Origin Energy (ORG) has joined its big rival AGL Energy (AGK) in revealing cost cuts and restructurings to accommodate a slowing in demand for energy in the next few years.
Like AGL, Origin revealed the new approach at an investor day briefing which committed the company to cost cutting.
Origin said this cost cutting would see a total $100 million trimmed from the business in 2014-15 and 2015-16. Capital spending in the new financial year would be cut by $50 million to around $250 million.
The cost cutting would aim at lifting returns through increasing earnings from the wholesale natural gas supply, building customer loyalty and reducing customer churn, as well as expanding its product range.
That sounds like standard operating procedure these days for utility style businesses – especially the bit about building customer loyalty and reducing the churning of customers (replacing ones who go to another supplier). It is also at the heart of the latest revamp at Westpac.
Investment in the current financial year has been cut by an unannounced amount, while the company has refused to say if the cuts so far, or in the future, will include job losses.
ORG 1Y – Origin cuts capex
And like AGL, Origin is cutting costs to improve returns in its existing power generation business, while aiming to expand further into solar power generation – in this case, becoming the leader in the rooftop solar power market. AGL is concentrating on solar power generation and brought its 100 megawatt Narrabri station in NSW on line this week and supplying into the national grid.
Origin said while its solar business would likely make a loss of $25 million in fiscal 2016, it would break even the following year, and was targeting 170 megawatts of installed capacity by the 2018 financial year, the briefing slides explained yesterday.
In the investor day presentation Origin said the key risk to the aims to increase returns in energy markets was the level of competition in the retail sector, pointing to offers of discounts, gift cards and and credit by some of its competitors.
Origin said it was cutting the cost of servicing customers by $30 million this financial year, with a further $50 million improvement forecast for 2015-16.
In power generation, Origin is targeting further reductions in operating costs of about $220 million and in capital expenditure of $95 million.
The driver for all of this activity was to be found in Origin’s outlook for electricity and gas markets.
The company has expectations of further declines in wholesale electricity prices as the revised 2020 renewable energy target pushes more renewable capacity into the oversupplied market.
Origin sees a flat demand for electricity, apart from in Queensland, while rooftop solar PV would continue to increase as falling costs made it competitive even without subsidies.
And we can expect origin to announce more wind farm developments over the next five years. The company yesterday pointed to a “window of opportunity” to build new wind farms over the next five years to satisfy its RET liability, saying it would be more economic to build new capacity than pay the penalty for non-compliance.
The company has forgotten the emerging battery technology. It said yesterday it was carrying out a trial of a Samsung 3.6 kilowatt hour battery while it evaluated a range of potential battery suppliers.
Origin shares rose 0.7% to $12.65 yesterday after the update was made public.
