Boardroom Energy

This week:

  • Warning shots – ACCC wants more gas

  • Carbon divestment doesn’t reduce emissions

  • Would you buy an insurance policy from this energy company?

  • Chart of the week: Q3 contract prices

In brief

Along the east coast of Australia this morning, a nation holds its breath. The city streets are still, mainly from COVID-19 lockdowns admittedly, as we wait on the verdict of energy ministers who are discussing the possible switch from an energy-only to a capacity market. It would be the biggest energy market reform in a generation. Boardroom Energy’s intelligence is that, as usual, Victoria is likely to be the most reticent to listen to the advice of the Energy Security Board. In the past this has meant the discussion gets deferred. We’re predicting that will happen again today too.

BHP has continued to strip off profitable but reputation limiting assets as it positions itself for the 21st century. This time it is selling its oil and gas assets to Woodside, Telstra wants to buy Meridian Energy’s Australian assets which includes two wind farms and retailer Powershop and AGL is going to sell insurance as well as telephony, as well as energy. AGL is also selling off its gas storage facility at Newcastle to help fund its demerger.

The ever-vigilant ACCC thinks the east coast gas market could be short by 2 petajoules from next year and wants the big LNG exporters to sell more gas at low prices in Australia instead of making more money selling it offshore. Origin lost more than $2 billion last year. The AEMC is taking a look at what could amount to a radical shakeup of planning and investment for transmission infrastructure in Australia, including the idea of opening up these monopoly assets to competition.

The Chair of the UK Hydrogen and Fuel Cell Association quit claiming he could not support blue hydrogen which is derived from fossil fuels and the emissions captured and stored. The WA government wants to build a chain of 45 EV rechargers to allow electric car drivers to get around the gigantic state. Now all we need is some EVs. Tesla shareholders are suing the company claiming its $2.6 billion acquisition of ailing solar panel manufacturer SolarCity was actually a bail out. Meanwhile US authorities have begun a formal inquiry into the string of fatal crashes linked to Tesla’s driverless car technology.

Twiggy watch: This week Andrew “Twiggy” Forrest announced plans to make 50 million tonnes a year of green hydrogen (why not 100?) by 2030.

Warning shots

The ACCC’s latest gas report holds warnings for three groups: gas users, producers and pipeliners. Gas users are warned that 2022 threatens to see the tightest supply/demand balance since ACCC began reporting on the east coast gas market four years ago. Figure 1 below shows how finely balanced the two sides of the market are forecast to be based on AEMO’s GSOO report and ACCC’s analysis of producer data.

Figure 1: supply and demand forecast for 2022

Source: ACCC

In particular, under this scenario, supply from the southern states (Victoria, NSW, South Australia) is no longer enough to meet local demand and so imports from Queensland will be required. This in turn relies on the LNG exporters’ surplus gas being sold into the domestic market rather than sent overseas as LNG spot cargoes. Of course, these forecasts contain a number of uncertainties, and the supply/demand balance could end up being better or worse.

Gas producers are warned that the ACCC will be watching them like a hawk on both whether they supply spare gas into the domestic market (rather than flog it on the burgeoning LNG spot market) and at what price they provide it. According to new heads of agreement between gas exporters and the federal government, the three LNG exporters have agreed to offer any surplus gas they produce over and above their existing supply contracts to the domestic market first. A key clause is that such offers should be “with reasonable notice” and “on competitive market terms”. There is a lot of room for interpretation in those phrases and ACCC notes that they had observed “insufficient compliance” with the previous heads of agreement.

Gas pipeliners are warned that the ACCC considers that they still have effective monopoly power over transporting gas between any two given locations, given the limited number of gas transmission pipelines in eastern Australia.

Large gas users have been complaining for years about the market power of both the big producers and the pipeliners, and that this results in them getting excessively priced and inflexible offers – if any. ACCC has been monitoring the gas markets for years and demanding detailed commercial information from the supply side. Even though it says in the report it has identified monopoly power and poor compliance with existing rules, there seems to be little it can do, except at the margins.

Maybe the knowledge that they are under scrutiny is moderating the behaviour of the producers and pipeliners. The ACCC noted that through 2020, gas supply offers trended down along with the netback price and were tracking close to the cost of supply for a time. They also noted that offers had dried up in recent months as gas prices turned back up and that users were still struggling to get competitive offers for gas supply beyond 2022. So, maybe not.

Figure 2: Price offers for 2022 supply, southern states

Source: ACCC

Gas buyers are actively exploring options. ACCC notes buyers’ interest in developing alternative energy sources, such as biogas from waste producers and hydrogen, but that these are some way from being cost-competitive. LNG import terminals in the southern states may bring some welcome competition, but not in time for 2022.

The ongoing challenges for gas users in securing gas at terms acceptable to them mean the federal government’s so-called gas-led recovery remains a soundbite not a reality.

Carbon divestment doesn’t reduce emissions

The Big Australian BHP has ditched the Billiton, the London stock listing and its oil and gas businesses and picked up a Canadian potash mine which it expects will be a key ingredient for fertilisers for the next one hundred years.

It’s the latest multi-billion-dollar instalment in a nearly decade-long strategic pivot for the publicly listed global miner which has been offloading carbon intense and related assets for nearly a decade.

In 2015 BHP Billiton demerged a suite of metals and mining projects including alumina, coking coal for steel, and metals like manganese, zinc and silver, most of these acquired in Billiton merger in 2001.

The demerged business, South32, went on to outperform BHP, highlighting the strategic, non-commercial undertones of the deal. This week’s deal with Woodside is the next step. BHP will transfer its oil and gas business to Woodside in exchange for shares, so that BHP can improve its ESG performance and focus on cleaner future industries like feeding a growing global population.

BHP has also put its remaining coking (steel making) coal mines in Queensland and thermal coal mine in NSW on the market to complete the process. US based Peabody Energy is believed to be the front runner.

Cleaning up your business, cutting scope 1 and scope 2 emissions and committing to net zero by 2050 is becoming crucial for any high-profile public company wanting to raise cheap capital and keep investors happy in the 21st century.

Importantly, BHP, like other carbon divestors, isn’t closing these carbon-intense assets. It’s selling them. The real dance here is how producers of still essential carbon intense products like coal, gas oil and their derivatives, are being slowly aggregated into more concentrated pools of capital. In the short term this makes it easier for investors to choose what they do and don’t want in their portfolio. In the long term, it neatly packages up emissions-intensive businesses for a potentialswitch over to private capital in the future.

Private equity is happy to pick up cheap, unwanted but profitable fossil fuel assets and make handsome returns. There’s still plenty of private money in the US and Asia.

Woodside has opted to double down on its core business – gas – knowing that global gas demand is likely to remain steady or grow for decades as a flexible, renewables-backing replacement for coal and as the best source of high temperature industrial heat, at least until green hydrogen manages to get down the cost curve to displace it, which could be decades away.

Its $39 billion worth of assets are neatly bundled up if the time comes to move from public listing to private equity. The capital is moving around ownership of the assets, but the emissions aren’t really changing.

Would you buy an insurance policy from this energy company?

AGL is adding home insurance to its existing suite of offerings: gas electricity and telecoms. The giant energy retailer wants to position itself as a “one stop shop” for household services. Unlike in telecoms, where it acquired a regional broadband provider (Southern Phone) and rebranded it to offer services under the AGL brand, it is dipping its toes into the insurance waters by partnering with Honey, a self-described “disruptive” insurer.

This approach is nothing new. Several large businesses with an established consumer channel have looked at how to leverage that to provide multiple services/products. The benefit for the customer is derived from extended brand relationship, low cost and simplification or bundling of purchases.

Since the late 20th century retailers Coles and Woolworths have diversified into liquor and insurance. Airlines have built powerful loyalty schemes led by the Qantas Frequent Flyer scheme which has  so many partners it needs an A-Z directory to sort them all. In energy Qantas partners with Red Energy.

Health insurers are also in on the game, with BUPA offering both other insurance products and sundry other services – many but not all of which have some kind of health link (discounted supplements, gym memberships, etc).

Australia’s major banks pursued at times too aggressive cross-selling of financial services. Perhaps this is why they are looking broader – Commbank have recently bought 25 per cent of new energy retailer Amber to improve the stickiness of mortgage customers buying home energy technologies and non-mortgage customers by being able to access the commercial benefits of them.

Last year Tesltra announced it would be expanding into retail energy as it looks for new revenue channels  as the NBN has limited its once strong earnings in broadband services. It’s now looking at buying the Australian assets of New Zealand renewables generator Meridian Energy.

The problem faced by energy retailers is the volume of energy sold is shrinking as consumers increasingly generate and even store their own electricity. Changes in retail rules plus the various forms of price regulation around the NEM, means margins in energy retail are effectively capped. As a result there is no growth in retail energy markets, so AGL is looking for growth by bundling services from other markets.

The bigger question is whether AGL’s retail plans will work. It’s a well-recognised brand with millions of customers, but is it trusted enough to recommend an insurer? Energy retailers have struggled with trust recently, following years of price rises (even if they’re not solely responsible for those rises), periodic customer service issues, and negative media around these issues and disconnections.

Energy Consumers Australia carried out a consumer sentiment survey every six months. Their latest results show 52 per cent give electricity companies a positive trust score (7-10 out of 10), 33 per cent neutral and 15 per cent negative. That may not seem impressive, but telecoms get 50 per cent positive, insurers 42 per cent and banks 45 per cent. Only water companies out of basic service providers beat electricity and as they are all state-owned, they are unlikely to be muscling in on other sectors any time soon. So, electricity retailers such as AGL may have a slight brand perception advantage against the incumbents in these new markets they are targeting.

While the goal is to get consumers buying a range of services from the same provider, new entrants into each market will discount heavily to attract new consumers. So in a few years time, price sensitive consumers may find themselves getting insurance from AGL, financial services from BUPA, a mobile plan from Commbank and electricity from Telstra.

Chart of the week: Q3 2021 base future prices

Baseload futures for Q3 2021 increased slowly but steadily this year, spiking briefly in Queensland after after the Callide C explosion in May. They proved a good buy as prices have tracked higher as the quarter opened in July. Interestingly there is a clear separation between the black coal/low wind states of Queensland and NSW, trading at a $20 premium to the brown coal/high wind states of Victoria and South Australia.

Figure 3: Q3 2021 baseload futures contract prices by region, $/MWh