On Sunday, the ABC’s Inside Business program aired an interview conducted with Mr Grant King, managing director (MD) of Origin Energy (ASX: ORG). King has been the MD of Origin since the company’s demerger from Boral (ASX: BLD) in 2000 and prior to that he was MD of Boral Energy since 1994. This enormous depth of experience makes King’s views on Australia’s energy market widely followed and analysed.
The recent decision by Prime Minister Kevin Rudd to bring forward the emissions trading scheme’s (ETS) move to a floating carbon price to 2014 has wide ranging effects. In Origin’s case, King was pleased there was a 12 month lag as this should mean minimal disruptive for Origin given its current hedging arrangements.
However, the broader ramifications from a lower carbon price (once the link to the European market begins) for base load power investment and for the intent of the ETS is significant. Base load power investment requires long lead times and whilst currently there is enough capacity, given the uncertain political outlook, investment for future power requirements is not occurring.
Indeed, given the long lead time on building new base load power, in the near future power companies such as Origin and AGL Energy (ASX: AGK) are going to need a clear idea of what to expect otherwise in a decade’s time Australia could find itself severely underinvested in energy infrastructure.
In terms of the intent of the ETS, King made the point that at the current European market carbon price of $6/tonne, Origin would build coal-fired power stations, as that would be the most economic option. To invest in gas-fired power, Origin would need to see a carbon price closer to $40/tonne to make the economics swing in favour of gas rather than coal.
By becoming part of the European ETS, Australia has basically become dependent on European decisions for the price we pay for carbon. This makes the future incredibly uncertain. King speculates that European governments will be forced to keep the lid on the carbon price, so that their struggling industries can remain at least partially competitive with the rest of the world.
The future is always an uncertain place and that is what often creates profitable opportunities for investors. One thing that is reasonably certain is that energy companies will have customers for a long time yet. This makes the long-term outlook for energy producers, especially the vertically integrated ones like Origin, appealing businesses for investors.
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Motley Fool contributor Tim McArthur owns shares in Origin Energy.