Power: Renewables and regulation short circuit prices
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 10 January 2023, 7:30 AM
- Sectors Covered:
- Industrials, New Energy
- Wholesale electricity prices continue to tumble as growing renewables’ market share and government intervention weigh on both spot and futures markets.
- We expect a jump in tariffs in FY24 when the draft DMO is released in February but we’re less confident of continued increases into FY25.
- Our view is that upside is limited in the sector but for those willing to accept higher risks, there is potentially significant upside for GNX.
Summer spot prices well below the squeeze anticipated by the futures market
NSW and QLD average prices settled at ~$120/MWh in the last quarter. This is well below the >$200/MWh level that the baseload futures contracts were trading at when the quarter began. Futures prices have tumbled across the board with prices expected to remain at more normal levels during CY23 and beyond.
So far, summer temperatures have been mild while renewables output and capacity have climbed. This has meant that wind and solar have claimed more market share from fossil fuels, and black coal in particular.
Government intervention to limit the costs of fuel are also likely having an effect on the outlook. In the longer term though we fear this may lead to underinvestment in generation and upstream fuel projects.
Retail rebound may not last beyond FY24
The integrated retailers are likely to receive an earnings boost as we think that the past six months of extreme prices will have an effect on tariffs next year. Outside a further period of energy market volatility, tariffs are likely to soften in FY25, limiting the upside for AGL Energy (ASX:AGL) and Origin Energy (ASX:ORG).
We downgrade our rating on AGL to HOLD because of the softening outlook. We retain our HOLD rating on ORG because of the possibility of the takeover proceeding but we see downside risks because of the proposed code of conduct.
Juniors have to make do with weakening merchant outlook
The outlook for smaller, more spot exposed generators like Genex Power (ASX:GNX) and LGI Limited (ASX:LGI) will also be softer and in the long term, they are both price takers.
LGI has better short term price protection and much lower risk but we believe it is appropriately valued and maintain our HOLD rating.
GNX faces significant construction risk and as a result we think the market is under-pricing the stock. We upgrade to SPECULATIVE BUY but we note there are significant risks to be overcome for our (login to view) price target to be realised.
Figure 1: CY22 NEM generation output changes vs pcp
Source: Morgans Financial, Open NEM
Find out more
Download full research note
If you would like more information, please contact your adviser or nearest Morgans office.
Request a call
Find local branch
Need access to our research?
You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team.
Create trial account
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.