How will falling electricity prices impact ASX energy shares like AGL?

Will Aussie energy stocks wither under these newly proposed electricity prices?

| More on:
A young man looks like he his thinking holding his hand to his chin and gazing off to the side amid a backdrop of hand drawn lightbulbs that are lit up on a chalkboard.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX-listed energy shares are in the spotlight today amid the release of a key regulatory determination.

The Australian Energy Regulator (AER) — a government agency responsible for overseeing Australia's electricity and gas industries — has tabled its draft of the default market offer (DMO) for 2024 to 2025. Barring any changes, this document sets the maximum electricity prices energy retailers can charge nationwide.

As you can imagine, what the regulator decides in the DMO can greatly impact ASX energy shares — essentially capping profit margins. So, is there enough meat on the bone for companies like AGL Energy Limited (ASX: AGL) and Origin Energy Ltd (ASX: ORG) to make a living?

Consumers to dodge another cost of living zap

Many households across Australia can breathe a sigh of relief at what their electricity bills might look like in the year ahead — but not all residential customers will be as lucky.

According to the release, most residential customers can expect prices by as much as 7% from 1 July 2024. The largest proposed decline in residential electricity prices would be experienced by customers falling within the Endeavour distribution zone.

However, in the sunny state of Queensland and across regional New South Wales, customers will likely be slugged with a 2.7% increase.

The variance across capped prices is due to ranging costs in different regions depending on network, environmental, and retail costs.

Despite a steep drop in wholesale electricity prices since 2022, the full reduction won't be passed along to customers due to persisting costs for the provision of power. The release notes that inflation and interest rates have pushed network costs higher.

Small business customers could be the biggest winners. The proposed changes would see a business in the Ausgrid distribution zone pay up to 9.7% less than the previous year.

'Reasonable profit' for ASX energy shares

What does it all mean for the potential profits of listed energy providers?

Well, AER chair Claire Savage explained what margins could look like under these new prices, stating:

Our draft determination should still allow a retailer to recover their costs and make a reasonable profit with a retail margin of 6% for residential plans and 11% for small business plans. These are higher margins than we see in other markets, such as Victoria, where strong competition remains.

For context, AGL recorded a net margin of 3.1% for the 12 months ended 31 December 2023. Based on the above comments, the changes would suggest a 6% to 11% margin is feasible for an ASX energy share, depending on the customer mix.

However, RBC Capital Markets analyst Gordon Ramsay doesn't see it as a bright spot for AGL or Origin Energy. Ramsay notes that the changes don't accommodate cost increases for these companies. As such, the analyst noted:

We expect this to lead to a narrowing of the captured margin in FY25, and we therefore forecast falling energy markets earnings for both Origin and AGL.

Despite the commentary, shares in ASX energy giant Origin are up 0.7% to $9.10 this morning. Likewise, the AGL share price is 2.5% higher at $9.00 per share.

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.

More on Energy Shares

Happy man standing in front of an oil rig.
Energy Shares

Broker says Woodside share price weakness is a buy opportunity

Now could be a buying opportunity for investors according to Wilsons.

Read more »

2 workers standing in front of a wind farm giving a high five.
Energy Shares

Origin shares fall despite 'highly strategic' $300m renewable energy acquisition

Origin is taking a big step in its clean energy transition.

Read more »

Copal miner standing in front of coal.
Energy Shares

Should ASX investors buy the dip in Whitehaven stock?

We review the latest broker ratings on this ASX coal share.

Read more »

A young man stands facing the camera and scratching his head with the other hand held upwards wondering if he should buy Whitehaven Coal shares
Energy Shares

Are Paladin Energy shares really surging 900% today?

What's going on with this uranium stock today?

Read more »

sad looking petroleum worker standing next to oil drill
Energy Shares

Why is the Santos share price tanking on Tuesday?

Santos shares are missing out on today's market gains.

Read more »

A miner in visibility gear and hard hat looks seriously at an iPad device in a field where oil mining equipment is visible in the background.
Energy Shares

How ASX 200 energy stocks could soon enjoy US$100 oil prices

A range of factors are lining up to support higher oil prices, offering tailwinds for ASX 200 energy stocks.

Read more »

Man in yellow hard hat looks through binoculars as man in white hard hat stands behind him and points.
Energy Shares

Here is the earnings forecast to 2026 for Pilbara Minerals shares

Should investors be excited about the lithium stock’s outlook?

Read more »

Oil worker using a smartphone in front of an oil rig.
Share Fallers

Guess which ASX 200 energy share is imploding 18% today on cost blowouts

ASX 200 investors are rushing to hit the sell button on this popular energy stock on Monday.

Read more »