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So far as electricity generation (as distinct from retailing) is concerned, most of the generation that Origin owns is gas-fired. They also have a significant kerosene-fired plant in Queensland, and a bit from wind.
In addition to generation owned outright, they have contracted rights to the output of a major black coal-fired plant in NSW which accounts for around half their total generating capacity. Also they have contracts concerning a pumped storage hydro scheme, also in NSW.
An issue is that as the LNG plants in Qld come online, East Coast (Qld, NSW, ACT, Vic, Tas, SA) gas prices are expected to soar to export parity levels. That's good news for gas producers (including Origin) but to some extent profits from gas will come at the expense of losing profits from power generation. Even under the highest likely carbon price scenarios, gas-fired generation will no longer be competitive with coal.
Now, Origin isn't "paying" that price as such, since they produce gas as well as use it in power stations, but the power stations do effectively compete against LNG exports for the same gas. You can't burn it twice.
At present, there is reasonably heavy use of gas-fired (and hydro) generation whilst the carbon price is fixed at a higher level than is expected under an ETS (or if a Coalition government abolishes it altogether). But it's pretty well known in the industry that, no matter who wins the next election, we'll soon see a slump in hydro output (as the lakes dry up due to current over production) and gas-fired generation (as gas prices rise) and that that most of this will be offset by an increase in production from coal. All this falls into place over a fairly short timeframe in 2014.
I haven't worked out exactly what it means to Origin's bottom line, but the power stations they own will certainly be far less profitable in future than they are now. Turning cheap gas into expensive electricity today versus using expensive gas to produce electricity that must compete with cheaper coal (lower carbon price) tomorrow. That's a pretty big hit to the profitability of gas-fired power generation.
They also have that kero burning plant too. The AUD is dropping and the oil price is rising which means the fuel cost there will be going up too. Technically the plant could be converted to run on gas, but first they need a sufficient gas source (ie build a pipeline) and of course that only makes sense if the gas itself is cheap enough.
Complicating all this will be what contracts they have in place since I'm referring to market prices expected to prevail going forward for electricity (getting cheaper), gas (more expensive), carbon (cheaper) and oil (more expensive). There will be an impact of higher wholesale gas prices on their gas retailing business too, which also ends up competing against exports (LNG) for the same gas resource.
I would also not rule out the possibility that government steps in to regulate gas (plausible) or electricity (less likely) prices in the domestic market given the likely magnitude of price rises expected in the near future and the impact this will have on households, business, manufacturing etc. Needless to say, such a move won't boost the profits of the likes of Origin if it were to happen.
It's complex to work out what it all means to the bottom line but certainly the fundamentals are likely to shift in the energy business, with the emergence of Qld LNG exports being the primary driver.
In addition to generation owned outright, they have contracted rights to the output of a major black coal-fired plant in NSW which accounts for around half their total generating capacity. Also they have contracts concerning a pumped storage hydro scheme, also in NSW.
An issue is that as the LNG plants in Qld come online, East Coast (Qld, NSW, ACT, Vic, Tas, SA) gas prices are expected to soar to export parity levels. That's good news for gas producers (including Origin) but to some extent profits from gas will come at the expense of losing profits from power generation. Even under the highest likely carbon price scenarios, gas-fired generation will no longer be competitive with coal.
Now, Origin isn't "paying" that price as such, since they produce gas as well as use it in power stations, but the power stations do effectively compete against LNG exports for the same gas. You can't burn it twice.
At present, there is reasonably heavy use of gas-fired (and hydro) generation whilst the carbon price is fixed at a higher level than is expected under an ETS (or if a Coalition government abolishes it altogether). But it's pretty well known in the industry that, no matter who wins the next election, we'll soon see a slump in hydro output (as the lakes dry up due to current over production) and gas-fired generation (as gas prices rise) and that that most of this will be offset by an increase in production from coal. All this falls into place over a fairly short timeframe in 2014.
I haven't worked out exactly what it means to Origin's bottom line, but the power stations they own will certainly be far less profitable in future than they are now. Turning cheap gas into expensive electricity today versus using expensive gas to produce electricity that must compete with cheaper coal (lower carbon price) tomorrow. That's a pretty big hit to the profitability of gas-fired power generation.
They also have that kero burning plant too. The AUD is dropping and the oil price is rising which means the fuel cost there will be going up too. Technically the plant could be converted to run on gas, but first they need a sufficient gas source (ie build a pipeline) and of course that only makes sense if the gas itself is cheap enough.
Complicating all this will be what contracts they have in place since I'm referring to market prices expected to prevail going forward for electricity (getting cheaper), gas (more expensive), carbon (cheaper) and oil (more expensive). There will be an impact of higher wholesale gas prices on their gas retailing business too, which also ends up competing against exports (LNG) for the same gas resource.
I would also not rule out the possibility that government steps in to regulate gas (plausible) or electricity (less likely) prices in the domestic market given the likely magnitude of price rises expected in the near future and the impact this will have on households, business, manufacturing etc. Needless to say, such a move won't boost the profits of the likes of Origin if it were to happen.
It's complex to work out what it all means to the bottom line but certainly the fundamentals are likely to shift in the energy business, with the emergence of Qld LNG exports being the primary driver.
