ORIGIN DEMERGER

Last week it was AGL. Is it now Origin Energy’s turn to announce a demerger?

On Thursday Origin Energy’s CEO put an end to the speculation, saying that they would not be taking AGLs lead and demerging their business for now.  In the announcement, AGL’s rival highlighted the benefit for the company to stay whole, but to diversify their earnings.

Commentary around the potential demerger has been highlighted by Edge and others over the last couple of months. Edge saw an opportunity for Origin to either spin off its retail business or split the business into 2, being electricity and gas.

Origin is a complicated business, operating across both electricity and gas, and across wholesale and retail. Parts of the business are also tied up in joint ventures such as the LNG export terminals in Australia and its part share in Octopus Energy in the UK. Origin has reported that it ‘‘will continue to assess the portfolio’’.

Origin’s structure is different to AGL’s.  Origin’s LNG business is currently propping up its domestic gas and electricity business units. If the pressure from a dropping international gas price puts stress on LNG returns, we may well see Origin have a closer look at its portfolio and structure.

Currently the APLNG venture returns $800M to Origin after tax.

CEO Mr Calabria said “Origin’s energy market business already looks very much like the ‘’new AGL’’’, with the notable difference that Origin has a more gas fired portfolio, with Eraring (the only coal unit) flagged to shut down from 2030.

Mr Calabria has also shown limited expectations in the short term for the energy industry, unless we see hotter summers leading to higher demand or the shutdown of coal power generation as a result of the unsustainable low spot prices.  He remarked that the market is in an ‘‘unstable equilibrium’’ as an increased amount of renewable generation enters the market and the resulting wholesale prices squeeze profits of the generators and retailers.

As we move through this unstable equilibrium, Origin sees opportunities for State governments to take NSW’s lead and introduce policies to motivate investment rather than wait for increases in spot price.

NB: Spot prices have historically been the leading indicator for investment in new generation. If government led roadmaps became predominant, it may lead to a smoother transition to a renewable future and the orderly retirement of coal and gas generation.

So, with APLNG subsidising Origin’s other business streams we are unlikely to see a demerger, but can Origin utilise this upper hand in the market to push out the competition – demerged or not?

CARBON PRICES INCREASE

As the next round of auctions are set to take place under the Emissions Reduction Fund, prices for Australian Carbon Credits (ACCU) have increased steadily since January and are now trading at $18.40 per certificate, 10% higher than in January.

The growth in the ACCU market is partially from the Federal government’s Safegaurd mechanism, but also due to an increasing number of companies implementing zero emission targets and using ACCU’s to offset their emissions.

As more companies choose to aim for a net zero emission position, the supply / demand balance in the ACCU market has shifted and the price of the commodity is increasing. Some forecasts predict ACCUs could reach as high as $45 per certificate by 2030.

The biggest jump in the price for ACCUs was recorded in February when the Prime Minister endorsed a net zero target by 2050.

As highlighted in previous articles, many companies are responding to shareholder pressure to reduce emissions and decarbonise.  The European market, Emissions Trading System (ETS), a block of 27 countries, has seen EU carbon permits jump from €23 in November to €41 in March.  They were trading closer to €5 only two years ago. The price increase has been the result of the EU’s tougher climate change policies.

Large emitting companies had until February 2021 to purchase their ACCUs to comply with their Safeguard liabilities, hence the  increases in price. However as seen from the chart above the prices of ACCUs has remained high. This leads to the assumption that voluntary purchases of ACCUs are maintaining upward pricing pressure.

Across Australia, large emitters such as AGL have been joined by large energy users including the Coles Group and Woolworths to commit to net zero greenhouse gas emissions by 2050. Other large gas and petrochemical exporters have started to sell carbon neutral LNG and other carbon neutral products, this is achieved by carbon offsets such as ACCU’s.

As the demand for carbon offsets increases the ACCU price is likely to continue to rise until cheaper abatement solutions develop such as improved farming practices resulting in improved soil carbon storage and broad acre management such as Savanna burning.

Common to all markets, the offset market is currently in a state of flux.  Demand will most likely increase the price of ACCUs while new project and pressure from international carbon offsets will put downward pressure on prices. The positive takeaway is businesses are clearly proactively moving to reducing their carbon footprint.

What are you doing to reduce yours?

WILL A “SUN TAX” SLOW DOWN ROOFTOP INSTALLATIONS?

Look around the suburbs and you will see rooftop solar PV installations have taken off. But Australia’s love of using the sun to power our homes has led to increased pressure being put on the distribution network. The high share of intermittent generation on the network, such as rooftop PV, has seen network operators warn consumers of an increased risk of congestion on the grid and possible blackouts. The increase congestion and the increase risk of blackout has led to the call for more market reform.

As part of ARENA’s Distributed Energy Integration Program, the Australian Energy Market Commission (AEMC) have rolled out their next phase of market reform in response to the increase congestion on the distribution network. The proposed changes include:

  • Changing distribution power networks’ existing incentives to provide services that help people send power back into the grid
  • Officially recognising energy export as a service to the power system.
  • Allowing power networks to develop new tariff options including two-way pricing.
  • Flexible pricing solutions at the network level.

The latest raft of reforms are designed to allow more solar and new tech energy into the grid. But Solar advocates have focused on the rule change that will allow distributors to charge solar households to export power.

Solar advocates have labelled the new legislation a “Sun tax” and have called upon state energy Ministers to “protect solar owners from this discriminatory charge’’.  The proposed reform, released for consultation last week, has been labelled a ‘‘sun tax’’ by community interest group Solar Citizens. Solar Citizens also called on state energy Ministers to ‘‘protect solar owners from this discriminatory charge”. It must be highlighted that this legislation is not a tax, and the new energy rule will include extra safeguards to ensure existing and new solar customers – and non-solar customers – are protected. The proposal does not mandate default charges for exporting power.

Market participants, including the distribution companies, agree the proposed reforms will allow more rooftop solar systems and batteries. This reform will also allow the smarter use of the network with distributed energy resources (DER) linking together to optimise the grid. This reform will enable more DER and how DER is managed. Currently as high levels of rooftop solar PV generation increase distribution companies restrict the power exported to prevent voltage spikes, frequency changes and in some cases blackouts.

Modelling by the AEMC shows a typical household with a roof top PV could lose out on $70 each year if this market reform goes through. The AEMC modelling also showed the reforms could impact around 20% of households. 80% of households will be no worse off and many may be better off by $15 as they would not be paying for the higher cost of distribution associated with building a grid to accommodate excess solar energy.

The AEMC have highlighted that these reforms are fairer as late adopters of rooftop PV are not disadvantaged with the current “first in, best dressed” structure.  AEMC CEO Ben Barr emphasised that the proposal would not mean that every kilowatt of energy exported into the grid would be charged, he believes distributors to offer a variety of options for solar households, which could include free exports up to a certain limit.

Energy Consumers Australia, which represents retail energy users, said the proposed reform was only the first step in a process that needed to focus on talking to consumers and putting their needs first.

EDGE IS HELPING BUSINESSES TO STEP UP THEIR CLIMATE EFFORTS

The world is changing……………………. you only had to look out the window this week, to see the impacts of this.

No matter how you think it is occurring or who you think is contributing to it, climate change is real.

Over the last decade it has been more evident that Australia is being impacted by climate change. We have seen higher temperatures, worsening droughts and most recently parts of Australia have been impacted by the worst floods in a decade.

Australia has always been affected by extremes in the weather, but science shows the impact and regularity is increasing.

At Edge part of our role is to advise our clients on how to best manage risk. This is not always financial risk as most people would assume but, indirectly climate risk. This is the biggest risk many companies are facing, and this directly relates to financial risk.

Investors are starting to push companies to align their operations towards emission reduction targets and the use of sustainable practices. Many companies across Australia are pledging to reduce emissions to ‘‘net zero’’ by 2050 however, many do not have a clear strategy to reach this target.

Edge has and is currently assisting our clients with the development of low carbon business models.

When investors are weighing up the performance of a company, they are now allocating more weighting to how the company manages it sustainability.

Edge works with a range of clients including, some of the largest mining and utility companies worldwide and over the last couple of years we have developed strategies to decarbonise their businesses.

The procurement of renewable energy is just one way in which Edge is assisting clients.

We have developed sophisticated mechanisms to provide the client with access to:

  • renewable energy
  • environmental certificates
  • emission offsets

and……………..we are still able to manage the price risk and uncertainty in the energy market.

IS GAS THE TRANSITIONAL FUEL?

 

Following feedback from industry that gas is not the transitional fuel for Australia to help move from Coal fired generation to renewables, AEMO is grappling with their plan to model a ‘gas led recovery’ scenario for the 2022 Integrated System Plan (ISP).

AEMO are now calling the ‘gas led recovery’ the ‘diversified technology’ scenario.

It appears that not all is dead for gas as an option as the transitional fuel and a fuel used into the future. Methane (CH4) is commonly thought of as the gas to power generation, however in this case it looks like ammonia (NH3) could be used. This carbon free fuel can be made by renewable hydrogen and is commonly used in fuel cells and rocket engines as a propellant.

Gas turbine generators are essentially modified rocket engines so it’s not hard to imagine ammonia to be used to fuel power generating gas turbines. Mitsubishi Power have developed gas turbines to operate on hydrogen but now they have gone a step further to develop ammonia-fired technology.

Mitsubishi Power is currently developing a version of its 40MW H-25 series gas turbine that would operate using ammonia, this commercial scale gas turbine is the first in the world to operate on ammonia as a fuel and is expected to reach commercialisation by 2025.

Ammonia is the chosen fuel as it is a highly effective transporter of hydrogen, using readily available nitrogen molecules to create a stable compound able to be easily stored and transported.

Apart from the usability of ammonia as a fuel source it comes with the added benefit of achieving a carbon neutrality fuel.

As with any technology there is always a downside, the combustion of ammonia results in the production of Nitrogen oxide (NOx).  NOx can have harmful effects on the environment by creating smog and in some cases acid rain. The NOx by-product can be reduced using catalytic similar to the ones used in car exhausts to reduce the level of emissions.

Edge News – March 2021 Newsletter

If your business isn’t looking at renewable backed energy deals, you are fast becoming the minority. All major market retailers and generators are seeing an exponential increase in enquiries for renewable backed energy deals and are scrambling to service this.

We only hope ownership remains diversified and we continue to see retail products take shape for smaller C&I and multi-SME consumers. They need access to renewables as much as the largest users.

WHO WERE AUSTRALIA’S TOP EMITTERS?

Last Thursday the Clean Energy Regulator (CER) published the latest National Greenhouse and Energy Reporting (NGER) data outlining the largest 400 emitters across Australia.

As expected, Australia’s energy companies ranked highest in the list with AGL leading the list, with greenhouse gas emission reported as 42.2 million tonnes of scope-1 emissions for 2020 financial year. AGLs emitter was more than double that of the second highest emitter Energy Australia, at 17.9 million tonnes.

Other high emitters included:

  • Origin Energy with 16 million tonnes
  • Stanwell Corporation and CS Energy emitting a combined 30.3 million tonnes.

Following the list dominated by thermal generation came the oil and gas producers.

  • Chevron Australia emissions equaling 10.2 million tonnes
  • Woodside Petroleum reported 9.2 million tonnes
  • Santos emitting 7.3 million tonnes

As AGL owns the oldest and dirtiest power stations due to the fuel they burn, it is not surprising they top the list of emitters with 8% of Australian greenhouse gas emissions.

AGLs largest emitting stations was the brown coal fired Loy Yang A coal power station with 16.7 million tonnes and Bayswater Power Station at (14.0 million tonnes), which burns black coal.

With the release of these results, it will put increased pressure on the retailers to clean up their generation by moving towards renewable generation.

 

Emission reductions have changed across various sectors in the 2019-20 year, which was mostly due the impact of COVID-19 however as seen below the electricity generation sector had continued a historic trend of reduced emissions due to the higher penetration of renewables.

Emissions from the electricity sector dropped by 7.5 million tonnes compared to the previous year. Emissions from the oil and gas sector dropped by 3.4 million tonnes as result of reduced venting and flaring of gas.

IS SOLAR POINTING IN THE RIGHT DIRECTION?

 

Are we installing rooftop solar panels to produce the best outcome for our households?

Traditionally solar panels including residential, commercial and industrial scale have been orientated to catch the sun to produce as much solar energy as possible. This has resulted in solar panels being installed facing north in the southern hemisphere, to face the equator. The north facing panels would then produce the most energy from the sun when it passes the zenith in the middle of the day. This results in the most amount of energy being produced, usually when a majority of households are not using electricity, resulting in excess energy being exported or stored in batteries. The returns from the export credits are lower than the cost of electricity during the peak times of use and the capital cost of batteries, which are currently high.

We are all aware, the export of excess solar energy during the middle of the day is causing issues for the National Energy Market (NEM) and can result in negative spot prices during these times. There are currently 20% of households with rooftop solar installed and this is expected to grow in the coming years. The issue of excess solar energy being exported will worsen over time.

The University of South Australia (UniSA) is comparing rooftop solar installations compared to the usage patterns of consumers. UniSA see “the real challenge now facing the solar industry is finding ways to balance production and consumption by maximising self-consumption for the solar panel owner”. This has led to researchers exploring the orientation of rooftop solar panels, rather than to match the times of best generation but to meet patterns of consumption. Matching consumption will result in a reduction in overall energy generation but exports will be minimised.

The UniSA research found “by orienting panels in different directions rather than just facing the equator, it’s possible to minimise the shortfall between load and generation for a community precinct…This benefits the end-user by decreasing the amount of electricity required to be imported, and the stability of the grid by decreasing the amount of variability between peak and low loads.” The research found it was better to face the panels North West to match the afternoon loads. To optimise for the morning and afternoon consumption, by placing panels North East and North West, the load in the middle of the day was still met, but a greater proportion of the morning and afternoon load was also delivered from the solar panels.

Edge News – February 2021 Newsletter

We don’t know if time really does go faster as you get older, or if we hit the ground running so fast into 2021 that it felt like January was over before it started. Either way, whilst many enjoyed an extended break after a challenging 2020, our teams were pumping with productivity.
It’s the year of the Ox and we’re pretty excited about it! Diligence, resilience, and upward momentum symbolise the Chinese year of the Ox, and our team couldn’t be working more diligently, resiliently, or with any more upward momentum! We’re so excited to be proactively involved in the energy transition, and working with many brilliant minds to bring a range of renewable backed solutions to market – financial and physical.

What is a letter of authority?

Although vitally important to the operations of your business, many business owners won’t have the time to personally compare and select the best energy deals for their company or handle the administration involved with managing their existing account.

That’s why so many businesses hand over this responsibility to an intermediary that can do this for them. These third parties typically work for professional energy consultancies or as an independent broker. To use an intermediary like this, your business will need to provide the agent with a valid signed and dated letter of authority. Without a valid letter of authority, a third-party consultant cannot legally complete the following jobs on your behalf:

  • correspond and liaise with your current energy supplier to deal with any service and/or billing queries on your behalf.
  • organise energy-related maintenance or upgrade appointments with your supplier, such as standard boiler services or smart meter installations.
  • submit meter readings or collect energy consumption data collected by your supplier for energy management purposes.
  • start the process of renewing or switching energy supplier contracts or negotiate with other suppliers to find your business an improved deal (subject to your final approval).