Australian electricity utilities

Justin Braitling

Watermark Funds Management

[Screen Shot 2015-08-17 at 10.11.13 am.png]AGL

The retirement of long-time CEO Michael Fraser, replaced in January by the American Andrew Vesey marked a notable shift in strategy for AGL; appointing an ‘outsider’ as CEO can generally be seen as a catalyst for change.

In April AGL released a greenhouse gas policy, stating that it will not extend the operating life of any existing coal-fired power stations and ‘decarbonise’ generation entirely by 2050 – quite a turn-around considering the company’s new ‘prized asset’ is its recently acquired coal-fired Macquarie Generation power plants. AGL have subsequently outlined a more transformative roadmap involving material cost reductions and asset divestments, while their recent review of the upstream business confirmed a definitive shift to a ‘purer’ utility model.

More tellingly this recent presentation was AGL’s first public acknowledgement that the structural decline in electricity consumption (driven by efficiency gains and continued take- up of rooftop solar) and elevated competition in the retail market will require a change in strategy.

AGL’s management team has indicated a pointed focus on technology going forward. They intend to be first to market with digital offerings in the sector as a key point of differentiation, including electronic billing and a smartphone application to track consumption. IT system upgrades have allowed them to segment the market and target high-value customers for retention/acquisition rather than continuing to rely on heavy discounting to remain competitive.

A “New Energy” division has been established, which is intended to position AGL for this long-term industry change. Management are aiming to foster a more anticipatory culture – somewhat ironic from a company whose livelihood rests on fossil fuel generation. AGL already have a retail rooftop solar offering (albeit they only hold ~1% market share in a heavily fragmented market) and intend to extend this. Solar penetration is particularly low in the commercial and industrial sectors, which is where the company identifies the biggest opportunity. There is also a clear future in electric vehicles, and AGL have entered into a partnership with Mitsubishi to roll out solar charging stations.

Solar installations will be complemented by a battery storage option, which AGL sees as an opportunity to smooth electricity demand by reducing peak consumption. The final piece of the puzzle is smart metering, which is essential in order to integrate solar and battery technologies. In Victoria all households already have a smart meter but it is not yet compulsory in other states. Being an accredited installer, AGL is already positioned to get a head start with a target of 1million installations. It is clear that AGL’s end-game is to use its scale and ongoing customer relationships to provide an integrated service whereby they can lock customers into contracts to reduce churn, and take advantage of the wealth of data provided by smart meters.

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Origin Energy

Hot on the heels of AGL’s strategy update, Origin held its own Energy Markets investor day. Unsurprisingly, much of the rhetoric was the same: cost out, a pivot towards renewable generation, offering integrated solar products (including battery storage and EVs) and improved brand perception. The focus on cost reduction was more muted than that of AGL, although we argue that there is greater scope for Origin to benefit from this being a less efficiently run business than AGL.

Origin also talked about providing integrated and managed solar/battery/EV systems to both residential and corporate customers. Currently Origin are the second-largest rooftop solar installer (by cumulative installations over the last 10 years), and they are planning to market this to customers more aggressively. They also have an internal smart metering business called Acumen Metering, however progress to date has been limited and Origin seemed to express less enthusiasm on expanding the smart metering business than with AGL.

The company’s troubled IT systems upgrade is now behind them and they are working on leveraging the new capabilities. One example of this would be the move towards an ‘Omni’ customer experience, whereby customer interactions can transfer seamlessly between different channels (for instance a customer seeking assistance through live chat can be redirected to a call with customer service without having to give all of their details / explain the problem again). Origin is also working on a smartphone app due to roll out over the next few months and is placing a greater focus on interacting with customers through social media including responding to customer complaints in order to improve their brand image.

We identify further opportunities for both AGL and Origin to adapt to changes in consumer preferences, for example by leveraging their brand to bundle energy with broadband/telco services in order to reduce customer churn (which Origin have flagged as a possibility, and which has proven successful in NZ) and through low-touch products such as an online-only retail offering from Powershop for budget conscious consumers. Click on the (VIEW LINK)  to read other industry focused case studies.


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Watermark Funds Management

We are active, high conviction investors in Australian shares. As an absolute return manager, Watermark offers a proven alternative to traditional institutional funds.

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