Today’s AFR carries an article Investors warn of consequences of cutting electricity retailer margins (the print version was “‘Crazy’ to target energy retail margins, warn big investors”):
Big investors have slammed the Morrison government’s “big stick” approach to the electricity sector, saying any move to force companies to cut prices will have a major impact on profits, future investment and result in less competition in the long term.
Federal Energy Minister Angus Taylor has called on the big energy companies – AGL Energy, Origin Energy and Energy Australia – to cut their power prices by January, or face the threat of forced divestment as well as other measures such as a default electricity price. A royal commission into electricity prices is also a real possibility.
But with forward wholesale prices up more than 40 per cent since June, big investors say it’s “crazy” to target retailers saying their margins were not excessive, with any forced cuts only going to chew into profits and return to investors. (Emphasis added)
That was Allan Gray Australia‘ managing director Simon Mawhinney, whose company has a stake in Origin Energy. He said the retailers were being targeted in a populist push before the next federal election because the government could do nothing about wholesale prices or regulated poles and wires assets.
I checked Alan Gray’s Australian Equity Fund and found that Origin Energy was their third largest investment at 7.4% of the fund, and was listed amongst the five worst investments of the fund in the last month. In these circumstances they are likely to be a net seller of Origin.
Mawhinney’s comments were backed up by others, such as Argo Investments managing director Jason Beddow, whose company has a stake in both Origin and AGL. He said the retailers could not control the wholesale price which has increased significantly in recent months:
He said investors had already started to walk from the big energy companies who are now going to be hampered with making long-term investments.
“As an investor it’s hard but what about the companies trying to run a business and invest capital on a 10 or 20 year view? As a shareholder I can sell it if I don’t like it. I think it’s a real concern. If you look at Origin and AGL [share] prices they have already been pretty beaten up,” he said.
Alan Gray offers managed funds, including superannuation funds. Argo is itself a listed company which invests in other listed companies. Argo:
Aims to provide shareholders with reliable, tax-effective dividend income and long-term capital growth.
This is a chart of the AGL share price over the last year:
While the ACCC, Taylor et al have been screaming about rip-offs, actually investing in companies like AGL has been an excellent way of losing money. I’ve looked at company research, which shows the AGL profits are likely to be flat over the next three years, and that assumes no tangible and quantifiable ‘big stick’ intervention.
I’m awaiting further analysis about what is going on with electricity prices, but here is a snapshot today from NEMWatch:
I’ve been watching from time to time, so impressions are a little random and selective. However, the NEM seems to be propped up by a backbone of coal in NSW, Queensland and Victoria. Honestly, wind (green) has been a bit hard to find. In recent months there has been a notable increase in large-scale solar, but the swing factor is gas, especially in SA and Qld, which is, of course, expensive.
With a hot summer forecast, meaning demand at record levels, it is not surprising that retailers, who control none of the above, would not be keen to offer Taylor what he needs politically, having styled himself as the minister for lower electricity prices.