Power: Will the rising retail tariff wave crest next year?

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Max Vickerson
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By Max Vickerson
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Date posted:
19 June 2023, 7:00 AM
Sectors Covered:
Industrials, New Energy

  • Retail tariffs and realised hedged prices are set to rise as the lagged impact of last winter will land next year.
  • Electricity futures are in backwardation though which suggests that tariff gains could moderate in the medium term without more severe disruptions.
  • AGL and LGI provided strong guidance upgrades and their share prices responded in kind. We anticipate that the lagged impact from previous high wholesale prices will dissipate after FY24 and see a widening gap between our DCF and earnings multiples.
  • In this report we update our forecasts and target prices for AGL Energy Limited (ASX:AGL), Origin Energy (ASX:ORG), Lgi Limited (ASX:LGI) and Genex Power (ASX:GNX) from page 5 onwards. All ratings are unchanged.

Rolling average prices look to roll over in FY25

Our estimate of two-year rolling averages of electricity futures shows significant growth through FY23 – 24. This is a key input for benchmark tariffs (DMO) and the hedged price of baseload generation.

With the exception of Victorian peak contracts, all other futures prices are showing decline in FY25.

Batteries are the focus for new capacity

AGL is focusing on rolling out battery projects until 2030. It is planning to build 1.8GW of short duration storage and 0.5GW of long duration, presumably its Muswellbrook Pumped Hydro project. It will also look to add 3.1GW of contracted renewable Power Purchase Agreements (PPA).

The remaining 6.6GW of the company’s planned new generation is planned for the following decade and is likely to be an almost 50/50 split between storage and renewables.

Similarly, LGI has clarified that the expansion of its Mugga Lane facility will largely be batteries. It plans to add 13MW of batteries and 2MW of additional gas in FY24 – 25.

ORG acquisition approvals continue to proceed

ORG’s potential acquirers have formally sought ACCC approval which may be granted by early September. Our view remains that the takeover will proceed.

Volatility likely to be the only certainty

Investors in the sector will need to be prepared to accept that dislocations in the energy market will likely continue as the grid decarbonises.

We see limited upside for most companies in the sector at these price levels, particularly given the ongoing challenges of navigating electricity market volatility and the potential for government intervention.

Figure 1: Three-month sector relative performance

Growth stocks have had a choppy ride since the onset of the pandemicSource: Morgans Financial, Factset

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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.

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