Major energy retailers hit by changing market impacted by renewables

Australia’s two biggest power and gas suppliers have been smashed by a collapse in wholesale power prices triggered by surging renewables, with AGL Energy booking shock write-downs of almost $2.7 billion and Origin Energy warning of a two-year profit hit.

More than $1 billion has been wiped off the value of Queensland government-owned coal and gas generators, as falling electricity demand and the growth of wind and solar slash profits, with the Queensland Audit Office warning that further cuts are in store.

Some $867 million was wiped from the two energy giants’ combined market value on Thursday as investors took fright at the hit from the expected drawn-out downturn in power prices. Standard & Poor’s flagged a possible cut to Origin’s BBB credit rating.

Some $1.92 billion of AGL’s write-down relates to provisions for “onerous” contracts that it signed to support wind farms between 2006 and 2012 when prices for wholesale power and renewable energy certificates were much higher. Reduced demand due to COVID-19 restrictions is adding to the downwards pressure on wholesale prices.

A further $1.112 billion comprises charges to cover the environmental remediation of sites, while power and gas plants will be impaired by $532 million. A positive tax gain of $878 million will offset only part of the total.

AGL now expects “a sustained and material reduction in prices”, for wholesale power and renewable energy certificates, eroding the value of its power stations and making sales contracts signed in earlier years for wind power unprofitable. It pointed to policy measures to underwrite new-build electricity generation – as proposed by the federal and NSW governments, among others – and lower technology costs as reasons for the softer price outlook.