Quyen Do

Author: Do Quyen (page 1 of 2)

May 2, 2023

AGL Energy (AGL:ASX)

MICRO

OVERVIEW

AGL is Australia’s largest energy provider, delivering 4.2m services including gas, electricity and telecommunications to residential, business and wholesale customers across Australia. The company generates around 20 per cent of the total electricity generation capacity in the national market.

AGL’s power generation includes generation plants spread across traditional thermal generation, natural gas and storage, as well as renewable energy sources including hydro, wind and solar.

COMPANY EARNINGS

  • AGL’s fiscal 2023 net-profit-after-tax guidance range was narrowed and increased by 13% at the midpoint and fiscal 2024 guidance was given for the first time, portending a strong rebound broadly in line with our expectations.
  • Headwinds intensified for AGL as average wholesale prices dropped to just AUD 40 per megawatt hour, or MWh, in early 2021. Lower wholesale electricity prices, lower carbon credit prices and rising fuel costs drove underlying net income to just AUD 225 million in fiscal 2022. But electricity prices have since recovered and the medium-term outlook is good
  • Improved fiscal 2023 guidance reflects a solid second-half performance on the back of increased power station reliability and growth in retail customer numbers and profits margins.
  • Earnings are set to accelerate in fiscal 2024, mainly as high wholesale electricity prices pass through to residential and business customers. Earnings should also benefit from the startup of grid-scale batteries in Adelaide and Broken Hill and, hopefully, the nonrecurrence of major power station outages.
  • These positives are expected to be partly offset by higher bad debts and support for struggling customers, increased maintenance spending on power stations, and general cost inflation.
  • With the refinancing of AUD 1.6 billion debt in April demonstrating ongoing support from lenders, and management confirming an anticipated profit recovery in fiscal 2024, key investor fears have been allayed.
  • Further, management provided a long-term expectation for NPAT in fiscal 2036 to be similar to fiscal 2024 as investments in batteries and renewable energy, and growth in retail profits offset the closure of coal power stations.

VALUATION

  • Fair value estimate for AGL Energy is AUD 12.80 per share.
  • The stock still screens as slightly undervalued despite the strong rally in recent months, trading on a forecast fiscal 2024 price/earnings ratio of 11 and offering a dividend yield of 5.4% based on the current share price.
  • Valuation is underpinned by my view that wholesale electricity prices will be well supported for at least the medium term. Average wholesale electricity prices in eastern states recovered strongly since the 2021 lows. Higher wholesale prices will take time to flow through to customer contracts and thus AGL Energy’s profits.
  • Recovery has been partly caused by rising gas prices increasing operating costs for gas-fired power stations and unplanned outages, supporting our thesis.
  • Dividend franking will likely return in fiscal 2025, a little later than  previously expected.


RISKS

  • Companies that obviously have conflicts with ESG standards are faced with a shrinking pool of willing lenders and the possibility of some big investors withdrawing investments to satisfy members/ shareholders.
  • The momentum for climate change action is building. A change in government may mean radical changes to carbon emitting standards, regulatory uncertainty is very high

 CATALYSTS

Electricity prices to remain supported by closure of the Liddell power station in 2023 and tightening Victorian gas supply as gas fields deplete.

MACRO

Significant discussions are currently centered around decarbonisation and electrification across various sectors. However, these topics may not be the primary focus of the current discussion on old-world themes. The key factor influencing the energy space is the balance between supply and demand.

In the short term, the old-world energy sector is seeing a lot of positive signals due to supply-side challenges. The current situation involves less supply meeting the increasing demand, which is likely to result in higher prices. However, the energy landscape might undergo significant changes in the next decade.

In terms of renewable energy, like any energy producer, it’ll just depend on their cost of production and we see a good opportunity for old-world energy companies to invest in renewable energy solutions where the returns are right.  The advantage renewables have is that commodity prices may get adjusted for a price of carbon, which would put them in a favourable position versus other old-world commodities.

The most interesting thing at the moment is how old-world energy companies are transitioning to the new world. AGL Energy is probably a great example of that recently. They’re the biggest carbon emitter in Australia. They’re moving away from coal power generation into renewables.

We’ve seen the share price rise as the market transitions from being concerned about that, to seeing what the scope is for them to use the cash flow that’s being generated in the old world to fund the new world energy solutions. We’ve seen a rerate in the share price.

March 7, 2023

Why efficiency first?

It has become commonplace in recent years, also among politicians: energy efficiency is our first fuel, and: energy efficiency first [i]. The three most important things we can do to combat climate change are to save energy, save more energy, and save even more energy.


But is that still correct? By the end of last year, I was asked the question [ii]: did you change your mind about something, last year? This is my response:


Let’s be honest, saving energy has brought us a lot. In many Western countries, total energy use is barely growing or even falling. This can largely be attributed to energy efficiency improvement: the growth of our economic activity is offset by the fact that all our devices and processes are becoming increasingly efficient. What has worked particularly well is setting standards for the energy consumption of all kinds of new stuff: electric appliances, lamps, homes, cars, and electric motors. To give a striking example: a refrigerator that is bought now has an electricity consumption that is about a quarter of a comparable refrigerator at the beginning of this century. There is little to be seen on the outside of the fridge, but behind the refrigerator door, a quiet revolution has taken place. What is going less well is the improvement of existing things: think of existing buildings, and of existing industrial installations. They all have a long lifespan, from several decades to more than a century. Improvement of the existing through retrofit is possible but proceeds slowly. The pace of the energetic renovation of homes provides a striking example. The rate of renovation rarely exceeds 1% per year in most countries. That does not help to achieve a fast energy transition. The International Energy Agency (IEA) also emphasizes the lack of progress. The rate of energy efficiency improvement is not even half of what it should be to meet ambitious climate targets [iii].


I myself have always strongly emphasized the importance of energy saving from a scientific point of view. Around 1990 I was one of the first to compile a database, with an exhaustive quantitative overview of all possibilities for energy efficiency improvement, showing that the potential is enormous. And when I moved from Utrecht to Delft as a professor in 2014, in my inaugural address I focused on ‘the neglected side of the energy system’: the demand side, and emphasized the vast opportunities for energy efficiency improvement [iv].


That is why I have always wholeheartedly supported the above slogans, such as ‘energy efficiency first’. But what struck me was one of the outcomes of the latest report by the UN’s scientific climate panel, the IPCC. In the report, we have provided an exhaustive overview of all options for reducing greenhouse gas emissions in 2030. And guess what? Although all options for energy saving in buildings, transport and industry are important, wind energy, solar energy, and stopping deforestation, for example, are – each in their own right – about as important as all those energy savings together [v]. The important role of solar energy and wind energy is particularly striking. The mantra has always been: save first, then make the remaining energy more sustainable, but that logic is no longer there. This of course is related mainly to the sharply reduced costs of solar energy and wind energy. We must quickly continue scaling up those energy sources, and we certainly cannot wait for energy-efficiency-first!


Should we then stop promoting energy efficiency? I’m certainly not there. We should anyway continue to set energy efficiency standards for appliances, homes, etc., and expand and tighten those. But at the same time, we should ask ourselves whether the policies that we have been pursuing so far for existing buildings and industrial installations are effective. Everything we have done now in terms of subsidies, knowledge transfer, voluntary agreements, and carbon taxes, is good. But I think we should go a step further and also here use regulatory instruments: setting requirements for the efficiency of buildings and industrial processes. In practice, this means: for buildings, set a maximum energy consumption per square meter, and for industrial processes set a maximum for the energy consumption per tonne of product.

February 12, 2023

We’re getting to 2 degrees

GEEN CATEGORIEWhat global temperature increase are we heading to? Many are pessimistic about this and expect that we are heading for 3 °C by the end of this century. In this blog, I want the make the point that 2 °C is a much more likely outcome – thanks to a mechanism agreed upon in the Paris Agreement.

A while ago, the journal Nature [1] held a survey among the lead authors of one of the recent IPCC reports, the one on the physical science of climate change (Working Group I). The outcome is depicted below. Most IPCC authors expect that we will end up at 3 °C compared to pre-industrial levels, just a few are a bit more optimistic:

Earlier this year, I asked the same question to a group of followers on Twitter with an interest in science and I got about the same result [2]. I do not know what is the background of the respondees’ expectations. Most likely it is based on the many estimates of the impact of the Paris agreement. With some variation, the research into the impact of all the Paris-related commitments came to the conclusion that the combined effect of all commitments would be about 3 °C [3][4].

But this overlooks one important element in the Paris Agreement: the so-called ratchet mechanism. While the Paris Agreement was forged, the negotiators already acknowledged that the total of pledges by the countries was not sufficient. Therefore, it was agreed that every five years countries would be invited to present a new pledge (called Nationally Determined Contribution in the UNFCCC jargon). Each new pledge should be a progression compared to the previous one. There is no way back – therefore the name ratchet mechanism.

The question is of course whether this mechanism really works. The first test was at the Glasgow climate conference in November 2021 – postponed by one year because of Covid-19. And: yes, it worked. Many countries have updated their pledges and come with higher ambitions for 2030; these include China, the USA, Japan, and the European Union. Moreover, these countries and many others have submitted pledges for the phase-out of net greenhouse gas emissions (or just CO2) in 2050 or 2060.

Do all these enhanced pledges make a difference? Also here, the answer is a clear yes, according to the analysis by Climate Action Tracker:

2015
Paris Agreement [5]		 2030 pledges 2.7 °C
2021
Glasgow Pact [6]		 2030 pledges

2030 pledges
+ net-zero pledges		 2.4 °C

2.1 °C
optimistic interpretation: 1.8 °C

Obviously, if all the countries would live up to their pledges, we are heading rather to 2 °C than to 3 °C by the end of this century. The analysis by Climate Action Tracker is confirmed by a publication in Nature earlier this year: full implementation of all the pledges would lead to limiting global warming to 1.9 – 2.0 °C [7].

The final question is of course: will the countries live up to their pledges? Also here, the historic developments over the past 6 years give way to some optimism. Climate Action Tracker not only assesses the impact of pledges but also the impact of concrete policies. Whereas in 2015, they estimated that actual policies would lead to a temperature increase of 3.6 °C, in their current assessment this has dropped to 2.7 °C. There clearly is a substantial lag between pledges and policy implementation on the ground, but at least we also see substantial progress here.

So, taking it all together: step-by-step we are moving towards pledges and associated policies that will bring us closer to a maximum temperature rise of 2 °C. Don’t interpret this as “we’re done!” Actually getting there will still require a lot of effort for all governments, all companies, and actually all of us in the coming decades.

A global temperature increase of 2 °C is a lot better than 3 °C. However, there is also wide agreement now that the climate change impacts will be still a lot worse at 2 °C than at 1.5 °C. And can we achieve that latter target? As we have shown in the latest IPCC report, the window to reach 1.5 °C is rapidly closing. Whereas reaching 2 °C could be considered a likely outcome of the current progression of international climate action, this step-by-step approach seems just not fast enough for reaching the 1.5 C target. How to get to a 1.5 °C pathway should therefore be the top issue at the table at the next climate conference in Sharm El Sheikh next November.

The ratchet gear on the photograph was found on a steamshovel build around the time of WW1. Photo credit: Pete Muller.

[1] J. Tollefson: Top climate scientists are sceptical that nations can rein in global warming, Nature 599(2021)22-24.

[2] In January I was operating the Twitter account NL_Wetenschap for a week. The Dutch-language account has over 20,000 followers, with presumably a more than average interest in science. I asked the same question as in the Nature article [1]. The response was as follows.

[3] J. Rogelj, M. den Elzen, N. Höhne, T. Fransen, H. Fekete, H. Winkler, R. Schaeffer, F. Sha, K. Riahi, M. Meinshausen: Paris Agreement climate proposals need a boost to keep warming well below 2 °C, Nature 534(2016)631-639.

[4] All temperatures mentioned in this blog are compared to pre-industrial levels. Only mid-range numbers are given, but all numbers show uncertainty, especially due to the uncertainty in the reaction of the climate system to the increased presence of greenhouse gases in the atmosphere.

[5] J. Gütschow, L. Jeffery, R. Alexander, B. Hare, M. Schaeffer, M. Rocha, N. Höhne, H. Fekete, P. van Breevoort, K. Blok: INDCs lower projected warming to 2.7°C – significant progress but still above 2°, Climate Action Tracker, 2015, available here.

[6] See, the “thermometer” on the website of Climate Action Tracker, with link to the methodology section.

[7] M. Meinshausen, J. Lewis, C. McGlade, J. Gütschow, Z. Nicholls, R. Burdon, L. Cozzi, B. Hackmann: Realisation of Paris Agreement pledges may limit warming just below 2 °C, Nature 604(2022)304-309.

July 29, 2022

Climate policy for whom?

The costs of a stringent climate policy will probably be much lower than what the energy models currently suggest.

This is due to “technological learning” that occurs as soon as a technology is applied on a large scale. This phenomenon is best known in the sustainable energy world, where the worldwide upscaling of wind and solar energy has resulted in the availability of electricity from these sources at cost prices of 2 – 5 cents per kilowatt hour, often lower than the cost of conventional generation, in many places around the world . The same effect also occurs for all kinds of energy-saving applications, such as high-efficiency boilers, energy-saving lamps and efficient household appliances [1].

We see this, for example, in the price of double glazing: although the current high-efficiency glazing is almost a factor of 3 better than conventional double glazing, the price is hardly higher. There is often no cost difference anymore and the most used product turns out to be the cheapest. All this probably means that the costs of energy and climate policy will be much lower than currently calculated with the energy models.


The best way to limit the costs of energy and climate policy for low-income households is to let them fully participate in energy saving and the application of sustainable energy.

Many measures, such as the usual insulation measures, the use of efficient household appliances, the use of LED lamps and nowadays also the installation of solar panels, lead to lower costs for households. A substantial number of households still do not make sufficient use of these options, for various reasons. These include, lack of knowledge, lack of investment capital or simply the fact that they live in a rented house. This may apply most often to low-income households. The best thing to do for this group is to ensure that they benefit from the cost benefits associated with the application of energy saving and renewable energy, e.g. through an ambitious insulation program for social housing, stringent energy efficiency standards for household appliances and support with the financing of, for example, insulation and solar energy.

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