The Australian energy retailing space is getting tight due to the emerging renewable generation and supply of extra energy from renewable into the grid. While the demand for energy across the continent remained high during the March 2020 quarter, the ASX-listed energy retailers such as Origin Energy Limited (ASX:ORG), AGL Energy Limited (ASX:AGL), are facing some pressure in the wake of COVID-19 impact on the global commodity market and higher installation of rooftop PVs.
The spot electricity prices across the National Electricity Market (or NEM) averaged $70.6 per megawatt-hour during the March 2020 quarter, which remained largely in line with the previous quarter average price of $70.5 per megawatt-hour, however, remained ~ 45 per cent lower against the previous corresponding period average price of $127.4 per megawatt-hour.
While extreme heat and bushfires impacted transmission and generation during the period, the lower average price mainly reflected the impact of increased renewable generation.
To Know More, Do Read: Rooftop Solar PVs Dodge the COVID-19 Impact as New Installations Set Records
Apart from the falling retail electricity prices across NEM, the impact of COVOD-19 over the consumption-based commodities is posing another challenge for energy retailers, and while challenges are well evident, the ASX-listed energy retailers such as Origin Energy Limited (ASX:ORG) are taking strategic measures to sail through the stormy market.
Origin Establishes Strategic Partnership With Octopus Energy To Transform Retail Business
ORG announced that the Company established a strategic partnership with the United Kingdom-based Octopus Energy- an energy retailer and emerging technology business to deliver a radical improvement in customer experience, a considerable reduction in cost, and to unlock future growth opportunities.
Origin suggested that the Company would acquire 2.0 per cent interest in Octopus and a licence in Australia to its market Kraken- a leading customer platform of Octopus, and the Company would also adopt Octopus’ leading operating model and technology platform to deliver substantial benefits to its customers, employees, and shareholders.
The Company intends to transfer its 3.8 million retail electricity and gas customer account to Kraken over the next 24 to 30 months, which is anticipated to deliver a cost-benefit or reduction in operating and capital costs in FY2022, and ORG anticipates that the previously estimated pre-tax cash savings of $70-80 million in FY2022 would reach $100-150 million annually from FY2024.
ORG plans to fund the transaction with staged consideration with an upfront payment of $134 million and spread of $373 million over four financial years, consisting of equity instalments and progress payments.
Benefits and Proposed Design of the Retail Business
The Company believes that implementing Kraken and redesigning end-to-end retail operating model would help Origin differentiate from the market via making a radical improvement in customer experience, considerably reducing cash costs, making operations agile, and building on the existing digital and data analytics capability.
The Partnership Structure
The Company estimates the transaction and implementation costs to stand at $80 to $100 million, spread over four financial years, which would include the parallel system running costs and decommissioning costs, and apart from that, ORG estimates an accelerated depreciation associated with decommissioning existing systems over the implementation period of $100 million.
Origin plans to fund the staged consideration from its cash and free cash flow over time and suggests that savings from the Kraken roll-out are on top of the existing target which would reduce the retail cost to serve by $100 million by FY2021, and would deliver material returns above the cost of capital with staged payments offset by savings from FY2022.
The Company would also appoint one director and an observer in the board of Octopus and would provide a three-year guarantee to support a EUR 160 million of Octopus working capital facility during the first two years, reducing to a maximum of EUR 110 million in the third year.
While the energy market is facing some tough times, many ASX-listed energy players are coming into the picture with various plans to deal with the challenges and preserve shareholders interest.
For example, recently, Oil Search Limited (ASX:OSH) decided to raise equity capital to maintain higher liquidation during these unprecedented times.
However, except few, most of the energy stocks are facing pressure in the wake of the recent bloodbath in the oil market, and many are trading around considerable low levels, which is leading to another interesting speculation among market participants over entering oil stocks.
Investors need to fathom out their risk and reward profile well to decide whether to dive into the energy space currently or stay clear.
To Know More, Do Read: Oil Crisis: Should you Buy or Sell Some Oil Stocks?
In a nutshell, energy players are exposed to dual gizmo of increasing renewable penetration and lower commodity prices, and to stand tall amidst those challenges, many energy-related companies are adopting various measures, and Origin has decided to roll-out Kraken platform to bring a radical change in customer experience and cost structure, which the Company anticipates would deliver strong cash benefits over the long-term.
The stock of the Company last traded at $5.270, down by 5.21 per cent against its previous close on ASX.