Unless you're legitimately interested in electricity, you could be forgiven for not knowing that Australia is in the midst of an energy crisis at the moment. The shutdown of Victoria's Hazelwood power plant and growing demand for gas and electricity has left state government's scratching for answers as the nation's electricity market struggles to cope with Australia's electricity needs.
Whilst some high-profile Australians (such as Atlassian co-founder Mike Cannon-Brookes) have stepped in to challenge unconventional thinkers like Tesla Inc CEO Elon Musk to put their money where their mouth is and fix Australia's electricity problems, the overarching supply problem doesn't appear to be abating any time soon.
Accordingly, here's why I believe AGL Energy Limited (ASX: AGL) and Origin Energy Ltd (ASX: ORG) could be short-term winners from Australia's electricity woes.
The energy market
Australia's energy market is a complicated beast comprising generators, wholesalers, distributors and retailers.
Put simply, most Australian homes are connected to the electricity grid through contracts with retailers like AGL, Origin and EnergyAustralia (to name a few). These retailers buy electricity at regulated prices from the national energy market (the wholesalers).
Electricity is provided to the national energy market by the generators (who generally own the power plants which convert raw fuels into electricity). In Australia, this is predominately dominated by AGL, Origin and French-multinational Engie.
These generators transmit electricity across the grid, into homes, using transmission and distribution networks owned by the likes of AusNet Services (ASX: AST), DUET Group (ASX: DUE) and Spark Infrastructure Group (ASX: SKI) (amongst others).
So what?
Whilst there is clearly a number of players in the electricity market, the looming shutdown of Hazelwood on 1 April 2017 means existing generators are set to make a killing as competition for electricity generation decreases.
In fact, the impending shutdown of Hazelwood has already sent electricity futures soaring to all-time highs with May 2017 contracts currently being settled at $151 per megawatt. This is in stark contrast to the average electricity price of $40 per megawatt obtained by the same generators this time last year.
Even more beneficial to electricity generators is the concept of "load shedding". This is where power plant owners shutdown electricity generators to reduce supply to the energy market, in turn increasing the spot price of electricity and virtually allowing them to control market prices.
Whilst the practice is effectively a manipulation of market prices, no regulations prevent load shedding and therefore electricity generators are able to profit at the expense of wholesalers. This is a powerful position to be in.
Foolish takeaway
Although the share prices of both AGL and Origin have soared over 40% and 30% respectively, the current rules governing the electricity market suggests the balance of power is in their hands.
Whilst new energy sources, like Tesla's power wall, as well as regulatory changes may affect the ability of electricity generators to command such control, for the foreseeable future nothing seems concrete.
Accordingly, with the shutdown of Hazelwood on 1 April, I believe investors should consider buying AGL and Origin for upside from electricity prices.
