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Keep Calm as Summer Is Upon Us; Summer Blackout Fears Lift Origin Shares

  • December 06, 2019 11:20 PM AEDT
  • Team Kalkine
Keep Calm as Summer Is Upon Us; Summer Blackout Fears Lift Origin Shares

Origin Energy Limited (ASX: ORG) is an ASX-listed energy retailer with a focus on accelerating towards clean energy, and the company plans to have over 25 per cent renewable storage capacity by 2020. While energy retailing is the primary business of the company, the business portfolio is just not limited to it, and ORG owns and operates APLNG prospect for the customer is fleet transportation.

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Origin operates a diverse business spanning generation, upstream gas, and retail operations, and the business model of the company provides a natural hedge against oil prices fluctuations in the international market.

The stock of the company is currently moving in an upswing with prices rising from $6.030 (low on 24 December 2018) to the current high of $8.790 (high on 29 November 2019), which underpins a price gain of over 45 per cent.

Why Origin Energy is Gaining Price Momentum?

Fears of Blackout Summers in Australia

The upcoming summers are anticipated by many subject matter experts to witness a large number of blackout due to various problems, which the National Electricity Market (or NEM) could face, over certain issues in the domestic market.

Australia has witnessed a large number of natural calamity with excessive bushfires, lightning, storms, and high winds, which could significantly reduce the output of all types of generation, and impact the transfer capacity of the transmission lines, which could result in the loss of electricity supply in the domestic market.

  • The Bureau of Meteorology (or BoM) advised in September that a strong positive Indian Ocean Dipole event is underway, which was anticipated by the Bureau to be the most crucial climate driver through spring.
  • The Dipole event is predicted to decay in early summer as the Asian monsoon trough moves into the southern hemisphere; however, BoM anticipates a negative Southern Annular Mode (or SAM) to exacerbate the effects of the positive Indian Ocean Dipole, which would push the winds further north than normal.

The aforementioned event could increase the risk of intense bushfires in the South-east of Australia with an elevated risk of warmer and drier end of the year. The BoM has informed the energy operator to expect a below-average rainfall (particularly for eastern Queensland). The Bureau had also warned the energy operator about the changes of higher bushfires and exceeding median maximum temperature.

Median Maximum Temperature (Source: AEMO)

Higher Electricity Demand

The operational consumption, which is resources drawn from the grid over a period of time, and maximum demand, which is resources required from the grid at a single point in time, would be impacted from the installation of photovoltaic cells, which could further reduce the higher grid demand.

The 10 per cent probability of exceedance (or POE), which is a statistical probability of a forecast being met or exceeded, maximum demand forecast for this summer is as below:

Historical Demand and Probability Case (Source: AEMO)

While higher rooftop installation is anticipated to reduce the higher grid demand, Origin could take advantage of such a situation via its solar packages and plans. However, the grid demand in the peak summers cannot be overlooked.

The Australian Energy Market Operator (or AEMO) is improving the capability to assess key uncertainties that could impact the supply in the National Electricity Market, to ensure a steady supply during the peak summers; and,

  • While the AEMO anticipates 3,700 megawatts (MW) of new additional capacity into the NEM since summer 2019, it also anticipates that additional 125 megawatts of reserves would be required to meet the reliability standard in Victoria under the expected conditions.

Non-Market Generation

Under the National Electricity Rules, the Reliability and Emergency Reserve Trader (or RERT) is a function through which the energy operator could enter into reserve contracts with resources not available to the market to ensure higher reliability of supply.

The 2019 Electricity Statement of Opportunities (ESOO) projected reserve shortfalls over the reliability standard in Victoria this summer, and to manage that the energy operator released tenders for long notice RERT in August 2019.

The Energy Market Operator is also securing short to medium notice panel agreements for RERT in Victoria and other jurisdictions.

RERT Comparison from Summers 2018

On 24 January 2019, the energy market operator secured 396 megawatts of RERT, in which 366 megawatts were short notice reserves, and 30 megawatts were long notice reserves.

On 25 January 2019, AEMO secured 625 megawatts in total, out of which 596 megawatts were short notice reserves, and 29 megawatts were long notice reserves.

The energy market operator incurred a total cost of $34.5 million, and the operator used the previous estimates to assess, that it would incur a cost of $44 million for the period of 1 November 2019 to 31 March 2020.

Origin Power Plant in Queensland

The Mortlake power station of the company is out of action since July 2019 amid an electrical fault, and in the status quo, the company mentioned that the restarting of the plant in Queensland would be delayed by 10 days and is expected to come online on 30 December 2019.

While the generator of the company would be delayed by 10 days, the current coal-based power station of another energy retailer- AGL Energy Limited (ASX: AGL) in Queensland (Loy Yang A) is also out of the action at the moment with repairs been conducted across the Unit 2 of the prospect.

The Appeal of Energy Users Association of Australia

The association of energy users urged the customers, that while the market operators and producers are working in collaboration to fill the supply, nobody could guarantee that the lights will never go out. The association also mentioned that the paramount efforts would be to achieve no power cut would bring additional cost to the consumers.

Energy Users Association of Australia also mentioned that the Mortlake gas-fired power station and Loy Yang coal-fired station would come back online quickly.

In a nutshell, the extreme weather conditions is anticipated to disturb the grid supply in the domestic market, which is now prompting the AEMO to secure additional reserves, and apart from that, the increased shared of solar rooftops, which are expected to reduce the daytime consumption significantly could be beneficial for the company.


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