Coal and gas price caps: Implications for AGL and Origin Energy

The Australian Government is rolling out an Energy Price Relief Plan which includes 12-month price caps for domestic thermal fuels including gas and coal.

"The reality is that due to global circumstances and a decade of energy policy mismanagement, Australians will continue to still see high energy prices for some time," the government said in a statement on Friday.

In summary, the price caps will introduce:

• A $12 per gigajoule on new wholesale gas sales by east coast producers

• A $125 a tonne cap on coal used for electricity generation, implemented by New South Wales and Queensland Governments

In addition, the Energy Ministers plan to implement the 'long overdue Capacity Investment Scheme' which seeks to unlock $10bn of investment in clean energy storage and generation.

Near-term stock impacts

Morgan Stanley said the temporary gas price cap was "consistent" with their expectations and manageable for gas producers under its coverage.

"The proposed temporary domestic thermal coal price cap appears to apply to all NSW deliveries,and if so, would be a positive for coal costs for Origin Energy but neutral for coal costs for AGL," Morgan Stanley analysts said in a note on Sunday.

"The impact of falling forward electricity prices is a negative for both Origin and AGL over the forecast period," the analysts warned.

Of note, the government said the average family would be $230 worse off without the Energy Price Relief Plan.

Origin Energy: A closer look

At a glance, Macquarie said the price caps may limit the upside to earnings growth for utilities companies but not the broader recovery.

In terms of immediate earnings impact:

• Origin has rebuilt coal inventory at pricing closer to $200-250 a tonne, which may cause a one-off loss on coal inventory (between $75-125m)

• Gas price cap to take a $30-60m hit on FY24 dividends

• Gas price cap puts $100-200m pre-tax at risk

As a result, Macquarie downgraded its FY24 earnings estimates by -7.0% and FY25 earnings by -3.5%.

The investment bank retained an Outperform rating with a $7.68 target price.

Its worth noting Origin is currently undergoing due diligence regarding the indicative and non-binding takeover offer from Brookfield Asset Management at $9.00 per share.

Origin Energy share price chart (Source: TradingView)