AGL Energy’s Earnings Expected To Decline As Federal Government Plans To Force Down Electricity Prices

The Australian Prime Minister, Mr. Scott Morrison recently outlined four market intervention measures which are designed to force down the electricity costs. The first measure is to force power companies to offer default price contracts which will ensure customers are not being exploited to pay higher prices for electricity. These default offer prices will be set independently by the Australian Energy Regulator and they will applied in each network distribution region.

The second measure involves forced divestment of power companies and if they don’t comply it could result in a royal commission. The Australian Competition and Consumer Commission disagree with this measure and called it an extreme measure to take in any market. The third measure is to force the energy companies to contract or buy ahead to make sure that there is sufficient reliable power in the system and it will be done by encouraging the states to implement the reliability mechanism of the otherwise defunct National Energy Guarantee. Â

This move by the federal government has increased the uncertainty in the market for companies like AGL Energy and Origin Energy. As a result of these measures of forcing down the power prices, it is expected that AGL Energy Limited’s (ASX:AGL) earnings could reduce by 16 percent and Origin Energy’s (ASX:ORG) earnings could decline by 12 percent. On 24 October 2018, AGL shares decreased by 0.912 percent and Origin Energy’s shares declined by 3.439 percent. It is expected that AGL’s earning will be more affected as Origin has more customers on standing offers than AGL.

Australia’s Federal Energy Minister- Mr. Angus Taylor has invited AGL’s Interim chief executive Mr. Brett Redman and Origin’s CEO Mr. Frank Calabria to a "roundtable" meeting to discuss the reductions in their standing offers which they will be required to make for January 1, 2019. In the letter he mentioned that if the industry start focusing on customers and their interests, the government could return to the light touch reduction.

It is expected that AGL's 2020 earnings before interest, tax, depreciation and amortization could decrease by $361 million from the current estimate of $2.291 billion if the customers received a 10 per cent price reduction. According to the Interim Chief Executive of AGL, Mr. Brett Redman, any move to cap retail tariffs would trigger alarm bells with investors and it could reduce the power sector investment and according to him the investment certainty will be threatened. He further added that the company supports the move for reference or comparative pricing, but the details on the impact are yet to be ascertained fully.

In the last six months, AGL’s share prices decreased by 7.72 percent as on 23 October 2018, and it traded at a PE level of 7.710 x. AGL’s shares traded at $18.480 with a market capitalization of Circa $12.23 billion as on 24 October 2018. The group has a decent dividend yield of about 6.27 percent.

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