AGL Energy (AGL) & Origin Energy (ORG) – Battery overbuilding clouds earnings outlook

AGL Energy supplies energy generated from coal, gas-fired, wind, hydro, solar and grid-scale batteries, and also offers natural gas storage and other firming and storage technology. It operates through three key segments: 1) customer markets; 2) integrated energy; and Investments. It serves the residential, small and large businesses, wholesale, energy, telecommunications, and Netflix customers. The company was founded in 1837 and is based in Sydney.

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Ord Minnett sees increasing downside risk to AGL Energy and Origin Energy as electricity market transition dynamics evolve less favourably than had been anticipated. Our central thesis is that battery capacity in the National Electricity Market (NEM) is being deployed materially faster than required in the absence of corresponding coal-fired generation retirements. This excess flexibility is suppressing price volatility, reducing the earnings potential for batteries and other flexible generation assets such as gas peakers and hydro. Reflecting this outlook, we downgraded AGL Energy to Hold from Buy and cut our target price to $11.75 from $13.25, while our Origin Energy recommendation was cut to Lighten from Hold and our target price reduced to $10.40 from $11.00.

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Battery-capacity additions are now running at close to double the pace implied by system requirements to 2030, meaning anticipated needs are likely to be met as early as 2027. Many of the coal-fired power station closures assumed in long term planning, however, have yet to occur. This timing mismatch has materially reduced volatility across the electricity market, and is evident in lower gas demand from power generation, a sharp fall in capacity contract prices, weaker frequency control ancillary services revenue, and narrower intraday price spreads. These trends directly pressure earnings from flexible generation, including the battery fleets being developed by AGL Energy and Origin Energy.

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We now forecast battery operating earnings (EBITDA) of around $150 million per annum for AGL Energy in FY28 and FY29, well below prior expectations for EBITDA of $250–300 million. For Origin Energy, we estimate battery earnings contributions for FY27 and FY28 of $230–270 million before lease cash costs of approximately $120 million per annum. These changes led to cuts to our EPS estimates for AGL Energy of 10% and 17% in FY27 and FY28, respectively, while our EPS estimates for Origin Energy were cut by 21% and 24% in FY27 and FY28, respectively.

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