AGL - orig. The Australian Gas Light Co. Now one of Aussies biggest energy providers

[Snoopy]

How did all their purchasing from a clean green wind energy source go so wrong?

CEO, Mr Brett Redman, answered this question in the February 11th Half Year result conference
(p3 of transcript)

"I’d now like to look in more detail at market conditions. Spot and forward electricity prices have decreased rapidly to levels unseen since 2015. On the one hand, supply has increased as a result of new grid-scale and rooftop renewable generation combined with the deferral of major planned outages at thermal plant as a result of COVID-19. On the other hand, demand has fallen due to mild weather and COVID-19. La Nina has created an unusually cool summer, particularly in December."

The above comment strikes me as odd. It implies the thermal generation plant that was due for maintenance could not be turned off in times of excess supply.

(p3 of transcript continues)

"We expect a sustained impact to long-term wholesale energy prices reflecting policy measures to underwrite new build of electricity generation and lower technology costs, leading to expectations of increased supply.
This lower price environment will put pressure on existing generation in the market, while new generation build will increasingly rely on government contracts. Amid these conditions, in the near term we expect to see further margin compression as our historic hedge positions roll off."

It sounds like individual rooftop solar installations on a large scale are making a real difference to electricity supply. Of course solar power generation makes more sense in Australia than NZ, as production and consumption are better aligned. It is curious though, that construction of renewable power stations seems to to be driven by government, not the power industry.

(p12 of transcript)

"I want to conclude by looking at the historic relationship between EBITDA and Wholesale Electricity prices, to help put more context about our outlook beyond this year. Wholesale Electricity prices are the biggest driver of AGL’s profitability – and you can see from the chart to the right that there is a strong correlation between the price trend (both up and down) and AGL earnings. The steady rise that occurred from FY15 to FY18 translated into record profits in FY19, and the decline we’ve seen since is now translating to much lower earnings this year and into the next couple of years. Markus (Brokhof, Chief Operating Officer) has taken you through our hedge book in more detail, from which you can see that our progressive hedging approach smooths our earnings outcomes, both downside and upside."

"The chart here shows that wholesale prices are at levels last seen in 2015, hence it is likely earnings will follow."

(p21 of transcript).

"One last reflection too, on the impairments that we took around the wind contracts. An acid test is always, if you could go back in a time machine, would you have entered into those transactions. And the answer is yes. If you look at the whole of life economic outcomes that we achieve through that wind development, the results and the profits that we made in the earlier parts, the last few years where green prices and black prices have been a lot higher, in some respects what we’re seeing is a little bit of disconnect to the phasing of when costs and profits are booked versus the actual economic outcomes of projects. So do I, on behalf of the company, regret those wind projects from a decade ago? No. I think they did what they set out to do. They established a renewables and wind industry in Australia. They did provide good returns over the years to our shareholders. And I think for the whole of life, they’re not absolute knock it out of the park returns by any means, but they are respectable on the way through, so the impairment is not good, but the whole of life economic decisions there are not bad."

The question that wasn't answered, and is not company specific, is why did the Wholesale Power price collapse post 2018? The hint is that new generation is being underwritten, regardless of market price indicators.

The lesson here is, could the same fate befall Genesis Energy on the NZX, which like AGL, is primarily a fossil fuelled company with rent-a-green generation assets and concomitant contracted power pricing? The answer is, because wholesale power prices do go up and down, this is exactly what will happen to GNE. It is merely a matter of 'when'.

SNOOPY

discl: do not hold AGL or GNE