Power: Now is the winter of our discontent

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

08 July 2022, 10:30 AM

Sectors Covered:

Industrials, New Energy

• Electricity markets continue to be extremely tight with QLD approaching the cumulative price cap again and baseload futures at over $100/MWh or above out to FY24.
• AGL Energy (ASX:AGL) remains our preferred exposure to electricity prices as we see cheap fuel costs underpinning earnings recovery although with some underperformance in the legacy generation fleet.
• Genex Power (ASX:GNX) also stands to gain from wholesale exposure in its operating solar assets but we think a material share price recovery will be contingent upon the Kidston Hydro project construction remaining on track during FY23.

Bleak outlook for energy consumers in FY23

Spot prices in QLD were moving back towards the Cumulative Price Threshold (CPT) less than a month since the spot market was suspended highlighting how tight the domestic energy market remains.

Newcastle coal futures remain above USD225/t out to FY26 and JKM LNG futures above USD19.70/mmbtu out till January 2025. Futures markets can be volatile but clearly the international energy crunch is not expected to be resolved quickly.

We’ve analysed the rolling two year simple average and VWAP of baseload futures and we find that the VWAP for FY23 contracts has surged over the simple average in most states. We attribute this to a scramble amongst retailers to cover shortages as the reality of a protracted energy squeeze is sinking in.

We expect that FY24 contract activity will increase during FY23 despite high prices.

Coal clunkers performance varying but AGL holding up better than ORG

In the second half of June AGL’s Bayswater plant brought output back up to ~75% capacity. Unfortunately, Liddell is limping along with less than three of its remaining units running and on reduced capacity and is due to shut entirely by April next year. Loy Yang continues to operate on three of its four units.

ORG’s Eraring plant output varies but is running at significantly less than maximum output. The company appears to be having some success at railing coal but we doubt this is enough to make up for the loss of the expected contracted coal from Mandalong.

Cycle will turn eventually but unlikely in the medium term

We expect the outlook for prices will moderate in later FY23 but will remain elevated over long term averages for a number of years. 

New renewables and storage projects will no doubt enter the market more quickly but unlikely fast enough in our opinion to make a difference for some years to come.

Figure 1: AGL and ORG estimated coal plant output

Source: Morgans Financial, Company

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.