I. Sector Landscape and Outlook
Renewable Energy has gained significant momentum and has led a profound and complex transformation in the energy sector. The different types of renewable energy sources comprise of wind energy, solar energy, hydropower, biomass, biogas, etc. Australia has an enormous pipeline of renewable energy and energy storage projects, which are expected to meet its climate change targets and ensure affordable and reliable power supply. In 2019, the state governments, industry, and communities welcomed the transition to clean energy, with 34 large-scale projects completed during the year, increasing Australia’s large-scale renewable energy capacity by 2.2 GW, generating $4.3 billion in investment and adding more than 4000 new jobs.
Figure 1. Large-Scale Renewable Energy Projects (Under Construction or Financially Committed)*
Data Source: Clean Energy Australia Report 2020, Chart: Kalkine Group
* 2017 to March 2020
Overview of Renewable Energy Generation in 2019: In 2019, 24% of total electricity generation came from the renewable sources, representing a record high percentage for Australia. Among different sources of renewable energy, hydropower contributed 25.7% of energy generation, lower than the previous years due to drought impacts in Eastern Australia coupled with significant growth in wind and solar power generation.
Figure 2. Renewable Energy Generation by Category (2019)
Data Source: Clean Energy Australia Report 2020, Chart: Kalkine Group
In 2019, the additional large-scale wind and solar capacity of more than 2,200MW was added to the Australian grid. The rising growth in battery storage market, with more than 22,000 new residential battery systems installed in 2019, reflected the strong performance of the sector. The cumulative installed storage capacity has now passed 1 GWh.
Figure 3. Cumulative Installed Wind Capacity in Australia
Data Source: Clean Energy Australia Report 2020; Chart: Kalkine Group
Growth Drivers
- Reduction in Emissions: The introduction of the Renewable Energy Target (RET) in the Australian Energy Policy initiated the country’s energy transformation that has helped wind and solar energy to progress towards being one of the cheapest sources of power generation. As per the Clean Energy Australia Report 2020, RET was more than a year ahead of the 2020 deadline, with Australia reaching the target in September 2019 following the completion of the 148 MW Cattle Hill Wind Farm.
- Shift in Public Sentiment: Towards the end of 2019, the environmental changes due to the devastating bushfires in Australia caused a notable shift in public sentiment, pressurising the government to act upon the growing impact of climate change and take necessary steps to reduce carbon emissions. Notably, more than 50% of South Australia’s electricity came from renewable sources in 2019 and the Australian Capital Territory (ACT) became the eighth major jurisdiction in the world to generate 100 per cent of its energy from renewable sources.
Figure 4. Renewable Energy Penetration by State (2019)
Data Source: Clean Energy Australia Report 2020; Chart: Kalkine Group
- Significant Progress in Hydrogen Industry: In 2019, The Council of Australian Governments (COAG) Energy Council agreed to back $370 million of hydrogen projects under the National Hydrogen Strategy. The country’s emerging hydrogen industry has shown promising signs of success with strong preference for development of commercial scale hydrogen projects. Notably, the Australian Renewable Energy Agency (ARENA) expects to announce successful projects through the Renewable Hydrogen Deployment Funding Round worth $70 million, by the end of 2020.
Figure 5. Different Hydrogen Growth Scenarios in National Hydrogen Strategy
Data Source: COAG Energy Council; Chart: Kalkine Group
Highlights from Q2 2020 Carbon Market Report, Clean Energy Regulator: According to the report, 6.3 gigawatts (GW) of total renewable energy capacity is expected to be delivered in 2020. The report highlighted that project registrations in 2020 surpassed the 2019 number, with total registrations under the Emissions Reduction Fund standing at 43. Notably, the Renewable Energy Target and Emissions Reduction Fund are expected to lead an approximate emission reduction of 54 million tonnes CO2-e in 2020, as compared to 48 million tonnes in 2019.
2020 Electricity Statement of Opportunities: The Electricity Statement of Opportunities (ESOO), issued by Australian Energy Market Operator Limited, forecasts electricity supply reliability in the National Electricity Market (NEM) over a 10-year period to inform decisions by market participants, investors, and policy makers. As per the 2020 ESOO statement, the expected reliability outlook has improved for summer 2020-2021 due to lower forecast peak demand, significant development of renewable resources, and minor generation and transmission augmentations. COVID-19 impact on electricity consumption is highly uncertain in the short-to-medium term.
In the medium term to 2030, Australia’s population growth is expected to drive underlying growth in electricity consumption for the residential sector. In the longer-term i.e. 10-20 years, operational energy consumption and maximum demand are expected to return to growth across many NEM regions, driven by electric vehicles (EVs).
Government’s Low Emissions Technology Statement: In the Low Emissions Technology Statement released on 22nd September 2020, the government outlined five priority technologies and economic stretch goals to make new technologies as cost-effective as existing technologies. The Government also announced a $1.9 billion package in support of the statement, which includes $1.62 billion for ARENA over the next 10 years.
Figure 6. Priority Technologies and Economic Stretch Goals
Data Source: Low Emissions Technology Statement – 2020; Chart: Kalkine Group
Transformation of the Electricity System by 2050: The electricity system in Australia is witnessing an unprecedented change, with customers embracing new technologies and taking control of their energy use. According to Electricity Networks Australia and CSIRO’s (Commonwealth Scientific and Industrial Research Organisation) Electricity Network Transformation Roadmap, the electricity sector is expected to achieve zero net emissions position by 2050 and network charges are expected to fall ~30% below 2016 levels. Annual saving of $414 is expected in average household electricity bills, with a reduction of $101 billion in cumulative total expenditure by 2050.
Risks/Challenges
Figure 7. Key Risks for the Renewable Energy Sector
Source: Kalkine Group
Grid Connection Costs: The development of the renewable energy industry may face difficulties due to substantial increase in capital expenditure in relation to grid connection for a project. The Federal government has recognised the relevance of connection costs in ascertaining the most efficient generation and network investment and believes that connection costs will become extremely important as the electricity supply system continues to transition towards renewable energy.
Regulatory and Policy Challenges: Administrative barriers and delays in project approvals, insufficient financial incentives, shortfall in technologies, complex regulations, and infrastructure deficiencies are some of the key barriers for renewable energy development.
Social & Institutional Acceptance: The use of large-scale renewable technologies is a relatively new phenomenon for institutions and consumers, which may lead to competition between renewables and non-renewables. Therefore, the renewable energy market needs to offer attractive incentives for consumers to be more supportive towards the new technologies.
Barriers to Regional or Community Scale Projects: Smaller projects may face additional barriers due to their low population density and significant distance from major supply and demand centres. Governments and industry need to join hands for integration of renewables in rural electrification to facilitate transition.
Reduction in Clean Energy Investments: The latest data from Clean Energy Council reveals that the number of large-scale renewable energy projects committed in the second quarter of 2020 was the lowest since 2017. Investment in financially committed projects stood at $600 million, down 46% on the previous quarter and 52% on the quarterly average for 2019.
Outlook
Overall, with the large-scale renewable projects under construction, investments in next generation technologies to reduce emissions and energy costs, initiatives under the Renewable Energy Target and Emissions Reduction Fund, and investments in hydrogen projects, Australia retains enormous potential to leverage renewable energy for the nation’s COVID-19 economic response by creating jobs and infrastructure to support overall recovery.
II. Investment theme and stocks under discussion (AGL, ORG, CEN and IFT)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analyzed based on ‘EV/EBITDA’ method.
1. ASX: AGL (AGL Energy Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 8.49 Billion)
AGL Energy Limited (ASX: AGL) is engaged in the operation of energy businesses and investments, including electricity generation and gas storage.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~27% on 1 October 2020 closing price. For the said purposes, we have taken peers such as Genesis Energy Ltd (ASX: GNE), Infigen Energy Ltd (ASX: IFN), Infratil Ltd (ASX: IFT), etc. At the same price, the stock of AGL was offering a dividend yield of ~7.2%.
2. ASX: ORG (Origin Energy Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 7.57 Billion)
Origin Energy Limited (ASX: ORG) is a leading energy company that operates two strong cash-generating businesses- Energy Markets and Integrated Gas.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~18.4% on 1 October 2020 closing price. For the said purposes, we have taken peers such as AGL Energy Ltd (ASX: AGL), AusNet Services Ltd (ASX: AST), APA Group (ASX: APA), etc. At the same price, the stock of ORG was offering a dividend yield of ~5.81%.
3. ASX: CEN (Contact Energy Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 4.42 Billion)
Contact Energy Limited (ASX: CEN) is a New Zealand-based energy company with a diverse mix of assets which helps it to maintain a reliable, affordable, and environmentally sustainable electricity supply in the country.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~18.5% on 1 October 2020 closing price. For the said purposes, we have taken peers such as Mercury NZ Ltd (ASX: MCY), Infratil Ltd (ASX: IFT), Meridian Energy Ltd (ASX: MEZ), etc. At the same price, the stock of CEN was offering a dividend yield of ~5.64%.
4. ASX: IFT (Infratil Limited)
(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$ 3.35 Billion)
Infratil Limited (ASX: IFT) is engaged in operating businesses in the energy, transport, data infrastructure and social infrastructure sectors.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~16% on 1 October 2020 closing price. For the said purposes, we have taken peers such as AGL Energy Ltd (ASX: AGL), Infigen Energy Ltd (ASX: IFN), Origin Energy Ltd (ASX: ORG), etc. At the same price, the stock of IFT was offering a dividend yield of ~3.3%.
Note: All the recommendations and the calculations are based on the closing price of 01 October 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
Disclaimer
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