In the dark: ASX energy shares facing a perfect storm

What do higher prices mean for ASX energy shares?

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Consumers and businesses are bracing themselves for an unprecedented situation in Australia’s energy markets. A dark cloud has been floating over ASX energy shares in the last week as fossil fuels reach mind-blowing prices.

Initially, one might think this would be a boon for energy retailers. If prices rise, profits should rise too, right? Well, because keeping the lights on is an absolute necessity for modern society, the energy market is heavily regulated. Additionally, with wholesale gas prices reaching 80 times their normal level, the majority of consumers would be unable to afford the inflated cost.

So, how exactly is this playing out for the energy sector and ASX shares?

State of play in energy

The sobering reality is Russia had accounted for around 17% of the world’s natural gas supply. Meanwhile, Europe’s reliance on Russia is far greater than the rest of the world. At 40% of its gas imports, Russia has a firm grip on the European Union (EU).

Due to the sizeable shortfall in supply as the world banishes the importing of Russian products, the demand has spread globally. In turn, the going rate for energy-rich commodities has exploded, putting pressure on energy retailers.

Last week, news hit the headlines of Weston Energy ceasing operations. The gas retailer responsible for 7% of Australia’s east coast commercial and industrial supply shut up shop. A more than 180% increase in gas prices was cited as the culprit.

The damage is also being witnessed in public markets. ASX-listed small-cap energy share, Locality Planning Energy Holdings Ltd (ASX: LPE) entered voluntary suspension after suggesting to its 20,000 retail customers to seek out a new supplier. The company planned on increasing its electricity prices by over 100% on 1 June.

Showing that the pain is not exclusive to the small end of town, Origin Energy Ltd (ASX: ORG) was dealt a blow yesterday after revealing a toll on its expected earnings. The ASX energy giant now expects its underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) to be between $310 million to $460 million for its energy markets division.

Aren’t higher prices good for ASX energy shares?

There’s an important variable in this equation for energy retailers. One that morphs high prices from a potential tailwind into a likely headwind. In the finance world, it’s called a price ceiling — but it is commonly referred to as a price ‘cap’.

To try and maintain an orderly energy market, regulators have stepped in and introduced price caps. For instance, the Australian Energy Market Operator (AEMO) applied a $40 per gigajoule to the Victorian gas supply on Tuesday. Meanwhile, the ‘real’ price reached $800 per gigajoule.

In essence, this means that ASX energy shares such as Origin and AGL Energy Ltd (ASX: AGL) won’t be able to take full advantage of this ‘perfect storm’.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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