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Lights on for energy retailers

Energy retailers have been in the limelight over recent months and it hasn’t been a pretty experience for shareholders. However, release of the Government’s new energy policy might just clear the stage, removing some of the political risk for this sector

Government policy

The essence of the new policy is that energy retailers will be obliged to supply a mix of power that meets two standards, one for carbon emissions and the other for reliability.

The Government will set a national emissions target but under that the standards for individual retailers will be set by an independent regulator.

Implications for energy retailers

Political risk is a big factor for investors in energy retailers like AGL and Origin Energy. The current policy proposal will need to be agreed by State Governments. If this happens and the policy is implemented, it looks to me as though it will be a positive for energy retailers

  • Most importantly it will create certainty, allowing the industry to plan future investment
  • It gives industry the flexibility to work out the best and most profitable way to supply energy that meets the twin standards
  • It increases the potential benefit of vertical integration where companies like AGL are in the business of both energy retailing and power generation.  The energy retailers have the obligations under this policy but under a vertically integrated model they are well placed to co-ordinate strategy with generation.
  • Having standards set by an independent board should substantially reduce the volatile  political risk so much on display over recent years

There will always be political risk when it comes to power prices but an agreed policy like this might reduce it to more acceptable levels for shareholders

AGL chart

As the ASX 200 index approaches its high for the year, AGL languishes nearly 15% below its April high. That may be of interest in a year in which the pattern has been to rotate into sold off sectors rather than rely on the whole market carrying most boats higher.

The past 2 weeks have seen a recovery off now established support around the 50% retracement level near $22.50 

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