Like it or not, energy grids are changing. The shift towards a greater reliance on renewables poses new challenges. At the same time, it could pave the way for more lucrative markets for some companies. I reckon one of those special energy shares is on the ASX.
The big utility providers have long been out of fashion, clouded in their hard-to-shake fossil fuel smog. It's hard to have the appeal of being a forward-looking, green energy retailer without being green by birth. That's simply not a luxury that long-standing utility operators have.
I'm starting to think some ASX energy shares are being too quickly dismissed for this reason.
Pivotal puzzle piece in green transition
Origin Energy Ltd (ASX: ORG) is best known for supplying electricity and gas to its customers.
The company is no stranger to protests over its coal-fired power station and gas production. However, hidden behind the old energy veneer is a more modern core.
Last week, Origin doled out $300 million to acquire a 1.5 gigawatt (GW) wind farm and 800 Megawatt hour battery. It's another step towards the company's ambition of reaching 4 GW of renewables and storage capacity by 2030.
Yet, the most enticing portion of this ASX energy share might be its ownership in another business.
Octopus Energy is a renewable energy company based in the United Kingdom. In a short amount of time, Octopus has become the UK's second-largest energy retailer, attracting 7.7 million customers to its green energy offering.
More importantly, Kraken — Octopus Energy's tech platform — is operational across 54 million customer accounts. Instead of gatekeeping the software, the company licenses it to other energy companies worldwide — Origin Energy being one such customer.
Part of Kraken's attraction is its ability to balance the grid.
Octopus Energy founder and CEO Greg Jackson recently explained:
It means we can just get rid of all the coal standby. It costs 10 times less than coal to pay consumers.
In other words, backup coal power can be avoided by paying its customers to use less electricity during peak load times. I believe this technology will be instrumental in load balancing during our transitory phase.
What could this ASX energy share be worth?
Analysts at Macquarie valued Octopus Energy at up to A$15.8 billion last year.
For FY23, the company generated £13 billion (A$25.1 billion) of revenue, increasing by 197% from the prior year. If I were to assume a 20% growth rate over the next five years, then we'd have a company pulling in ~A$62 billion of revenue.
From here, I reckon a 5% net margin is achievable. That equates to A$3.1 billion in net profits. Then, a price-to-earnings (P/E) ratio of 20 seems reasonable, given the rapid growth.
Under this hypothetical scenario, Octopus Energy could be valued in the region of an A$62 billion market capitalisation in 5 years.
Keep in mind that Origin Energy holds a 23% stake. Origin's stake would be worth A$14.4 billion in this theoretical situation. Meanwhile, this ASX energy share is currently valued at $16.8 billion.
Now I understand why AustralianSuper wasn't keen on accepting the $18 billion Origin takeover bid.
