Origin Chief Executive Officer Frank Calabria’s speech to the Australian Shareholders Association Investor Conference, 1 June, 2021
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Thank you Lewis for your introduction and kind words and thank you to the ASA for having me here to speak here today.
This week is Reconciliation Week, when we look at how we as a nation can acknowledge and amplify the experience and voices of our First Nations people, one of the world’s oldest cultures. The theme ‘More than a word’ is about taking impactful action, not just this week, but all the time.
I wanted to acknowledge the traditional owners for the country on which we meet here today, the Gadigal People of the Eora nation and Elders past, present and emerging, and also the traditional owners for where you are connected into this event today.
I consider it a great privilege to lead Origin and deliver essential services – electricity and gas – that millions of customers in Australia and Asia rely on to run their homes and businesses.
Origin and the energy sector more broadly have changed so much during my time with the company, and I’ve been lucky to have had a number of very different roles, from CFO to head of energy markets and of course CEO for the past almost five years. It’s a privilege to lead a team of people who are passionate about always improving on how we deliver energy to our customers, to make it cleaner, smarter and more affordable at a company that is leading the energy transition.
Now to my presentation.
I will kick off by providing an overview of Origin, our strategy and what I think differentiates us from other energy companies. I will then talk a bit about the energy transition that is underway in our sector and discuss the key trends that are shaping it. And finally, the steps Origin has been taking to position the business to prosper over the medium term.
First I’ll tell you a bit about Origin and what we do. For those who don’t know much about Origin, we are one of the leading energy companies in Australia and have been listed on the ASX since 2000.
Origin is unique among energy companies, as we operate across both upstream gas exploration, production and export, a business we call Integrated Gas, and the domestic energy market, including energy retailing, power generation and wholesale/trading of energy, which we call our Energy Markets business. These cash-flow generating businesses serve large customer bases in Australia and abroad.
At Origin, we have been preparing for a low carbon world since our inception. Our generation portfolio consists of gas, as well as renewables like solar and wind farms. We also have storage and one coal asset, which we will exit by 2032. This positions us very well to navigate the energy transition and continue to prosper.
Our Integrated Gas business consists of our 37.5% interest in Australia Pacific LNG, Australia’s largest CSG to LNG project with joint venture partners ConocoPhilips and Sinopec. APLNG is a major domestic supplier, meeting around 30% of annual east coast gas demand, and also exports LNG under long-term contracts with customers in China and Japan.
Origin is the upstream operator for APLNG, responsible for gas exploration and production from fields in the Bowen and Surat basins in Queensland. ConocoPhilips is the downstream operator, responsible for the liquefaction plant and export terminal on Curtis Island in Gladstone, Queensland.
Our focus in recent years has been improving our operational performance and materially reducing costs to make us a globally cost-competitive operator. We have achieved this objective, with our full-year FY2021 distribution breakeven guidance at US$22-25/bbl – down from a budget of US$48/bbl when we started, which is a remarkable achievement. This maximises returns for shareholders and gives the project better resilience against commodity cycles.
Integrated Gas is also pursuing growth options, with acreage in Australia’s three most prospective onshore unconventional basins – the Northern Territory’s Beetaloo, the Cooper-Eromanga in Queensland and the Canning Basin in Western Australia. If these projects are successful and proceed to production in the future, we are well placed to build on our expertise in onshore, unconventional gas and apply our low-cost model. We are also applying our experience in LNG exporting to the development of green fuels like hydrogen.
Now to Energy Markets. Retailing is one of Origin’s core strengths, and today we have one of the largest customer bases, with approximately 4.2 million customer accounts spanning electricity, natural gas, rooftop solar, broadband and LPG both in Australia and across the Pacific. We supply energy to households, small and large businesses and heavy energy users like manufacturers.
Origin is a major power generator, with around 13% of the capacity in the National Electricity Market. This includes Australia’s largest power plant, the 2880MW Eraring power station, which meets about 25% of NSW’s energy supply. We also have solar, wind, and pumped hydro, with renewables making up around 20% of Origin’s owned and contracted capacity.
Origin operates Australia’s largest fleet of gas peaking power stations, which are crucial to supporting our changing energy system, as they can respond quickly to changes in supply and demand. Gas peakers provide fast and flexible back-up to renewables when needed, for example when there isn’t any wind, or during the evening peak when the sun goes down and supply from solar falls away.
I’ll unpack a little today Origin’s strategy of connecting our customers to the energy and technologies of the future – both how we are using technology to deepen engagement with customers in our retail business but also in the supply of lower and zero emissions fuels to customers here and overseas.
I wanted to touch on climate change up front, because as an energy company, this is embedded in just about every aspect of our strategy and business.
It is clear that the world is accelerating towards lower emissions and we have an important role to play in that transition, helping to bring to bear the energy and technologies that will be needed to meet decarbonisation goals not just for the energy sector, but for other sectors across the economy.
Increasingly as companies set their own decarbonisation targets, something we see happening all the time now, our role will be providing the technology, knowledge and expertise to help them meet those goals. We develop new products and services to meet our customers’ needs, and where customers or sectors continue to rely on fuels such as diesel or gas as a feedstock, help them transition to other low or zero emissions options.
We’re well progressed in the decarbonisation of our business. Origin was the first Australian company to commit to independent, science-based emission reduction targets, which includes halving our direct emissions (Scope 1 and Scope 2) by 2032. One of the ways we will do this is by exiting coal-fired generation by 2032 or earlier. Last year we committed to updating these targets we set back in 2016, in line with a 1.5-degree scenario.
We have also stated an aim to achieve net zero emissions by 2050.
On the road to 2032, we are conscious of the need to demonstrate our ongoing progress. Our direct emissions were lower last year and we’re forecasting they will be lower again this year. We’ve deployed solutions to bring our Scope 1 operational emissions at APLNG down by 29% over the past four years.
We have a way to go, but our ambitious targets and continued progress should give confidence that we are heading in the right direction.
Now to the energy transition. I think it’s fair to say that the world in which Origin was established and grew rapidly over our first 20 years as a listed business is very different to the energy sector today, and the one that will serve customers going forward.
Energy is undergoing the biggest transformation since the alternating current was invented by Nikolai Tesla in 1887, which allowed electricity to be generated in centralised power stations and carried thousands of kilometres across transmission lines to homes and businesses. Today, our sources of energy are becoming cleaner, and our supply is also much more decentralised – that is, generated in smaller units in thousands of locations, particularly on many of your rooftops in the form of solar PV.
There are four main, global trends we believe are shaping our sector. These trends that were already underway have accelerated due to COVID. They are:
1. Growth in renewables, storage and green fuels
2. Electrification of everything
3. Convergence of data and energy
4. Changing investment environment
I’ll first talk about renewables, storage and green fuels.
– Renewables like solar and wind will increasingly do the heavy lifting in meeting energy needs, with a range of firming technologies acting as back-up to support variability in this renewable supply.
– The discussion over the mix of firming technologies is a lot of what you might be reading in the media right now.
– Depending on the period of time for which back up is required, batteries, pumped hydro and gas peakers will play a role.
– We will continue to see growth in battery storage both at a grid scale and in the home, including as we see an increase in proliferation of electric vehicles, driven by technology cost improvements that will enable batteries to support the market for longer durations.
– Green fuels such as hydrogen are likely to play a role and have enormous potential for Australia. Hydrogen can be blended with coal or gas to reduce the emissions intensity of those fuels and existing plants can be adapted to use it. It is also safely transportable. We expect large customers, many of which are the countries that heavily rely on LNG today, to be a continued driver of progress in this nascent industry.
– And if the number of projects across Australia is any indication, I expect us to be one of the nations at the forefront of the development of a global hydrogen industry. Hydrogen is a tremendous opportunity to meet our domestic decarbonisation targets and literally bottle Australia’s abundance of renewable resources and ship it anywhere in the world.
The second trend is the electrification of everything.
– The biggest gains to be made globally in emissions reduction will be through electrification, particularly in parts of the world that still depend on carbon-intensive fuels such as diesel for energy.
– In mobility, the transition is already well advanced. Car makers are increasingly focused on developing EVs and many have signalled they will cease making petrol engine vehicles within the next decade or so.
– In Australia, take-up of EVs is still in its infancy – making up just 0.7% of new car sales.
– But we expect EV sales to grow rapidly in Australia as more models with longer ranges and lower price points are released, combined with greater consumer understanding of the benefits, including lower running costs.
– By 2040, we expect EVs to add more than 10 per cent (or about 22TWh) of electricity demand to the National Electricity Market.
– Beyond mobility, electrification of industry and of buildings is a huge opportunity.
– Just 21% of the energy consumed by industry is electricity – 44% is fuel burned for energy and the remainder is used as feedstock. It’s estimated that half of the fuel burned for energy by industry today could be replaced with electricity using existing technology. Electrification will transform industry, which will be met predominantly by renewables and storage.
– Of course, electrification of some industries will be much easier than others, for example, those that rely on gas as a feedstock, such as fertiliser and explosives manufacturers.
– We therefore expect the switch to occur at different paces in different sectors. And for some of these sectors, gas is likely to play a role for a longer period of time, and either offset or ultimately switched out with green fuels like hydrogen.
– For consumers, the pace of electrification is likely to be relatively slow, as it typically takes longer for new households to be built or for old appliances to be replaced – chiefly gas hobs for cooking and heating. We’ll support our customers no matter where they are on the journey to decarbonisation.
– While the pace of electrification will vary, over time anything that can be electrified, will be.
The third trend is the convergence of data and energy.
– Perhaps the most exciting facet of the energy transition, is that it is propelling customers to the centre of energy. Rooftop solar, batteries and electric vehicles, are paving the way for a much deeper and more valuable relationship between retailers and customers as we help them manage their energy costs and optimise how they use their power-hungry assets.
– The upgrade of analogue meters to digital smart meters has enabled rapid growth in data, giving us more than 17,500 data points a year per customer, communicated in real-time. Compare this to what happens today, where a meter reader would physically come out to your premises and read your meter four times a year to generate your bill. In short, we have gone from four data points to 17,500 per year, almost overnight.
– With the Internet of Things and growth in connected devices, the potential to harness this data, analyse it to gain insights and deliver greater value to customers through orchestration of both supply and demand is enormous.
– We can also run our grid more efficiently, by better utilising all of the capacity in the system and avoiding unnecessary investment that inevitably adds costs for customers.
– Solar provides a great insight into what we are going to see. Australia already has among the world’s highest penetration of rooftop solar, around 20% of households enjoy the benefits of solar today, compared to 0.2% in 2007. And solar installations continue to break records year on year, with 3GW of rooftop solar installed last year – larger than Australia’s largest baseload power plant.
– This has real potential, because solar is the gateway to greater energy literacy and customers engaging more with energy, which will help accelerate the take-up of data-driven products and services.
– We have also seen a further step change in customers engaging with us digitally. This is by far the dominant way that customers now engage with us – in short, we moved forward many years in a matter of months.
– I liken it to the trajectory of banking more than a decade ago. Today, we do everything in real time via apps online and ATMs and we can’t imagine banking any other way – technology is already transforming the way customers interact with energy and we expect it to accelerate from here.
– Every home will be its own energy portfolio and our role will be to efficiently manage it for customers. Rooftop solar, batteries, electric vehicles and everything else that runs in the home, for example hot water systems, air-conditioning, pool pumps – we will help them manage energy use in a way that is easy, transparent and delivers value back to customers.
– I should note that we serve a wide range of customers – some are highly engaged, who love technology and who want to actively manage their energy, but we recognise that not all customers want this. We’re designing a system that works and shares benefits with all customers.
The fourth trend is the changing investment environment.
– Traditionally private investment has flowed into energy, attracted by stable and strong returns.
– However, globally we are seeing a move away from pure markets with governments increasingly willing to step in, especially in essential services that underpin the economy.
– With a cleaner and more democratised energy supply, the transition must be carefully managed to ensure there are not impacts on reliability as we transition away from coal and integrate growing levels of renewable generation into the grid, and so we don’t see price shocks particularly as large baseload plant progressively exits the market.
– As we’ve seen over the past decade with the significant investment in renewable and low carbon technologies, capital has flowed away from dispatchable generation, although it is still needed in the market from a reliability point of view.
– Increasingly, state and federal governments are stepping in, for example, the $600 million Kurri Kurri gas plant by the Commonwealth government-owned Snowy Hydro.
– The model for investment in energy infrastructure potentially needs to change – currently, energy companies that operate power stations are only paid for the energy that they generate, or what’s called an energy-only market. The low cost of renewable energy drives down wholesale energy prices to low or negative levels much of the time, yet it is the higher wholesale prices that have historically incentivised investment in new generation.
If you follow the energy sector, you will know the transition is not without its challenges. Wholesale electricity prices have fallen to unsustainable levels, which is placing pressure on the profitability of baseload power stations. This is where the transition has the potential to get messy, as we are likely to see coal-fired generation leaving the market in a planned and potentially unplanned way, leading to shocks to either reliability or affordability. These are clearly outcomes we all want to avoid.
At Origin, we are embracing the changes the transition is bringing forth, as we have been preparing for a low carbon future for a long time.
We believe the structure of our business, our competitive strengths, and investments we’ve made over the past five years, position Origin to prosper through the transition.
First, to our opportunities in Integrated Gas. We believe natural gas will continue to be needed by customers here in Australia, particularly to support those industries that cannot easily electrify, and also to support the decarbonisation of economies all over the world, and particularly Asia which is a large importer of Australian LNG. APLNG is a world-class operation, underpinned by a quality resource, which continues to improve performance year on year and play a role in meeting customer demand for gas.
We will also look to apply our expertise in unconventional gas to our exploration interests in the Beetaloo, Canning and Cooper-Eromanga basins, leveraging the low-cost model that we’ve successfully established at APLNG.
It goes without saying that any new development of gas resources must be consistent with a net zero by 2050 goal.
Gas exploration and development is inherently about innovation – because exploration, development and production are all about problem solving – finding the resources, engineering how to get them out of the ground, reducing the environmental impact and making sure its competitive.
Just as the industry innovated last century and continues to do so, I’m am confident that it will continue to progressively decarbonise the gas it produces and partner with customers to achieve their climate goals. We will reduce emissions within our operational control, and remove what we can’t reduce by using offsets and in the future, progress other opportunities such as carbon capture and storage, which continues to be explored at a commercial scale.
There are also opportunities in helping our customers reimagine what their future energy sources might be and evolving our portfolio of fuels in a low emissions world.
Our experience in LNG export and Australia’s proximity to Asian markets uniquely places Origin to deliver hydrogen at scale. We are seeing strong demand emerging from the mid-2020s in Asia and are actively working with customers today on these opportunities. Two examples are our feasibility study into an export-scale green ammonia project in Tasmania’s Bell Bay, and a domestic-focussed green gas project in western Sydney.
Opportunities to grow renewables, supported by firming
Origin generates less electricity than it sells so is a net buyer from the energy market, and it also means we have the capacity to grow more low-cost renewable supply and add flexible and fast-start generation capacity to our portfolio. We have added more than 1,200MW of new wind and solar since 2016 and renewables and storage will comprise more than 25% of our owned and contracted generation capacity when the Stockyard Hill wind farm near Ballarat in Victoria is commissioned.
Eraring is a flexible, efficient baseload generator which we are already running differently in response to changing market conditions. We plan to exit coal fired generation by 2032 or earlier.
Balancing the grid in a decarbonising market is about ensuring that fluctuating levels of renewable generation are always backed up (or “firmed”) so we maintain reliable power.
Depending on the period and purpose for which back-up is required, we will need a combination of firming generation technologies and fuels. It is estimated more than $75 billion of investment will be required.
Flexibility and enhancing our ability to respond to the market will be the key. The most efficient way to add this capacity to our portfolio at least cost to end users is by upgrading our existing assets.
For example, we’ve already upgraded one turbine at Quarantine power station in South Australia with a fast-start aero-derivative turbine that can start up in less than five minutes. We will shortly upgrade a second unit at Quarantine to help us respond faster to market needs.
We are progressing plans for an up to 700 MW battery at our Eraring power station. In addition, we have the option to almost double the capacity of our Shoalhaven pumped hydro scheme in Kangaroo Valley in NSW.
Customers at the centre
As I mentioned earlier, energy companies once only generated and sold energy in one direction but energy flows are increasingly bi-directional and technology is offering customers the opportunity to have more control over their energy usage and costs.
The democratisation of energy well underway is putting the customer well and truly at the centre of the system and an opportunity to provide more personalised products and services that deliver value back to customers. We will also play a key role in helping customers to manage and optimise their portfolio of energy assets in the home, which also allows us to manage the grid more efficiently by using all the capacity in the system.
To be successful, trust is crucial. Right now, it’s mainly larger customers, typically industrial customers who want to reduce their emissions and/or costs, and early adopters in the retail market. But we envisage that this will be much more mainstream in the not-too-distant future as rooftop solar, batteries, electric vehicles and connected devices continue to grow and become the norm and apps/interfaces become more sophisticated, easier to understand and more user-friendly.
We’ve taken some important steps to ensure that we get the basics of energy retailing right in order to build trust with customers.
And a year ago, we announced a strategic partnership with innovative UK-based energy-technology company, Octopus Energy, which is unique in the global energy marketplace.
Energy retailing and traditional energy systems have always centred around the meter – not the customer. Octopus’s platform, Kraken, is unique in that it was purpose-built for energy retailing and is centred around the customer’s needs. The way Octopus operates, and its culture, is also more efficient and geared around customers. They are consistently awarded for having the best service of any energy retailer in the UK, with a cost to serve materially below their competitors. By adopting the Kraken platform for our retail business, and the Octopus operating model and culture, we are aiming to replicate this success at Origin.
Kraken gives a holistic view of all the services that a customer might have with Origin – electricity, gas, hot water, broadband – and empowers our customer service teams to manage any aspect of a customer’s account. It will also allow us to seamlessly add more data-driven and personalised services over time.
Origin also owns a 20% stake in Octopus, which continues to grow rapidly. In the 12 months since we partnered with them, Octopus has added around 100,000 customers per month in the UK, growing to a significant size of more than 2 million customers in its home market, and is expanding to other markets. Last year, Octopus entered the US, Japanese and NZ retail markets, as well as licencing its Kraken software to a growing number of leading retailers from all around the world.
We are progressing well with our Kraken migration with 250,000 customers targeted to be on the new platform by 30 June. We are excited to be able to deliver another step change improvement in customer experience to our valued customers.
With increasing amounts of decentralised energy and potential for reliability issues, aggregation and orchestration will play a growing role in our energy system, helping to stabilise the system by balancing supply and demand in real time, using all the capacity in the system.
Customers will entrust us to manage their assets in the most efficient way for them, a path we have been on for a number of years. We have invested over many years in digitising our operations and building market leading data and analytics capability – these foundations are crucial as they connect everything together and enable us to offer excellent service and seamlessly offer new products and services to customers – providing our customers the opportunity to get more value out of their energy assets, even to be paid to supplement the market when supply is tight.
A Virtual Power Plant or VPP connects thousands or even millions of energy assets across many separate locations and coordinates or orchestrates them so they work together like a traditional power station, sending electricity to the grid when its needed and drawing from the grid to charge batteries or power other devices when energy is cheap and plentiful – typically when renewables are generating.
Over the past few years, Origin’s VPP has quietly grown in size to more than 130MW across 52,000 customers – about the size of a unit at a gas-fired power station. The more customers we can connect to our VPP means we may be able to avoid investment in building a new power station or other energy infrastructure such as transmission or interconnectors – the costs of which are ultimately borne by customers in their energy bills.
What’s connected to our VPP? Rooftop solar and batteries, hot water systems, industrial plant and equipment, EVs, pool filters, anything that can export to or draw from the grid. You don’t need to be one of our large commercial customers to join it, although they were the early adopters because they could more clearly see the benefits for their businesses in both cost and sustainability. By spreading the load between all the participants, everyone plays a role regardless of their size.
What if you don’t have the tech to participate in demand response and the VPP? Actually, anyone with a smart meter can participate.
Late last year, we launched Spike, Australia’s first mass market demand response program using gamification and rewards to encourage customers to power down during regular ‘Spike Hour’ events.
Customers are notified via text and email of upcoming demand response events. We use smart meter data to forecast usage for each upcoming Spike Hour for each customer and all they need to do earn a reward is simply beat that forecast. For example, you could put the dishwasher on later, defer that load of washing or adjust the thermostat on your air-conditioning so you use less electricity.
From a standing start in August, we have 34,500 Spike customers and have reached more than $1 million in rewards.
During last summer’s heatwaves in California, our tech partner for Spike, OhmConnect, paid customers in US$1.2 million to reduce their usage by 1GWh during last year’s summer heatwaves that resulted in rolling blackouts affecting many thousands of customers. OhmConnect was able to engage mass market customers to rapidly and materially reduce demand when needed and that has major potential for our market.
Even 12 months ago, residential customers may not have been ready for demand response or understood how they could play a role in balancing demand across the network, but what we’re seeing with Spike is that Australian customers are increasingly ready for greater engagement and sophistication with energy.
We are getting participation rates of around 70% for each Spike hour and those customers are reducing their usage by about half. It is approaching the size that it could start to relieve pressure on the system during peak demand events such as heatwaves. The success of Spike comes down to the simplicity of the platform and making the way you earn rewards easy to understand and transparent for customers.
Storage in the home until now has been high cost and complicated, but there are a number of developments underway that will change this.
We are working on smaller, portable battery options for customers that have been locked out of the benefits of batteries until now such as renters or apartment owners.
Touching again on EVs, we believe these will become the primary means of storage in the home. There is a lot of work underway now with orchestration to optimise the charging and usage of EVs for customers across the network.
With around half of all new car sales to fleet owners, we have targeted this segment first in order to boost EV sales in the Australian market. Origin360EV fleet is Australia’s first one-stop shop for commercial customers looking to electrify their fleets.
We hope that by motorists seeing more EVs out on the road and also in the second-hand market as fleets are updated, we can help to grow the overall share of EVs in Australia.
To compete and continue to grow our market share, we’ll need to give our customers access to energy that’s cleaner and smarter. But the key is also making it easier for customers to engage so it’s not just the tech enthusiasts but ordinary customers like you and I having a line of sight as to how we can participate more actively and experience more value from our rapid transforming energy market.
I hope today has given you more insight into Origin. While there are some challenging near-term conditions due to low wholesale electricity prices, we have two strong businesses that are operating well and generating cash flows that can be redeployed into opportunities through the energy transition.
We will continue to leverage our strengths including the scale of our customer base and our low-cost retail business, access to domestic and offshore growth via our partnership with Octopus Energy, new low carbon products and solutions for customers large and small, all of which is enabled by our industry-leading digital offerings and data and analytics capabilities to make energy easier and cleaner for customers.
We have strong opportunities to continue to grow low-cost renewable energy supply and a portfolio of firming assets that can support the market when needed. At the same time, we are an experienced low cost gas producer and through our experience exporting LNG to customers in Asia, can contribute to establishment of a low-cost green hydrogen industry in Australia, powered by an abundance of renewable resources.
We have been planning for a low carbon future for a long time, and as the transition continues to accelerate, our climate strategy and targets will help us achieve our ultimate aim of net zero by 2050, and enable us to support customers to achieve their own abatement objectives.
It’s a challenging but exciting time to be at Origin, as we have clear line of sight to a range of opportunities to drive growth over the medium term.
Thank you and happy to take your questions.