable size will shake the industry up, ideally a few more. At least Telstra is Australian owner and the cash will stay in Aus.

      • Tom 1 year ago

        Except for the overseas shareholders. Allegedly limited to 35% of the shareholding, but who knows?

    • Brunel 1 year ago

      The CBA call centre is in Australia along with the Bank of Melbourne.

      Telstra have moved their call centres offshore! While charging their clients are fortune for ADSL.

      • Chris Marshalk 1 year ago

        Telstra also exploit their staff and expect them to absorb additional work from recently redundant staff

    • Nick Kemp 1 year ago

      You may be right but their inclusion just adds another poor customer relations provider so it’s hardly a solution to anything

  5. Alan S 1 year ago

    Possibly an attempt by Telstra to win goodwill by being mistaken for Tesla. Beware of bargain offers for old lead acid batteries from 50 V exchange backup systems, made obsolete by the NBN.

    • Brunel 1 year ago

      Ha ha ha ha! 😄

  6. Brunel 1 year ago

    The Telstra Exchange in Somerton has a huge diesel generator – surely it is cheaper to get electricity from a Tesla Powerpack instead?

    Adjacent to the exchange is a petrol station (I was buying petrol and I saw the diesel generator through the fence).

    Maybe Telstra could put a canopy atop both businesses and put solar panels atop that? Then they could both cut their electricity bills.

  7. Guy Stewart 1 year ago

    As one of Australia’s largest energy customers, with a national billing system, millions of customers already paying by the month, and billions in existing energy infrastructure; I am SHOCKED it has taken them this long.

    A retail license is about $3M, and Telstra’s lawyers could probably whip up the paperwork in their lunch break.

    This is a sure thing. It’s a good thing too. Another Gentailer, even a big one reduces the impact of existing colluders in the market that are incentivised to drive up prices.

    Telstra is incentivised to keep wholesale prices down, and can deploy billions of dollars in capital generation assets to move the market.

    • MaxG 1 year ago

      They all collude, like the petrol companies, to maximise their profit irrespective of churn rates. E.g. see Origin’s last half year profit of some 486 million dollars.

  8. MaxG 1 year ago

    I join the sentiment of others by saying why on earth are we cheering when one dinosaur wants to attack another? Do we really want to stir the market by encouraging the likes of Telstra to offer electricity. There are enough bad players in that market as it is. We need new players, and the likes of EnergyLocals… and even better get electricity, water, health and education back into public hands. Unless the latter is done, any new player will rip of its customer like the previous mob, and fill shareholders’ coffers, without any benefit for Australians.
    Telstra is just another example of a government monopoly turning corporate, taking all the public assets with them. For example, many areas in AU have fibre past the properties, but no interest to use it for Internet services. What a waste. What needs to be understood is, the current system (politically and economically) is rigged against ordinary people. Unless this changes, we will remain sheep.

  9. Guy Stewart 1 year ago

    One of the biggest threats to Energy Retailers is being caught between high wholesale prices ( up to $14 per kWh ) and fixed retail prices ( 30c per kWh).

    Telstra already owns the nations biggest hedge against this, with the largest dispatchable power capacity. There are standby batteries in nearly every exchange, and backup diesel generators in many of them too.

    When wholesale prices get high, which destroys profits for non-generating retailers, Telstra will have all the cards. They can either cover their own needs, and those of their customer liabilities or push all the way and creme on the wholesale market.

    Might be time to buy some more Telstra shares before the official market announcement. I cant see how this goes wrong for them.

    Competition and Consumer Commission?

  10. Guy Stewart 1 year ago

    The roof real estate for behind the meter generation / consumption on existing Telstra exchange assets alone is a massive opportunity. If that surplus can be delivered into a retailing arm, they possibly have one of the largest opportunities for transmission connected “shovel ready” solar deployment in Australia.

  11. Robert Comerford 1 year ago

    I agree with Max, first thing that needs to happen is for all essential services to be returned to government hands as entities responsible to the Australian people. Then Telstra can be retitled the PMG again and serve the interest of this nation in providing communications to all of us; not get involved in activities outside its brief..

    • handbaskets'r'us 1 year ago

      “…is for all essential services to be returned to government hands…”
      Couldn’t agree more!
      We’ve all been sold down the river, while big companies hang us out to dry.
      The government revenue that we once enjoyed from, -well it’s a long list-…is being siphoned off overseas or into $$$M CEO bonuses.
      The great opportunity of microgrids is that it allows us to own our own power.
      Watch them all circle like sharks, making sure that will never happen.
      No doubt, the Govt. will legislate in favour of the sharks.

  12. solarguy 1 year ago

    I really don’t give a toss what Telstra does, except have go back to Aussie call centre. That’s what I demand!

Comments are closed.

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