18 October 2017

Chairman's address to the 2017 AGM

Good morning Ladies and Gentlemen. I am delighted to be able to speak with you again today. Let me outline how I propose to conduct today’s meeting.

I will kick off with a discussion of some key areas the board is focused on – including Strategy, Safety and Financial Returns. I will then provide some comments about our operating environment and finally, how we are tackling climate change.

This will allow Frank, as the CEO, to focus on the performance of the business and outlook.

Starting with our strategy. At Origin, we are leading the transition to a cleaner, smarter and more customer-centric energy future. To ensure the business is well positioned to achieve this objective, we are focused on three key priorities.

These are to:

  1. reduce debt and improve financial returns;
  2. lead in our Energy Markets business with a focus on energy supply from renewables, gas and coal and smarter customer solutions, and;
  3.  lead in our Integrated Gas business with a focus on opportunities in unconventional gas development and improving productivity and reducing costs at Australia Pacific LNG. 

 

Underpinning these priorities is our focus on adapting and transforming our culture to ensure Origin is strongly positioned to meet the challenges of a rapidly changing and constantly evolving energy market, and this includes being more customer centric.

Now to safety, which is a matter of primary importance to the Board. For a number of years now management, supported by the Board Health, Safety and Environment committee, has worked to develop a learning culture which provides our people with the confidence to identify and respond quickly to risks and with the support necessary to improve the running of our operations.

Our results to date have reinforced this approach, with our primary measure of personal safety performance, the TRIFR – or Total Recordable Injury Frequency Rate – reducing from 6.5 in 2013 to 3.2 in 2017. This is our best result to date, and we are proud of the progress. Looking forward there is still more to do to continue this momentum towards our ultimate objective of zero harm to our people at work.

I’m sure that everyone in the audience is interested in our financial performance.

We committed to decisive action to improve financial performance and laid out a plan. While there is more to achieve, this year we recorded meaningful progress against our key priorities to reduce debt and improve operational performance. 

Improving our capital allocation and Return on Capital Employed (ROCE) are firm priorities. ROCE is a key performance measure in the Long-Term Incentive Program for management. This year, our Underlying ROCE doubled to 6.0 per cent which is positive progress, but we still must look to further improve in this area.

Given our focus on reducing debt, the board determined not to pay a dividend in 2017. We are acutely aware and fully understand the importance of dividends to many of our shareholders. This decision was not taken lightly, but it was considered in the best overall interests of shareholders at this time. A decision on the dividend will be considered each six months by the Board.

Operating Environment

I will now turn to the operating environment.

In Australia, blackouts and rising energy prices have made energy a major issue.

This has created increased regulatory risk as governments seek to respond. Australia still lacks a stable long-term energy policy, and the risk has increased of governments interfering in markets to regulate supply, or worse to set pricing.

On electricity prices, I would like to start by acknowledging that since 2010, energy expenditure has increased by more than total household expenditure and the CPI. This is putting pressure on both households and businesses.

The preliminary report to the Retail Electricity Pricing Inquiry by the ACCC outlined the drivers behind increasing energy prices from 2007/8 to 2016/17:

  • 41 per cent of the increase came from network charges, the poles and wires needed to get electricity to the houses;
  • 22 per cent came from rising wholesale prices, as power generation supply was crimped from plants closing and from a lack of long term policy settings;
  • 17 per cent was retail and other costs, and retail margins accounted for 7 per cent; and finally,
  • 13 per cent was federal and state green energy policies.

This demonstrates that retailers are only one part of energy supply chain. We cannot solve the pricing challenge alone. We need a whole of industry solution with networks, generators, retailers and governments all working together if we are to deliver a genuine and lasting reduction in energy prices for customers.

Encouraging investment in new supply is a critical piece of the puzzle, and we have urged governments to resist intervening with short-term policy and instead focus on getting the long-term energy and climate change settings right.

Over the past decade, there have been many attempts but we have not been able to agree on a genuine, coordinated and bipartisan national approach to the challenge of transitioning to a more modern and cleaner energy system.

In his comprehensive and scientific review of the national energy market this year, Dr Alan Finkel made 50 recommendations which Origin supported. The government has endorsed 49 of the recommendations and yesterday set out its preferred means of tackling emissions reduction.

We believe the National Energy Guarantee announced yesterday has the potential to address the objectives of ensuring security, affordability and facilitating the transition to a modern, cleaner energy future by unlocking investment in more supply.

We look forward to working with governments and energy market bodies to work through the detail of the policy.

We can clearly see the impact of new supply on wholesale prices.

Over the past 18 months, there has been a commitment to more than 4,000 MW of new renewable energy projects by the industry which will come online by 2020 and forward wholesale electricity prices are starting to fall in response to this new supply.

An investment signal beyond 2020 when the RET ends, will maintain downwards pressure on prices. We believe doing nothing will see prices again move in an upwards direction.

We have committed to 1,200 MW of new large scale solar and wind generation since March 2016 to help meet the Renewable Energy Target, we are running Eraring power station harder than we have ever run it before and we have worked with Engie to supply gas to bring 240 MW at its Pelican Point power station back online.

Now let me turn to gas and again acknowledge that gas prices have risen above CPI contributing to increasing cost pressures for many customers. In particular, this impacts large businesses that rely on gas. Gas supply has also been tight in the market.

Now there are a number of reasons for the gas market challenges. Australia has exhausted lower cost gas supply that delivered historically lower prices for customers and we are now accessing resources with a much higher cost of production. We have also created an east coast LNG export market, which connected domestic prices to global gas prices.

We believe encouraging supply is again the critical solution to security of supply and a reduction in prices. Yet the market has been unable to develop new gas supply due to drilling bans in various states on the east coast.

We have recently seen more supply diverted to the domestic market by LNG projects and this has contributed to a rapid decline in prices from a peak of around $16/GJ in April to below $10/GJ at Wallumbilla and getting close to export parity.

Further domestic supply commitments recently made by LNG projects for 2018 and 2019 should provide further downward pressure on prices, however new supply is critical and we must also stop creating the expectation that gas prices will return to historically low levels.

Now let me explain what Origin is doing to ameliorate the situation in the gas market, both with its partners in Australia Pacific LNG in which Origin has a 37.5 per cent shareholding, and through our retail business and future gas development opportunities.

Australia Pacific LNG has been a net contributor to the east coast gas maket since its inception in 2008 and today it meets approximately 20 per cent of total annual demand on the east coast. In the near-term, Australia Pacific LNG will contribute to the solution by diverting more gas from export to the domestic market, ensuring Australian customers have access to gas supply at competitive prices.

In addition to Australia Pacific LNG’s contribution, Origin is one of the largest gas suppliers to customers on the east coast of Australia. We are actively working to bring on more gas supply to offer customers for 2018, and we will continue to pursue future development opportunities including Ironbark and Beetaloo.

Responding to Climate change

Now to how we are responding to climate change, which is an important topic and that is why I would like to spend a little time on it.

Let me reiterate our position. We support the Paris Climate Accord. We endorse Australia’s commitment to a 26-28 per cent reduction on emissions on 2005 levels by 2030, as a minimum. We believe the electricity sector should do more than its proportionate share of achieving this and any future target because we have the means and can also facilitate other sectors to do the same.

This morning we released analysis on the potential impact of a number of emission reduction scenarios on our wholesale electricity generation portfolio. This analysis shows that not only is our portfolio resilient, but it prospers, in a low carbon economy.

This is not by happenstance or good luck; we have carefully built our portfolio with an eye on a low carbon future.

Our commitment goes further. We will adopt a company-wide, science-based, emissions reduction target by December 2017, a key component of the seven “We Mean Business” commitments we signed up to in 2015.  And, we will continue to publicly support a policy that targets net zero emissions from Australia’s electricity sector by 2050, or earlier.

We fundamentally believe the transition to a low carbon future presents opportunities to create value for Origin. This is because of our strategy to focus on renewables and gas.

Our pathway to the decarbonisation of our business has five pillars: 

  1. the closure of Eraring at the end of its operational life in the early 2030s;
  2. growing renewables with recent commitments putting us on track to increase our supply to renewables to more than 25 per cent of Origin’s generation mix by 2020;
  3. a strong position in gas as a lower emissions firming fuel to ensure security of supply;
  4. a focus on the customers’ needs for cleaner smarter solutions for their energy use; and finally,
  5. to continue advocating for climate change and energy policy solutions.

 

I hope you can see from this our serious and planned approach to reducing emissions and securing a better future.

Conclusion

To conclude, I would like to reiterate our concern about rising energy prices and our determination to be part of the solution and work collaboratively with governments to make sure we can deliver better outcomes to energy customers.

We supply 4.2 million customers with reliable energy to fulfil their lives. We are at the forefront of growing renewables in Australia and adopting new technology that will change the way customers interact with energy in the homes.  The Prime Minister has backed an innovation economy and we at Origin are responding to that call.

But we urgently need policy certainty. We cannot wait until 2020 for investment decisions to be made if we are to meet Australia’s 2030 emissions reduction target. We look forward to working with governments and energy market bodies to progress the new National Energy Guarantee announced yesterday, as we continue to focus on the objectives of delivering security of supply, affordable pricing and the necessary reduction in emissions over time.

Finally, I would like to thank our people for their incredible contribution this year. They have worked tirelessly to ensure we can continue to make Origin an even more successful business.

Thank you for your patience, ladies and gentlemen.

Gordon Cairns, Chairman