Australia's integrated utilities to feel the squeeze as coal profitability falls

Debates have stirred on whether to decommission aging coal plants ahead of schedule.

Australia’s integrated utilities face high earnings pressure as coal plants face uncertainty due to their declining profitability, according to S&P Global Ratings. The coal-fired plants in the country has been facing declining profitability with the rapid growth of renewable power output, stirring debate on whether some dominant but aging coal plants could be decommissioned ahead of schedule.

“Although the earliest coal plant closure is expected in 2022/2023 (Liddell), the government’s decision to underwriting new generation investment continues to present uncertainties for the sector as the details of how this will be implemented are unclear,” said Parvathy Iyer, one of the report’s authors

Coal plant profitability is not the only threat to the utilities’ profits as wholesale power prices also failed to decline according to market expectations no thanks to the volatility of renewable output and several outages of coal-fired plants.

“The recent curtailment of several solar and windfarms has prompted a debate on transmission pricing approach for new projects. Proposals by market regulators do not appeal to the proponents of renewable projects and this space will get some clarity over the next 12 months,” Iyer added.

In addition, the regulation of retail pricing has weighed on integrated utilities. Although many entities have estimated its impact in the next year or two, how the retail pricing will be adjusted beyond July 2020 is still unknown. “Lower churn rates and lower marketing costs will reduce the cost to serve, but these will be at the margin,” Iyer said.

Ongoing drought and high gas prices have also made the option of gas-fired plants to support reliability appears increasingly expensive, which will affect entities with shorter-term gas contracts more.