Origin Energy can't see the energy crisis because it scraps guidance - The Australian Financial Review

Origin Energy can’t see the energy crisis because it scraps guidance – The Australian Financial Review

Origin’s stake in the Australia Pacific LNG project is making good returns amid global gas pressure, and now expects its cash dividend from this company to reach $1.4 billion, up from the $1.1 billion it had forecast in February.

Higher selling gas prices offset increased costs in the gas business, including the cost of energy needed to process gas. Higher domestic gas prices are also a tailwind as Origin has a large portfolio of fixed-price gas for the 2022-23 fiscal year.

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But it’s an entirely different story on the other side of Origin’s business, known as the Energy Market Division. Here, core EBITDA is set to come in between $310 million and $460 million.

Not only does this large range speak for extremely high near-term uncertainty for the business, but it is well below the $450 million to $600 million EBITDA guidance provided in the group’s results in February.

The big problems lie with Origin’s aging power plant, which simply cannot get enough coal due to its suppliers’ supply constraints.

This has been an issue for the past 12 months, but Origin says things have worsened significantly in recent weeks due to “a material shortage of contracted coal delivery compared to expectations and Centennial Coal Origin notifying additional production restrictions at its Mandalong mine”.

With contracted coal delivery shortened, Eraring was forced to attempt to purchase coal at prices that had risen due to the war in Ukraine and other factors.

And even when Origin can buy coal, rail freight problems put more of the hand brake on Eraring production.

So, to meet customer demand, Origin needs to enter the spot electricity market where prices have gone up more than 140 percent. Earning is significant and could increase as the June 30th Origin Credit date approaches.

There is no easy way out

Origin predicted that the Energy Markets division will rebound in the 2022-23 fiscal year as higher commodity prices flow into customer tariffs; It expected earnings before interest, taxes, depreciation and amortization (EBITDA) to reach $850 million.

But that directive has now been withdrawn. Forecasts for coal connections and wholesale electricity prices are very difficult to predict.

“Challenges related to delivering coal to the Eraring Power Plant are expected to continue into fiscal year 2023,” Origin said Wednesday.

“This is expected to materially increase coal procurement costs due to higher coal prices and continued exposure to higher spot electricity prices.”

Shares of Origin, which were up 27 percent before Wednesday’s announcement, sank 13 percent in early trading.

The company promised to update its forecast for its results in August, but investors seem to have jumped on the obvious – if Origin is struggling to predict its profitability, what hope do investors have?

What is clear from Origin’s announcement is that there are no easy ways out of this. Gas prices do not fall as global demand rises.

Additional coal supplies are not likely to materialize, and even if they do, the asset is limited in the amount of coal it can bring in via rail. Which means Origin will need to continue tapping into spot markets to meet customer demand. This in turn means that upward pressure on wholesale electricity prices will be with us for months, if not years.

The implications, of course, go well beyond the original. The implications for industrial power users are only beginning to emerge, but the pain will spread far and wide.

For consumers, higher energy prices will drive up inflation and then interest rates in the short term, but with the war in Ukraine causing global energy shortages, energy inflation is unlikely to be temporary.

This crisis will not end quickly.

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