Ultimately it will be consumers that will need to find umbrellas to take cover from the inevitable outworking of the energy crisis - higher retail prices.
Origin CEO Frank Calabria.James Alcock
For Origin,it was a confluence of events that has left it in a position where with only a month left before the close of this financial year,the range of potential earnings outcomes varies between $310 million and $460 million for the division that holds the company’s retail and wholesale generation assets.
Origin’s particular snafu was not of its own making. One of the two large coal suppliers to its NSW Eraring plant,Centennial Coal’s Mandalong mine,has encountered production issues and can’t deliver the loads that Origin had contracted. (Origin is not the only company in this pickle. Mandalong has other customers that will be similarly affected.)
For its part,fixing Mandalong’s problems are being hampered by supply chain blockages.
Origin has two options to cover the shortfall in power that it needs to satisfy the demands of its retail and industrial customers - it can buy electricity from somewhere else,or it can buy additional coal from an alternative source.
Origin’s coal supply woes are being further exacerbated by difficulties in receiving other coal by rail - some of which are being affected by excess rain.
And neither of Origin’s options are particularly financially palatable because the spot prices of both are off the charts. The electricity spot market has risen more than 140 per cent.
So experiencing a shortfall couldn’t happen at a worse time as expectations for elevated coal and wholesale prices now extend into next year.
An additional risk posed by investors is that of government intervention,with one analyst likening the Australian electricity market to the European market six to nine months ago.
Origin’s chief executive,Frank Calabria,suggested that the caps on retail prices imposed in the UK would not solve the fundamental problems faced by the Australian energy market today.
In the UK many energy retailers went out of business because the caps did not allow them to recover the soaring wholesale prices.
Australia is now experiencing huge increases in wholesale prices but Calabria said the government’s response should be to address the issues that are causing supply deficits,such as outages that have crimped the generation capacity of coal-fired plants. Part of this he says is driven by supply chain issues and problems getting the fuel to these plants.
Already in Australia some smaller retailers are attempting to shed loss-making customers and last week the energy regulator raised the so-called default prices that energy retailers are allowed to charge. While only around 10 per cent of Australians are charged these default market offers,there is an expectation that energy retailers will follow with increases of their own.
For large integrated companies like Origin,the increase in energy costs should have been its time to shine. Its existing longer-term contracts were meant to keep its coal costs down while reaping the benefits of higher retail prices.
Until Origin’s problems were revealed on Wednesday its share price has rocketed up more than 70 per cent this calendar year.
The news sent the stock down 14 per cent.
The energy markets division of Origin’s business is now shrouded in uncertainty - with many moving parts that make it near impossible to predict its earnings even for the 2022 financial year with precision.
As for 2023,all bets are off.
“Frankly,coming up with earnings forecasts for FY23 feels somewhat pointless at present,” says analyst Mark Samter from MST Marqee.
The good news for Origin is that its integrated gas business is feeling the positive effects of higher prices and is able to provide the earnings heavy lifting.
At a group level Origin expects underlying earnings to come in smack in the middle of its previous guidance.
But for the shortage of coal supply,it would have come in higher.
The Market Recap newsletter is a wrap of the day’s trading..