OGFGY - Origin Energy Limited (OGFGF) Q2 2023 Earnings Call Transcript
Origin Energy Limited (OGFGF)
Q2 2023 Earnings Conference Call
February 15, 2023 5:30 PM ET
Company Participants
Frank Calabria - Chief Executive Officer
Lawrie Tremaine - Chief Financial Officer
Greg Jarvis - Executive General Manager, Energy Supply and Operations
Andrew Thornton - Executive General Manager, Integrated Gas
Jon Briskin - Executive General Manager, Retail
James Magill - Executive General Manager, Origin Zero
Tony Lucas - Executive General Manager, Future Energy and Technology
Conference Call Participants
Mark Samter - MST
Tom Allen - UBS
Ian Myles - Macquarie
Peter Wilson - Credit Suisse
Rob Koh - Morgan Stanley
Dale Koenders - Barrenjoey
Daniel Butcher - CLSA
Gordon Ramsay - RBC
Presentation
Frank Calabria
Okay, good morning, everyone. It’s Frank Calabria here, and welcome to the Origin Half Year Results Presentation. I’m joined here today by the Executive Leadership Team of Origin. And the format this morning will be consistent with prior reporting periods, you’ll hear from both me and Lawrie Tremaine, and then very happy to open up to questions to the team and myself.
Just turning to the presentation, therefore, going to Slide 4. And so, our key messages for this half year result. Firstly, consistent with the release that we sent out this morning, just to let you know that the consortium has substantially completed due diligence and active engagement continues in relation to the submission of a binding proposal, and we will continue to keep shareholders updated. And it’s contained in the release what we sent out today.
Origin is well placed to capture value from the energy transition. And so in this presentation, we’ve given information as to how we think a bit about that. And it sits across three aspects. It’s through a combination of an advantaged portfolio, we are positioned for growth through a number of businesses. And further, we represent a platform for transition investment. And we set out some of that on the following slide.
We continue to execute our strategy and we had a clear ambition and strategy that we’re executing at pace. You would have noticed that we, two weeks ago upgraded our guidance for energy markets for the financial year ‘23. And our medium-term earnings recovery is on track and we’ll go through that today and even since the upgrading of that guidance. We’ve continued to see a strengthening and an improvement in operating and trading conditions, including performance here and with Octopus. And we now expect to be at the high end range of our guidance.
No doubt, we’ll be reflecting on that. Because when you think about the first half results, and the second half, it is clearly a tale of two halves and reflects, I think the events we saw at the end of the ‘21 or the last financial year playing through in the first quarter and what we’ve seen since then is a continuing momentum and recovery that we’ll talk through.
APLNG continues to generate strong cash flow, which is evident in the presentation. And we’ll make some comments today about policy. Just really the key message from us is that, it must support investments. If we’re to successfully deliver a sustainable transition over time in Australia.
I did mention on Slide 5, I did mention that Origin is well placed to capture value through the transition. When we talk about an advantaged portfolio, it really centers across the fact that we have a large scale and capable retail business, we have a competitive gas supply and we also have the largest thermal peaking fleet, both of which are – all of which are key facets that you would want to have in your portfolio as we go through a transition that requires renewables and storage to be entered into the portfolio as coal exits the market. And not the least of which also is that we have a high quality, low cost APLNG gas resource. And you can see the benefits of the diversification across the two businesses in the half year results again.
By positioned for growth, we’ll really talk about the opportunities we see across businesses. Firstly, in terms of Octopus, and we’ll talk about its ascendancy in the retail market in the UK, but also its global utility software business, through multiple product – multi product offerings, Broadband, EV, and Origin Loop, our Virtual Power Plant, and through our growth businesses in Zero and Community Energy Services.
We’ve distinguished those growth businesses from the platform for transition investment, because the combination of that retail scale, firming generation, gas supply, and the upcoming Eraring closure provides a large scale opportunity, which I think has been identified by a consortium that have approached us, as an opportunity to invest in renewables and storage and also distributed energy assets I should add, to accelerate the transition. And then as we consider further opportunities that exist in the transition, there’s also the carbon products through carbon markets as they evolve, and then hydrogen developments.
Turning to the financial highlights, you can see that the statutory profits up AUD 530 million to AUD 399 million through favorable derivative valuation and impairment in prior periods not occurring this year. But you can see the underlying profit is down and it really is the reflection of a mixed result in terms of the energy markets earnings being down. We’ve got strong results still continuing to occur in APLNG, but what we have this year is the tax on those distributions, which has flowed through to the underlying profit result, and you can see that it’s down to – down to AUD 44 million.
Underlying EBITDA overall is just slightly below last year or the equivalent period equivalent half last year at AUD 1.05 billion. And you can still – you can see the combination of the two businesses reflected in the underlying return on capital employed, you’ve got integrated gases, return on capital employed, we should say for this, obviously, over this period of time 19.8%, I’m sure you’ll reflect that that’s a cyclical – that’s been a cyclical business over time, depending on commodity cycles, but it’s experiencing strength through the commodity markets at the moment.
But you’ll also notice that the energy markets return on capital point is negative. And so, when we’re talking about the recovery of the growth in earnings that we’re seeing, partly what we’re talking about here is a recovery in the energy markets earnings back to run rates that we’ve seen previously. Now adjusted net debt is up by AUD 0.4 billion to AUD 3.3 billion and Lawrie will take you through the cash flow. And I’m pleased to say that the Board has declared a fully franked interim dividend of AUD 0.165 per share.
We have a clear ambition and strategy on Slide 7, the ambition is to lead the energy transition through cleaner energy and customer solutions. And we have three strategic pillars that we remain very focused on unrivaled customer solutions, accelerating renewables and cleaner energy and also critically important is delivering reliable energy through the transition.
I’ve just included that slide to remind you of that framework, because as we turn to the next slide, we really just highlighting some of the key achievements to-date on executing our strategy, and what you can see there is, we’ve, in terms of some of the key achievements, we now have 96% of our customers on the Kraken platform, we were pushing hard to get a 100%, but we have a 96% through and we’ll complete that in the – over the coming half.
Octopus is now the number two UK energy retailer following the successful acquisition of Bulb, which is quite an achievement for a business that was only established in the middle of last decade. The CES gross profit is up to AUD 70 million on the back of organic growth, and in particular, this half, the acquisition of WIN and Origin Zero continues to actually offer low carbon and other non-commodity solutions to large business customers and we’re gaining good momentum.
We’re very well advanced on the Eraring battery, we’re in the quite advanced negotiations with the selected contractors underway as we approach the FID decision, which will be very soon, we expect. We’ve got virtual power plant connections that have grown by 75% in the last six months on our way to 2 gigs, we now have 450 megawatts. And that’s continued to grow. And I have to say, we’ve made good progress in relation to the Hunter Valley hydrogen opportunity, a domestic hydrogen, a greener hydrogen opportunity over the course of last six months.
In terms of APLNG, it’s been another very strong half year cash distribution of AUD 783 million. Compared to the last time we held one of these coals, I’m pleased to say that both coal delivery and stockpiles have recovered at Eraring and we now have over a million tonnes on the stockpile. And we’ve experienced wet weather in APLNG which has impacted production, and we’ll talk through the recovery of that on the way.
And in relation to our upstream exploration and appraisal business, the Beetaloo sale is completed and we have just very recently signed the Canning sale agreements. So, we’ve achieved quite a bit today, we don’t achieve it, we haven’t achieved everything we set out to, but very pleased that we continue to execute our strategy at pace.
Now, I’m sure for all the analysts out there, they’ve got rules out. And the whole idea was not to have rules out on this, but really to provide an earnings targeted trajectory over time, but really to demonstrate the various parts of Origin. So you can see how we think about this business over the coming years and both the sources of that growth and the value drivers.
In particular, you’ll see it’s done by FY ‘24. So it doesn’t show the FY ‘23 results. But what you can see there is a recovery as Eraring makes a positive contribution on the back of a tariff reset over the – over a period of time. And what really will occur over time as Eraring comes out of the fleet is that, the wholesale electricity returns will be dominated until we introduce more growth in renewables and storage by the returns we will see in the capacity market through our thermal peaking generation, also through our legacy renewable assets, and also through our ability in the market to continue to capture value in what will increasingly have intraday spreads and volatility.
What you will then see over time is that, that will be supplemented by a growth in renewables and storage as we introduce the new wave of assets to the portfolio. In this case, we’re clearly reflecting the fact that we would partner with others in terms of the capital that was introduced and we would continue to see that as a growth engine. And that’s what we really one of the key area as we describe as that platform for investment through the transition.
We have stable and long-term earnings from our strategic gas position, which is really a combination of legacy coal contracts and as well as capabilities, transport, and a portfolio and an ability to manage that. And we also have a scale, low cost retail business, which will continue to deliver a stable margin before we think of the additional products that’s added to, and the benefits you’ll see that will accrue as a result of the implementation of Kraken, which flow from next year.
And then you’ll see the two areas of growth, which are really the growth businesses we described earlier. But that is really presented to us by the customer scale that we have in the business and the capabilities, and that really extends across our community energy services, virtual power plant and broadband, and then the growth that will emerge and is emerging from Octopus as a retailer in the UK, and as a customer licensed growth business or a software business that’s scaling up across the globe.
And in addition to that, they’re increasingly investing in the transition as their market goes through a similar trend as we go through there. So we really wanted to provide that to demonstrate, I think, to you how we see the earnings contributors, and that trajectory that’s targeted based on our strategy execution, and the near-term recovery in earnings, particularly in the wholesale electricity markets.
We continue to be a purpose led organization, it’s a slide you would see us, we’re serious about it, we need to get energy right for our customers, communities, planet and our people, and you can see there are a number of the achievements that are sitting across that over the last six months, I would only highlight a couple of those points for customers.
We continue to support our Power On hardship customers and important right now in terms of rising prices for communities in which we operate. It’s the growing role and contribution played by regional indigenous suppliers, that the great work of the Origin Foundation in education, and the community investment engagement in Eraring, that standout over the last period of time.
We were very pleased in the terms of planet to have received 94.5% shareholder support to our climate transition action plan. And you can see there across a range of the products and initiatives that we continue to make progress. So we have strong targets, we’ve got action and we got progress.
And for our people, we’ve seen improvement in safety performance, but we never rest as you would expect organizations wherever there is – that wherever there are people that are still continuing to experience injuries and incidents, and so we will continue to focus on that. We’ve increased the proportion of our female senior leaders, and we’re actively supporting our people at Eraring through the transition.
Finally, before I pass over to Lawrie, I think it’s important to note that we must have policies that support investment, and we made comments six months ago and I think there were some clear messages that need to be I think made. If were to actually succeed on accelerating the transition. There is substantial investment required to underpin the new energy system, and I don’t think that’s any mystery. That’s right across generation transmission, its renewables, but also gas supply. And investors will require stable policy and adequate returns reflecting the risk profile to have that investment made.
There is investment in new gas supply required urgently, and government and regulatory interventions that create uncertainty don’t act in that investment being made on a timely basis. And therefore, that’s very important. It’s good progress to see the capacity mechanism that was introduced, and I think you know, it was very pleasing to see that progress.
There is further work required, because that capacity mechanism did not include either the orderly transition of coal and also the investment in new gas fired generation, and alongside storage and other assets will be required for a successful transition. Particularly as we know, the scale of what’s required is significant, and time is of the essence.
And lastly, should never forget the fact that we are supporting bill relief for customers that are most in need. We are well aware that prices are rising for our customers and we’ll continue to play our part, and that remains a key aspect alongside the regulatory and policy arrangements that continue to be worked across the industry.
So on that note, I’m going to pass over to Lawrie and then we’ll return to talk more deeply about some of the operational performance.
Lawrie Tremaine
Thanks, Frank and good morning, everyone. I’m going to start with profit bridge on Slide 13. So underlying profit was down AUD 224 million to AUD 44 million, driven mainly to lower electricity gross profit and income tax and unfranked APLNG dividends, partially offset by stronger prices, lifting APLNG earnings.
Earnings from the non-APLNG part of our upstream business is AUD 70 million lower due to higher oil hedge losses partially offset by a stronger commercial position in our LNG trading business, and lower exploration and appraisals spending, following our decision to exit our non-APLNG acreage. D&A expense is higher with the expected reduction in operating life at Eraring.
Moving to Slide 14. The extremely high commodity prices at the end of the last financial year had significant impacts on our full year results, which have partially unwound in this half year. I’ll talk more about this later, but higher fuel and fuel and pool costs further squeezed margin in our electricity business. The AUD 2.9 billion of net in the money derivatives held on the balance sheet last year end have revalued lower and partially settled resulting in a large net asset reduction on the balance sheet and fair value movements in statutory earnings and hedge reserves.
Very high pool prices in June ‘22 resulted in a large net creditor position with AEMO this arises as we are short generation and therefore a net buyer from the pool. This net creditor was repaid in the first half, resulting in a large working capital movement and lower operating cash flow which I’ll quantify later. In addition, our coal stockpile was rebuilt at high market prices, following a period of poor operating and delivery performance from a key supplier. Octopus energy earnings have also been impacted in the half by high and volatile wholesale prices and regulatory intervention. I’ll cover this in more detail later.
To the cash flow on Slide 15 dimensions some of these outcomes, lower cash earnings and AUD 757 million of high working capital. For the reasons I’ve just explained, higher tax paid partially offset by a further inflow of future exchange collateral have resulted in a net operating cash outflow of AUD 796 million. Higher distributions from APLNG and lower investment spend and net interest contributed to free cash flow. With higher expected cash earnings, more stable working capital and ongoing strong distributions from APLNG, we anticipate an improved free cash flow result in the second half.
I’ll drill into energy markets’ cash conversion in more detail on the next Slide 16. This chart shows energy markets’ EBITDA, that’s the black line plotted against cash flows. The operating cash flow in red approximates EBITDA in all periods, except for the last two. This is a function of the high commodity prices particularly at June ‘22. The chart shows how the low operating cash in the first half of ‘23 unwinds the strong cash conversion in the second half of last year.
Last year result also benefited from high futures exchange collateral inflows shown here in yellow. In blue, you can see the AUD 65 per certificate shortfall charge we’ve paid for the under delivery of LGCs will make a further shortfall payment of approximately AUD 200 million in the second half. But then expect that refunds net of the cost of forward certificate purchases of around AUD 420 million across financial years 2024 to 2026. In the second half, we expect to see a rebound in energy markets earnings and positive operating cash flows, and that rebound in cash flow should see us get back to more like our long trend in cash conversion.
Turning next to APLNG on Slide 18. Now, we all know LNG is a cyclical business, and we invest expecting to earn better than our cost and capital across these cycles. Without full participation across the cycle, investment in these capital-intensive long-dated projects would not be economic. As many on the call would recognize there have been years where this business hasn’t returned our cost to capital. We’re currently at a strong point in the cycle, benefiting from higher global oil and LNG prices, we’re also benefiting from good fuel performance enabling us to defer development expenditure. These benefits combined to deliver Origin a happy distribution of AUD 783 million and return on capital employed of over 19%.
The cash generation performance of APLNG in the half was outstanding, on a 100% basis, AUD 3.9 billion of cash was generated from operations after paying Queensland royalties of almost AUD 400 million. Investment spend was only AUD 200 million and debt servicing just over AUD 500 million, allowing total distributions of an impressive AUD 2.8 billion for the half.
On Slide 19, based on an expected improvement in earnings and cash generation, and given our debt remains towards the lower end of our debt to EBITDA range currently at 2.1 times, the Board has declared an interim dividend of AUD 0.165 per share, consistent with last year’s final dividend. This dividend as Frank said, will be fully franked and the DRP will remain suspended. We’re not in a position to contemplate further capital management initiatives just now, but this remains a consideration for the Board.
Turning next to energy markets’ earnings on Slide 19. Energy markets’ EBITDA was AUD 120 million lower in the half compared to the first half last year. Electricity gross profit was AUD 183 million lower, Octopus’ earning AUD 71 million lower and these were partially offset by AUD 145 million recovery in gas gross profit. The electricity result represents AUD 10.80 per megawatt hour reduction in unit margins down to AUD 2.10 per megawatt hour.
This reduction is largely a function of the very high fuel and pool purchase prices not being fully reflected in customer tariffs. Unit fuel costs reduced earnings by AUD 341 million and unit pool costs by AUD 193 million. We expect these higher costs will be recovered with future tariff resets, allowing a rebound in electricity margins.
In gas, customer tariffs for both mass market and C&I customers have repriced to recover higher unit costs, benefiting earnings by AUD 199 million. Offsetting this, increased gas procurement costs in this period decreased earnings by AUD 102 million. Business customer wins have driven a net increase in sales volume of 12.2 petajoules, providing a AUD 32 million positive earnings impact. Octopus earnings were substantially lower in the half, particularly in the October to December period.
Our equity accounted EBITDA result for the half was a loss of AUD 83 million. Now there were two factors driving this underperformance. Firstly, along energy position caused by lower demand, partly due to unseasonably warm October weather resulted in Octopus’ selling back excess volumes during a period of materially lower wholesale prices. Secondly, the introduction of the energy price guarantee by the UK Government resulted in fixed tariff Octopus customers renewing onto a lower cap price set well below the hedged cost.
In January to March this year, the price cap is now set and captures the significantly higher wholesale hedging costs observed in the latter part of calendar year 2022. As a result, Octopus are forecasting a recovery in earnings in the second half of this financial year and we’ve already seen positive earnings results from Octopus in January.
Lastly, turning to integrated gas on Slide 20. Excluding the impact of the equity sell down, our share of APLNG earnings were up AUD 397 million, primarily due to the higher LNG prices, both oil linked contract pricing and spot. The realized effective oil price before hedging was USD 109 per barrel, compared to USD 68 in the prior year.
Operating costs were AUD 157 million higher, with higher royalties associated with higher prices, representing most of this increase. High purchase of gas, increased work over activity and the commencement of planned cyclical upstream maintenance activities have also contributed.
With all that, I’ll hand it back to Frank for our operational performance.
Frank Calabria
Okay. Thanks very much, Lawrie. Now we’ll turn to the operational review and kicking off with energy markets on Slide 23, given the events that have occurred in the electricity market over the last 18 months, and the electricity margin that’s been suppressed through that period of time, we’ve included on that slide really what’s occurred in the market for the financial years ‘22 and half year ‘23. And what’s then flowing through to our improved outlook.
So you can see that in the electricity markets in FY ‘22, the low wholesale electricity prices during COVID, they flowed through to customer tariffs and that when combined with the coal supply disruption, and the extreme market events and conditions in the fourth quarter of that year led to high wholesale prices and therefore, compressed margins.
As we moved into the first half of financial year ‘23, the half we’ve just gone through, the customer tariffs did increase, but still not enough to recover the higher costs incurred. And since then, obviously, coal deliveries have improved as we’ve gone through the half, and that’s where we can see that market conditions have eased. But really that half year result is still reflecting those higher costs.
And so, as we look forward to the second half of this financial year and beyond into ‘24, we do see the continued recovery in electricity earnings. Wholesale electricity prices have moved lower, including through the impact more recently of the temporary price cap, and then customer tariffs will increase again as the lagged recovery of those higher costs incurred continues to flow through into the next financial year.
I should say that the implementation and the impact of the recent coal price cap is still being worked through, and there are a number of arrangements that we and other industry participants are actively in dialogue with the New South Wales Government right now.
What flows on the next slide is really just an analytical representation of some of the comments I’ve just made there. Firstly on the left-hand side chart, you will see the short run marginal cost of Eraring compared to what is recovered through customer tariffs, the default market offer or the cap – the default market offer. So that’s what’s most recently resulted in the negative margins. And when tariffs reset on the first of July, we expect this to move to a positive contribution, and for that to strengthen over time.
The middle chart shows the trend of electricity forward prices in the swaps, and the average of which feeds into those customer tariffs. And so that’s the relevance of including that, and you can see the rising forward price from, it started in April, but more likely in May that will feed in from May through to December, that will flow through to those tariffs. It also highlights the drop that’s more recently occurred as a result of the caps coming in. And the chart on the right really highlights the improved delivery of coal, and also the coal stockpile increase over the period.
Just turning to gas, the left-hand and the overarching message is, there’s a strong gas outlook. Based on the fact that we’ve largely locked in the cost of suppliers we go in over the next couple of years, and tariffs are repricing to reflect those costs that have been locked in. And when you look at the left-hand side chart, it really does highlight the sales volumes to business customers we’ve grown share in that market as we’ve won them over the course of the period.
Origin is almost entirely contracted to business customers for the FY ‘23 prior to the introduction of the AUD 12 gigajoule cap and so therefore, it’s not having a material impact in this financial year. And you can see therefore that on the middle chart just how our contracted volumes have evolved since 30, June through to the end of December.
We continue to offer contracts to our business customers, either fixed price or spot base, we did that through the period. A fraction of our CFI – as C&I gas volume is on default pricing as it traditionally has been, we’ve ensured that customers during the recent renewal window have been offered alternatives to this. It’s only those that have not responded to that that might be sitting on default. But otherwise, we have worked very hard to bring everyone on to either fixed price contracts or those that follow the underlying spot market.
Our supply is made up on the right-hand side as is made up a mix of fixed price review and JKM and oil-linked contracts. The JKM exposure is fully hedged through to FY ‘23 and FY ‘24 and substantially a very largely hedged in FY ‘25, as well, so we’ve got into that period. And as many of you will know, we’ve got a price review on which supply contract that occurs on the first of July ‘23, so it plays out for the 24 year and that process is underway at the moment.
I’ll now turn to retail, and you can see the retail market environment that really, firstly, as it relates to churn, you can see that spike that occurred around the times of those wholesale market events and also the communication of the tariffs at the time led to a lot of people seeking new offers. What’s happened then is that the market has remained elevated over a period of time about six months. And in the case of Origin, except for that really that one event around the July period is largely churn remained flat for the balance of the six months and overall our churn in the market is about 13.2%.
What you can see on the next slide – on the next chart is really the – we talk about the value management that we’ve undertaken through personalization and segmentation that has delivered a good benefit in this first half, you should think about that as a combination of lower discounts that are emerging, plus also our ability to continue to use data and analytics to then segment and focus on the customer value and the propositions we make to them, and also moving customers of non-profitable products through the period.
You can see that that discount is really a reflection of those market conditions as well as the wholesale prices are high. It’s no surprise that across the market, retailers therefore reduced those discounts. And just to highlight the extent of those market events that you see, we’ve had seven retailer of last resort have and since May this year. That’s obviously – that seems to have calmed down more recently, but that’s occurred.
And then so in addition to continuing to create value, we’ve also had customer accounts grow as our multi product strategy continues to be executed. And we continue to evolve our offerings and the products and we continue to grow that and pleasing to see the 4.7 star rating on TrustPilot.
In terms of those growth businesses early, you can see then on Slide 27, the growth in Community Energy Services, we will get a full year earnings contribution from WINconnect this year and combined with the underlying organic growth, you can see that businesses continue to grow. We’re number one in the market, and can see good profile for contracts that are going to evolve over time that flow through the results.
In the case of Broadband, we continue to grow our customers up to 74,000 and pleasingly received the Canstar Blue award, that growth really, we really are seeing the product resonate in the market, I think the key thing for us has really been balancing how much of our focus goes on to that product while we’ve been moving through the implementation of all of the Retail X program. So it’s really around, settling their business down and we feel very positive towards what we can achieve over time.
As I said earlier, very pleased to see the growth in the megawatts that are in our virtual power plant. And we’ve added I think, just under about 190 megawatts and 90 or so of those megawatts have come through our Origin Zero business. So, we can see that across both consumer and business segments.
Retail X, I did talk about just on Slide 28 talked about we’re now 96% customers’ accounts on that 3.4 million, we’re in the toughest time of these projects, we’ve got the last cohorts coming in now, we’re stabilizing operations, we’ve been pleased with the way the program has been undertaken, you can see that through the customer happiness index and employee happiness index that we are gaining confidence in the operating model.
But we’re in that time where we’re stabilizing settling down, and as you can imagine trying to wind down the balance of the business and achieve that well as we land the plane of the new Retail X being built. We remain on track for our targeted savings in FY ‘24 against the 2018 baseline at AUD 200 million to AUD 250 million cash cost savings. We will see some higher cost to serve this year, but that will be then followed quickly by the savings that we set out in the FY ‘24.
In terms of Octopus, Lawrie did talk about this earlier, but just highlights what’s happened in the UK market as it entered into this period. They’ve got the same circumstance that as high wholesale costs are incurred, they’ve got a lag where they recover it in the UK, though that’s now moved to a quarterly basis. But really what that yellow line highlights is just where wholesale costs did go in the commencement of the last quarter. And that’s now being recovered through the tariffs in the January to – in the January tariffs in the market.
So we are seeing strong recovery in the Octopus earnings even in January. And the other key aspect that we continue – they continue to manage is that, was very unseasonally warm in October, which meant that they sold some length of their position back into a lower spot price market. But we’ve got the Bulb acquisition coming in in the second half, we’ve got the recoveries where those tariffs and, and it all looks like that recovery is well and truly on track based on January.
It continues to be a very impressive growth story for Octopus and now following Bulb, you can see that the second largest energy retail retailer by customer accounts, they continue to lead the market on both customer experience and cost to serve, and a well placed to be able to grow their margin as used – as the UK really the customer growth strategy is now completed. So they’ve now got themselves in a market position where they can be really running their business to cash.
The growing license business 25 million customers now contracted on to the Kraken platform, a very strong growth pipeline. It’s now expanding into utilities such as water and broadband, and clearly the migration you can see where that is relative to the contracted customer base. And they have in their version of the VPP now got 4.6 gigawatts of assets contracted, and they are largely with third-parties, they’ve got 1.2 gigawatts online and you should think about Intelligent Octopus as the equivalent activity that we’re doing with our Origin Loop in that it’s really on our own customer base. And in their case, they’re a much bigger market for electric vehicles.
And as a result, it’s nearly all through that asset category that they’ve got their 140 megawatts, ours is spread across really a variety of devices that are in the home or in businesses where there’s a large energy loads. So, they’re seeing some very big increases occur in that business as well. And then now, they’ve established themselves as one of the largest specialist EV leasing businesses in the UK.
Just turning into Integrated Gas. The story really is that those record high commodity prices have really led to record high revenue. You can see there that in the half, we delivered three spot cargoes, but overwhelmingly, the revenue is being driven by the higher oil prices on our export contracts, and we are able to achieve very high production as a result of the downstream nameplate capacity on the LNG. Although, as you know, when it comes to the production, we’ll talk about some of the weather impacts that are recovering underway.
I think it’s important to note that on the next slide that – APLNG is a major supplier has always been to the East Coast domestic market since the project sanctioned over 1,400 petajoules have been sold to the domestic market. They’ve been at supply for average prices that are well below those paid by international customers. And you can see even in the last 12 months, we’ve paid AUD 800 million in royalties to the Queensland Government. And so, it continues to play a key role, has always played a key role in the domestic market.
The production, which was you know quarterly won’t be a surprise, is the guidance is down because productions and in the half year it’s down 5% against the equivalent half. There’s been an unplanned, not a - non-operated outage that we obviously received volume from. But probably the key driver has been the cumulative impact of weather that occurred really in the early months. And that therefore has led to the lag in in really sort of upswing in volumes as we’ve got restricted access and a whole range of activity was stalled over that period of time.
We also have planned on the cyclical maintenance on our gas processing facilities that goes to, it does have some impact on production and costs. And when you look at our costs, it’s really the cyclical activity and now the increased workover activity as we prioritize those that are flowing through and we’ve also experienced higher power costs in the business as well.
In terms of our production recovery underway, we just wanted to really show to you the impact of waiting on weather, which is really that percentage of time or workover rig is stood down for wet weather on average. And so you can see that that impact is over the last couple of years really associated with La Nina has actually had quite an impact on us. We are seeing that improve.
We’ve had dry weather recently that’s reduced in December – November, December. And the recovery has also been driven by the number of online wells, the workout activity really ramped up over the last several months. And we’ve also got new infrastructure coming online in terms of the Talinga Condabri North Pipeline, and soon to have the Orana South Loop Pipeline in the second half that all adds to our operational flexibility and ability to deliver volumes.
What we provided on Slide 36, is just a little more detail about where some of that focus is on operational improvements. And in terms of that production optimization really shows just how we target lower well pressures that then flows through to our gas rates and improving those and other things like optimizing pump speeds.
I think the point there is that, there’s a continuous program of activity that goes to the improvement of production and that’s something that we’re very much focused on. And we’ve also highlighted alongside that the mean time to failure and what we really have, I think just demonstrated through that chart is the successful strategy in relation to swell packers that have improved well reliability.
And as they move through more of our stock of wells over time, you’ll see an improvement in that alongside other initiatives. And that network infrastructure on the right-hand side is really just a little more detail on what I just described about some of the initiatives that are underway right now.
I did touch on the beginning in Slide 37 just on the strategic view of the non-APLNG assets, we’ve completed the sale of Beetaloo. We’ve executed the agreement in relation to Canning, which is expected to complete in the second half. And you can see in relation to the Cooper-Eromanga five permits will be transferred back to Bridgeport and we remain – and the remaining 12 permits remain under review and will advance that over the coming period.
So then just looking at outlook, really we provided updated guidance a couple of weeks ago in January. What has happened since then is the operating and trading performance in energy markets, including Octopus has continued to improve. And therefore, the energy markets underlying earnings is now expected to be towards the higher end of that upgraded guidance range that we provided and therefore, continues to reinforce the earnings recovery in that business and all of the initiatives are underway.
Otherwise, the guidance is the same as it was there. I think the only thing that we’ve added a comment here which supports some of them are comments Lawrie has made earlier, but the cash flow in the second half as you would expect is – expected to improve and it will be on the back of those higher earnings.
There’ll be one thing that offsets against that, which is the LGC shortfall, which is really the renewable certificate shortfall charge, which has been a successful strategy, but clearly has a cash flow impact that gets recovered over time. And there’s no material impact expected in relation to the AUD 12 gigajoule cap, and we continue to work through the coal. So none of this guidance includes anything associated with the legislative coal price cap that is being completed.
We do anticipate that that earnings growth continues into the next year, not the least of which is that you’ll have customer tariffs rising on those to recover those higher costs, Octopus Energy growth, and also you’ll have those cost savings coming through retail, and we’d expect to continue to see the benefits of a variety of drivers flowing through to ‘24.
The guidance for Integrated Gas is just the same as what we provided two weeks ago in relation to the production of 660 to 680 petajoules. And really, as a result of that, it’s associated with those volumes, the CapEx and OpEx range is the same, it flows through it or higher unit rate really on the back of the production. That’s the key difference there.
And why – what we’ve done in terms of LNG trading guidance, as you can see, we’ve seen the benefits, and we did communicate those to you a couple of weeks ago as well. So very pleased with the performance of that portfolio.
So on that note, we will – we’ve concluded the presentation and very happy to then open up to questions. And the team here and me, are ready for any questions you may have. So thanks very much for listening.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Mark Samter from MST. Please go ahead.
Mark Samter
Yeah. Good morning, guys. A couple of questions, if I can. First I’m going to try and ask a question on the bid and I’m not sure what question you’re going to be able to answer. But I’ll give it a crack anyway. And obviously don’t ask me to refer to any specific press that might be around. But should we assume that negotiations are still solely around a bid for the entirety of a company? Or is there scenarios where you could see parts of the business being sold, for example, just energy markets being sold are we purely for business conversations?
Frank Calabria
Mark, just for discussions, they’re constructive, they’re active and they’re ongoing, and they’re focused on the consortium proposal before us.
Mark Samter
And just – just triple checking small technical points there. The original bid was deducted by dividends, wasn’t it? So, as of when you go next step, you dropped [AUD 1.835] [ph] or whatever –
Frank Calabria
That’s right. Yes, so that’s right. It was an effective date and as a result, dividends would come off over time. Yeah.
Mark Samter
Yeah. And I’m going to guess you’re probably not willing to give us a date where you guys think for that and so that I’m just conscious that, obviously, people in the data room bid for your largest competitor. Last year, this probably only a certain amount of time you want them floating around in office indefinitely. But at this stage, it is just ongoing and you hope that conclude soon. There’s no drop a date from your guys’ perspective?
Frank Calabria
Look, the conversations continue to be constructive and ongoing. You imagine these are – this is large transactions, there’s the [inaudible] is substantially complete. And so from our perspective, that’s where the transaction stands today. And that’s the basis upon which we’re engaging with the consortium. So, it just continues at this point in time and we’ll see where that lands.
Mark Samter
Thanks. Just a quick question for Greg, if I could. Obviously, the other side of Origin is one of the largest sellers to the domestic gas market, but you guys are pretty sure I’m not insane. But the largest buyer of gas on the East Coast market you’re obviously covered for your minimum contracted volumes, but you would like to sell more into it. Greg, do you think it’s viable for the industry to strike long-term supply deals from 2024 and beyond at the moment or do you think it’s just paralysis by intervention at this stage?
Greg Jarvis
Sorry, Mark. Yeah thanks, Mark. Look, it’s pretty difficult to get any long-term gas contracts. At this point in time, I think from an Origin perspective, like you said, we have locked up our gas contracts. What we’re particularly focused on right now is Beach – Beach’s success. We are very interested in seeing policy and getting connected to the market which will give us ultimately additional gas supply. And if we get that gas supply, Mark that’s, you know that’s really good for our customers, right so we can offer that out to the market.
Mark Samter
And then two things. Toward the intervention from [inaudible] perspective have any impact on the price review? Or is it too late to have an impact?
Greg Jarvis
Look, Mark you know, again, I’ve got to be careful about talking about you know price review. That what I can say is that the conversation thus far is very constructive and mature. So I’ll just say that at this point that it’s going well.
Mark Samter
Perfect. Thank you, guys.
Operator
Thank you. The next question is from Tom Allen from UBS. Please go ahead.
Tom Allen
Good morning, Frank, Lawrie and the team. Hoping you can quantify please an indicative range of uncertainty and energy market EBITDA that you’re assuming for planning purposes, at least over the next couple of years based on uncertainty arising from current government energy policy? And perhaps also comments on the medium to longer-term return on capital employed that you think energy markets can reliably sustain?
Frank Calabria
Yeah. That there – so just in relation to just so I’ve got it. So the longer-term I get it, which is sort of the steady state, what do you think the run rates for the business should be. And the first one was just the impact of recently announced measures on caps? Is that the point that you’re – is that the point on the first one on the just so –
Tom Allen
That’s correct, Frank. But then also for planning purposes that the impact you’re assuming that that might come from that broader policy package as well. So that doesn’t matter if your code of conduct as well?
Frank Calabria
Yeah, sure. So as it relates, and I think you’re asking that in energy markets, as it relates to the moment, the coal price that comes – the coal cap, if implemented, would clearly be beneficial relative to the underlying cost of coal for Origin. But that would then also flow through overtime to the whole – to the wholesale electricity market. So I certainly don’t see downside associated with the coal, there may be some timing aspects associated with the coal cost coming in and how that flows through to tariffs. That should be – that could be beneficial, but we’re just working through that right now.
And you know as it relates to the gas price cap, firstly, when you think about the energy markets business, the AUD 12 cap has not had a material impact. But it will now determine it’d be now beyond the capital or be associated with the reasonable pricing and the ability to access that gas, as the previous question just went through. So for planning purposes, we’re really focused, I think, in the energy markets business about how the coal cap and ultimate flow through occurs in the business.
They do link though, to this sort of underlying premise of what’s the energy markets’ earnings over time. So you should now at least see graphically, that you’ve got a steady contribution that’s occurring through the retail business, the wholesale gas business is reasonably steady return because of the long dated contracts that are in place, and therefore that would be determined by the wholesale gas price, ultimately, but that would be the key driver there.
In the electricity earnings business, which is the thing you’re really focused on. And you could see that we’ve had a complete compression in the dollars per megawatt hour there. But when you actually look back into the longer-term, we do expect that to get back towards that sort of AUD 20 to AUD 30 range.
But even if you looked at the lower end of that range on a steady state basis, the composition of that will be quite different. And you’re probably observing that really a lot more will – a lot of that or at least half of that’s going to emerge just from the peaking fleet based on our view of long – a reasonably conservative view on long run cap prices. And then you’ll have some benefit associated with renewables, VPP and the ability to manage the shape in the market.
We don’t anticipate when we say this, that we’re making large margin out of Eraring, because it would be passing through a cost of coal through to a wholesale price. And so, we do see that the earnings recovery does get back and I mean people, you know, we do see that you could put that in and you would therefore see that we’d be back at a returning capital that would be above double-digits based on those contributions.
I should say that we make those statements before large capital investment for renewables or storage. And before probably thinking about the potential, full potential of those growth businesses when we make that statement. So really looking at the underlying retail, wholesale gas, wholesale electricity and the businesses we have today.
Tom Allen
Thanks, Frank. That’s clear. Just staying with policy for a moment. As APLNG’s drilling program changed at all due to the uncertainty arising from the proposed mandatory code of conduct, and particularly, that reasonable price provision legislation?
Frank Calabria
Look, I’ll pass that to Andrew just based on what’s going on right now, because I think activity is more driven by wet weather than any policy at this point in time so.
Andrew Thornton
Yeah, that’s right. So, Andrew here. So short-term now, we’ve got a clear work program and budget for the remainder of the fiscal year. It has been about trying to catch up on, in particular the workovers that we haven’t been able to do over the last several months through to wet weather. I think that you know there’s a longer-term question which, as is usual with the joint venture gets made sort of towards the middle of the year about what the ongoing investment program will be and we’re not out to that stage yet.
Tom Allen
Sure. Thanks, Andrew. And can you just confirm I’m interpreting correctly, but with APLNG’s to take unit costs in the range of 3.70 to 4.10 gigajoule. If the current draft legislation were written into law unchanged, and recognizing it is only a draft legislation, wouldn’t that provide little ability for APLNG to offer gas to the domestic market at a price over, say, AUD 6 so the unit cost of production plus a reasonable rate of return?
Andrew Thornton
Well, first thing I’ll say is, I think there’s still quite a bit of uncertainty as to how that would play out. But I don’t think that’s our understanding that it’s a reasonable price per supplier, I think it’s a reasonable price for the market. And so, I don’t think it’s about what APLNG is reasonable or marginal cost of production is, I think it’s what’s the next supply source to sell for the market and that’s our cost of supply.
Tom Allen
That’s helpful. Thanks, Andrew. And then just finally one to Frank or Greg. There was a big drop in electricity customers in New South Wales over the half. Can you just provide some color on what happened there? And then perhaps just talk to the proportion of your business customers that are on this pool pass-through basis?
Frank Calabria
I’ll just pass you over to Jon to talk about how that’s played out over the half in terms of customer value.
Jon Briskin
Yeah, no worries. Tom, it’s primarily the loss of a way we consider a very low value, large tender with quite a number of sites in New South Wales. So that is primarily the impact there.
Frank Calabria
Strategy more broadly, you’ll see from us, over the last period of time has been really to manage in a time where there’s been compressed electricity margin, and particularly the front end of it, we’ve been really managing the share, and value and that would have reflected in our retail unit margins over the full period as well.
Tom Allen
Okay, thanks very much.
Frank Calabria
Yeah, sorry, James.
James Magill
And then to the question on the frontage of C&I gas volume on default, I’d say, very low, single-digits and meaningful changes over time.
Frank Calabria
And it’s actually –
Tom Allen
Okay –
Frank Calabria
Just sort of way clear on that. That has always existed. It’s not a feature of the recent events. So it’s actually customers that have always either are transferring in or out or for whatever reason, don’t respond to that outbound. So it’s not, let’s be very clear, it’s not as a result of the introduction of the cap. In fact, we’ve worked extra hard to try and contact them because we think it’s in their best interest.
Tom Allen
Okay, thanks, folks.
Frank Calabria
Thanks, Tom.
Operator
Thank you. The next question is from Ian Myles from Macquarie. Please go ahead.
Ian Myles
Hi, guys. Just to hop back on coal. Can you just maybe give a bit more color on your inventory? Are you going to lose money on your inventory as a result of the prices dropping now, given the AUD 125 coal cap that your coal can trade at now AUD 200 a ton?
Greg Jarvis
Yeah. Ian, thanks. Look, no, we are under no obligation to bid that coal with, you know, we can bid that coal smart on price. And that’s what we’re continuing to do. Clearly, with new coal supplies that are coming in today that you know, is subject to the funding agreement that you know, we’re still netting to see final versions of that. But, you know, the cost I’ll call which is what you’re implying is you know, we’re under you know, we can bid that into the pool as we wish, right. So that’s it.
Ian Myles
Yeah, I guess I’m alluding to the price has already responded, haven’t they? So that if you’re bidding in now, you’re not going to probably make much money out of it.
Greg Jarvis
Yeah so –
Ian Myles
You actually lose money.
Greg Jarvis
Well not really, because, you know, we’re still seeing volatility and shaping the pool and we will bid our power station and you know turn it down the middle of the day where we’re seeing very, very low prices and when certainly not seeing any return on probably any coal in the marketplace because of the of the renewable solar shade but in the [P&Ps] [ph], we are bidding that power station accordingly and getting returns on that coal. So it’s a bit dynamic. It’s half hourly or it’s actually five minutes now that you know it’s still I think the most important thing for our portfolio is to have a stockpile of coal, which is going to be very important for this winter coming as well.
Ian Myles
Okay. And then how – just to be contentious, but how much notice would you need from government organizations to defer an Eraring closure?
Greg Jarvis
Yeah sorry?
Frank Calabria
Time so, if it was to be deferred?
Ian Myles
Well, we don’t have snow coming in anytime.
Greg Jarvis
Yeah, and really good question, sorry I understand your question now. But look, it’s you know we are making decisions now on maintenance today, it’s imminent. So, you know, we have to make those decisions and these outages take time. And we’ve got a, you know, I think we’ve got months to work at our next major outage, and just how much money we spend on that outage.
Frank Calabria
I think in advance of [25] [ph], you’re asking, you’d certainly, I think you’d want to know, you’d certainly want to know, you know, 18 months, two years in advance yeah something like that. We certainly we can respond earlier than that. But you know, it would be better that everyone understood that in an orderly sense.
Ian Myles
Yeah, okay. That’s pretty important. And just on that chart, which you gave on Page 9, I just want to make sure I’m reading it correctly. Are you suggesting that in FY ‘24 the wholesale electricity business is actually a breakeven exercise? That and your loss on Orion will be offset by the gains on your caps?
Frank Calabria
You will – you’ll be making margin there. But it’ll be still not fully – it would be a small margin in that period –
Ian Myles
Well just sort of doesn’t have anything there. So that’s why that gray box. It’s zero.
Lawrie Tremaine
It’s – hi, and it’s Lawrie.
Ian Myles
Yes, hi Lawrie.
Lawrie Tremaine
Good day. Look, you have to think about that chart as being sort of a cartoon, it’s deliberately not trying to be accurate. And so you know, whether that gray line intersects in the corner is sort of irrelevant. You know, we’re using that sort of trending technology. So you know, so that you – you’re not encouraged to look at any – trying to look at any particular number.
Frank Calabria
Given though the facts, we will make a contribution in energy in that electricity business next year. And we understand that in the efforts of trying to actually explain that simply, you know looking at that intersecting. It’s going to be – there will be a contribution next year.
Ian Myles
Okay I’m not trying to – I’ve just a stroke.
Frank Calabria
It’s a good question actually.
Ian Myles
The other thing is AGL got a bit of a response from the ACCC for making lots of money out of gas. And you guys have made even more money out of gas? I’m just sort of wondering how you’re dealing with the ACCC going, Are you going to get this like electricity regulatory response?
Frank Calabria
Well, we’ve got the unit gas margin that we’ve made this year is was, I think, less than AGL I expect – I understand that we’ve got a greater volume of gas we sell in the market. But if you look at the long-term history of what we make as a unit margin, this sits in that range of AUD 3 to AUD 4 or something like that.
There’s no doubt that the rising price of gas in the last 12 months has contributed to the rising benefit for that business. And we believe that as gas prices globally, domestically come down, that we will find, that we’ll be back into that and holding that sort of sustained margin that we have over many years.
As to government’s reaction to that, I can’t predict I understand and we all understand that the intent behind supporting customers. We also I think, all understand the complexity of the types of interventions having the desired outcomes. I think what we need is, we need supply for new gas coming in and we need a market that functions and is available.
And to the early comment, we need gas supply being made available to retailers and customers going forward. So they’re probably the key things. In our business you can see that intervention and regulatory plays a role. So, we always need to be mindful of that. And as a result of that, we worked very hard to support our customers to make sure no one was on default this year and get them on to contracts.
Ian Myles
Okay. Okay, I got one final question on APLNG. The pipeline investment you’re making, does that enable you to lift the production rates to a structurally higher level on a go-forward basis? Appreciate you may not have made an actual commitment to it, but have you created the potential will be able to do this now?
Frank Calabria
Just we’ll talk about how the fields work, Andrew, if that’s okay.
Andrew Thornton
Yeah. So I think that there’s a chart in the slides there that shows some of the pipeline and infrastructure investments we’ve made. The point of those investments is to connect gas supply to processing LNG to where we’ve got existing capacity to process additional gas, we don’t, when we started and took FID on the project, we tried to guess where we should put the GPFs.
And we got it mostly right. But in some places, there’s more gas, and we’ve got processing capacity. And so, what that serves to do those investments is at a relatively low cost of supply, accelerate that gas and put it into the existing capacity. So it’s a really economically effective way to get some additional production in places as well, in particular, I think we mentioned TCNP and the Orana South Loop Line that was also seeks to reduce pressure in the gathering system, which reduces pressure back on the oil, and so you will see an uplift in production to accelerate our resource into our wedge.
Ian Myles
Thank you.
Operator
Thank you. The next question is from Peter Wilson from Credit Suisse. Please go ahead.
Peter Wilson
Thanks so much. Just to follow that up so APLNG production we could see it move above for just like a 700 PJ range in the last few years? Or is that not the intention?
Frank Calabria
I think the key thing there is that, there’ll be decisions made by the joint venture each year about what it’s investing. I think to point around the infrastructure comment that was made – the question earlier was around that does enable in a field more production to come about or to be accelerated. But we do every year and remember, only 27.5% were a joint venture that will need to then decide what capital will be invested into that program over the next year. So that’s probably the key drivers about it making the best decisions economically for the market more broadly.
Peter Wilson
Got it, okay. And then a question on the coal cap compensation. So you’ve again declined to include any benefits that in the guidance due to uncertainty. Can you articulate what exactly is the uncertainty that you see in relation to the compensation piece more so than the potential for new coal contracting, and potentially give us – gives a range of outcomes that you expect there?
Frank Calabria
The real reason we – we’ve not done anything yet is that, simply the funding agreement hasn’t yet been completed. I think yesterday, there was even further directions orders. And that wasn’t done until yesterday and nor has the bidding agreements been completed. And so, it’s really, Peter, as a result of all of those being concluded that then you’d have the confidence on the understanding that that has all been locked down.
And once we understand that, and also the way minimum and maximum stockpiles and the way we bid and making sure we’ve got the protection for that through, it’s really been that’s the reason why we’ve not. And it’s a little different the market, because it’s actually associated with, let’s be clear, legislation and regulation and mechanisms. You want to see those finalized before you conclude. Greg, did you have anything else on it?
Greg Jarvis
I probably haven’t, Frank. And yeah, all I can say, Peter, is that, it’s real today, it’s probably what my team is mostly focused on. And that’s not just our team, the government and other industry participants there.
Frank Calabria
And I think the last point is that we’re also out. And I understand that there’s two components to it. There’s the compensation arrangements, and then the secondly would be the suppliers on the ladder. There’s actually still processes in place today, where we go out and nominate volumes. We’re waiting on responses. And so this is all just coming to a head, it’s really just wanting to have the confidence that we know it’s all as we understand it to be, and then we’ll actually update the market accordingly.
Peter Wilson
Okay. And Greg, should we assume that you’re thinking about it, I guess the consequences for spot price with some of the obligations that come with that coal cap? Would we be rather assume that’s your net short in New South Wales as you usually are or have you actually bought more hedges given that the coal supply issues that you’ve got?
Greg Jarvis
Yeah, look, it really depends on how much coal we buy. So we can square that position up. So you know, we, yes, so we can square the position up or dependent on coal and that supply is very important for us to have a coal stockpile, because you know as we saw last, the last half, we saw volatility in, you know, in July and August. And that’s where you really want to have the coal to maneuver.
Peter Wilson
Okay, good. And one last one for Lawrie, just the LGC surrender strategy, you still asserting that there’s value created there.
Greg Jarvis
Absolutely, yeah. Sorry –
Peter Wilson
Can you walk us through that, because yeah, the regional strategy was based on backwardation of the curve and an expected cost of less than AUD 20 a certificate and it’s gone against you. I mean, the spot price is above AUD 60 now. So how is that still creating value?
Lawrie Tremaine
Yeah, we, so you’re right in terms of the concept. We’ve already eliminated the risk, I say substantially, almost entirely eliminated the risk by buying forwards at prices that are much lower than what the spot price was in the year in which we would have to buy those certificates and surrendered them. And so we can very reliably calculate that the economic benefit is around about AUD 200 million across the three years.
Peter Wilson
Okay, understood.
Lawrie Tremaine
So it’s not a risk any longer. It’s all closed.
Peter Wilson
Got it, thank you.
Operator
Thank you. The next question is from Rob Koh from Morgan Stanley. Please go ahead.
Rob Koh
Good morning. Thank you. Can I maybe ask a question about the Octopus? Because you’ve mentioned there was an incident in the prior quarter, where they were quite long energy. Could you maybe give us a sense of what the gross margin for Octopus would have been excluding that event?
Jon Briskin
Hi. It’s Jon here. I think maybe the way to think about it is, in terms of the way the price cap works, the SBT is about 50 pound per customer and net margin on a cost to serve allowance, that Octopus have a kind of considered quite a considerable advantage on.
So to sort of bring it up a level at a steady state, you would expect all other things being equal, that you would be able to flow that advantage through to now you know, including all the 5 million customer base that they’ve got. So you can sort of see the potential in that market now that they’ve grown and got share. So hopefully that gives you an answer in terms of what a steadier state could potentially look like in that market.
Rob Koh
Yeah, thank you, Mr. Briskin, that’s helpful. Could you maybe, while we’re talking about Octopus, maybe just give us an update on how the balance sheet of that company is looking and liquidity? And I guess, if Origin might need to continue its investment there? Or should we think that it’s self-funding?
Jon Briskin
So in terms of the liquidity position is fine at the moment, there’s no, certainly no issues over this winter period. There’s also some, you know, a range of mechanisms now and interventions in place with government that supports some of the regions where supports retailers in the market, including one of those things Lawrie mentioned, which is the more regular repricing of the SBT that the capital requirements across the business will be looked at obviously, from time to time around whether next stages and businesses of growth are. And so it’s kind of hard to speculate at this stage you know, where that – what that may mean, but there’s you know certainly nothing on the agenda right now around, you know, significant capital requirements into that business.
Rob Koh
Okay, cool. Thank you. And then wanted to ask a question about Slide 9 with the Indicative targeted earnings trajectory. Should we be interpreting the relativity of those colors for example, wholesale gas margin there to be, looks like it’s bigger than electricity and green in the 25, 26 period? Is that or am I overthinking it as I always do?
Tony Lucas
Hey, Rob it’s Tony Lucas here. Yeah, the way that you should think really about it is, we’ve got you know wholesale electricity position, which includes Eraring today and that’s now that to the comments from the team on the profitability of that. And as we move through time, most of those earnings will come from the value from the peakers. Then you’ll see investment in storage and renewables in that green, which will effectively show up in wholesale electricity margin through time. And, you know, we expect gas margins as Frank indicated, to stay in that sort of stable range. It’s how we should think about that chart.
Frank Calabria
The relativities are reflective, Rob.
Rob Koh
Okay. Okay, that’s very helpful. Thank you. And I guess, Mr. Lucas well we’ve got you. I noticed you’ve seriously grown that VPP year-on-year up to almost 450 meg. Could you give us a sense of the firmness and the duration of capacity that you’re building there?
Tony Lucas
Yeah. So what we’ve added is a series of you know lots of connected devices, both in Origin Zero business and in residential customers’ homes. Each of those have different operating parameters, I guess some of them is moving load into periods of excess renewable supply, which means we can get a lower cost of energy, whilst others are more storage and nature. So, what we kind of do is, is we think about that as a portfolio. And we probably if we were converting it to a firm cap, you know, sort of percentage, Rob we’ll probably say it’s in the 30% to 40% firm.
Rob Koh
Okay, yeah. Great. That’s very helpful. I appreciate that one. And maybe can I direct my last question to Mr. Thornton, just about the package of forms that’s coming through. And I appreciate that that’s still a moving part. There is also a draft regulation for the ADGSM that’s come through. And it’s got allowances there for trading in allowed volumes and things like that. So just wondering, is that an opportunity for APLNG given its position?
Andrew Thornton
Yeah, good question, Rob. Look I think we’re still digesting what it all means. I’d say this, that certainly APLNG’s position as being a strong net contributor to the domestic market puts us in a good position to manage whatever comes our way. We – that ultimately and going back to something that Frank said before, ultimately, the joint venture can sustainably produce, and I think we’ve proven we can 700 petajoules for quite a while.
What the shareholders of APLNG choose to do and choose to support in this environment is still to be determined. But certainly you know we would expect you know over the short-term to have similar levels of uncontracted gas that we have had in the past, and that gives us flexibility to you know support the domestic market or other producers should they find themselves short in the case of an ADGSM is called.
Rob Koh
Yeah, yeah. Okay, sounds good. Thank you very much, everyone. That’s it for me.
Operator
Thank you. The next question is from Dale Koenders from Barrenjoey. Please go ahead.
Dale Koenders
Good morning, guys. I just wonder if you could confirm really the AUD 194 million margin impact that you’ve called out, which really looks like here only passing through sort of two-thirds costs into tariffs? Can you confirm this is really just Eraring short run marginal cost as you’ve highlighted or is this a DMO impact?
Frank Calabria
I think that that’s a combination that it is – it will be largely driven by the cost of coal and gas, particularly in that first quarter that was following the events where the market was tight, and plants were still coming back. And because we weren’t getting the production from our original coal dial, we were having to go in and buy more fuel. And then, in the absence of that, secure more swap contracts. So it really all centers around those events.
The tariffs that was determined for the first of July, was only set up to the middle of May. So the events of cost that you saw from the middle of May through to June weren’t reflective in the tariffs. And so you had a combination of that very high set of prices of wholesale electricity costs and prices over May, June not really getting recovered in the first of July and that’s why we get that recovery coming through the next tariffs. So the underpinning real reason is that, there is higher cost, and you don’t get the ability to pass much of it through. But that would be the way I would characterize it. I hope that answers your question.
Dale Koenders
Can you –
Frank Calabria
Hi, Dale, I can just add on a little bit more so I think about AUD 341 million of additional or higher coal and gas costs. Think of it is being mostly coal. And then also I don’t think I’m paying more for unit pool costs as well, which is another additional higher cost.
Dale Koenders
Can you give us here how much of that was really first quarter one-off?
Frank Calabria
Let me describe the fact that we’re now seeing a strong recovery in the second half, and you’re all now working out first half, second half, a lot of it is associated with those events in that period of time, and therefore, are largely one-off.
Dale Koenders
Okay. Just maybe some comments on your expectations for DMO this year. I understand it’s getting set in May again, and the risk of the same issues repeating?
Frank Calabria
Sorry, say that again, sorry, Dale.
Dale Koenders
Just your expectation for the DMO which I understand is getting set in May yet again, and I guess the risk of the same issues repeating?
Frank Calabria
Look, I don’t think there was, yeah, well I think there’s two things, they actually extended the date through the middle of May, which was a good thing, because they could see the rising costs, so just didn’t fully capture it at that point in time. So I think they attempted to hold it out as long as they could to try and benefit from it. So I think the timing wasn’t the concern. I think that was a good thing.
I think what we’re really focused on now is, they’re doing a review of the methodology. And we would want that methodology to consistently therefore reflect the underlying risk and cost in the market. And that’s the process that’s underway. So we look forward to seeing a consistent methodology.
Dale Koenders
And just maybe just a comment if you can on your hedging or buying forward practices if they’ve changed, given this market intervention and DMOs, and really the risk of even like gas code of conduct like cutting electricity prices beyond just 2023?
Andrew Thornton
Yeah, yeah. I mean, look that’s a big question. But we are very conscious of the regulatory intervention and what that does to forward purchases. So we have to be conscious of it. The reality in gas, we’ve largely got a locked in position anyway. So we’re not doing much additional buying gas that I think the biggest thing we’re looking at now is coal.
I’ve just got to reiterate, coal stockpile was very, very important for this market. And the New South Wales Government is very conscious of that. We had that experience last winter, it’s really important to have coal acting as your battery. So that’s probably the biggest risk management focus right now.
Dale Koenders
Okay, thanks.
Operator
Thank you. The next question is from Daniel Butcher from CLSA. Please go ahead.
Daniel Butcher
Hi, everyone. Just want to clarify before that Slide 9, with the long-term Treasury earnings chart. Can you clarify that EBITDA or impact? And so that’s just I want to sort of dive into. I was just sort of curious about the framing the renewables pilot, for example, it looks like you’ve sort of eyeball the chart very, very roughly, it might be AUD 250 million or AUD 400 million by 2028 uplift, and as well what sort of capital investment that might require and what sort of IRRs you anticipate on that investment as you start?
Tony Lucas
Hi, it’s Tony here. Yeah, so in that chart on the renewables and storage, it’s a combination of things like the Eraring battery, which we’ve talked about replacing the you know Eraring volumes with renewable PPAs, and then potentially other storage options then they may include batteries and other ICGT sites or contracting with third-party, so simply the margin from a combination of all those things. So some of them are on balance sheet and some of them are off balance sheet.
Daniel Butcher
So is that EBITDA or impact that you mean you’re quoting there just sort of curious, what’s the –
Tony Lucas
That’s EBITDA.
Daniel Butcher
EBITDA, okay. And secondly just on the Oct –
Frank Calabria
Just on that point. So clearly, that’s consistent with the way we would deploy capital, you know, in these asset classes, and that’s the way we’ve thought about it. I don’t think it’s lost on anyone that one of the rationales for the bid that we’ve received is, people see that as an asset class that they can deploy a lot of capital, which would then give returns associated with the ownership of those assets. And so that would be a larger EBITDA of who was in that scenario.
Daniel Butcher
Sure, sure. Okay. Just dispelling a crystal, that same topic that Octopus EBITDA last half went to AUD 183 million, and obviously calling out will turn around a bit next half. But again, it looks like it’s getting sort of AUD 50 million to AUD 100 million in this chart. How do you sort of see the path to profitability there and growth into a profit given haven’t had a profit yet?
Frank Calabria
Yeah. Well, we’ve expressed confidence about what we’ve seen come back as a result of that timing of the tariff. And it has no contribution for Bulb yet. And so the path to profitability, we do see associated with UK retail business, emerging now that it’s actually put itself in that position. It’s no doubt managing the volume volatility and price volatility in the market. But as those gas prices calm down, you don’t get any much price differential as much as we’ve seen over the last quarter, which was very accentuated leading into the winter.
So, we’re seeing that that will be the path to profitability. And that goes back to Jon’s analysis earlier about what the available margin is, and what their costs to serve advantages. And they just need to make sure that they are managing which they are the risk associated with volumes that have been through weather and so forth that comes about with that. So, we see – we do see the path to profitability emerging pretty quickly.
Daniel Butcher
Okay, thanks.
Frank Calabria
And January was evidence of that. Yep.
Daniel Butcher
Okay. And just a follow-up, I suppose it’s just rather than on the retail growth side. I mean, broadband customers only grew 13,000 from six months ago. 74,000, how much of that retail growth contribution is from broadband versus CES versus VPP in a month?
Frank Calabria
So I think, so very little to-date on broadband about 74,000 customers are not making much contribution at all. We certainly so CES is a big driver of it now and VPP will be a driver over time, the VPP benefits will be associated with both retail, wholesale, so there are combined but for simplicity, we’ve included in that, as we add more megawatts as will be Origin Zero over time. And but at the moment, broadband is not making much contribution at all, as it goes through that growth. But we’re confident that we’ve got a proposition here that firstly, it’s reducing churn, that will make a contribution over the longer-term, especially as we’ve bedded down the implementation Retail X, and we’ve got the operating model, and therefore we can scale that faster organically.
Daniel Butcher
All right, thanks –
Lawrie Tremaine
Hi, Dan, just this is Lawrie again. There is more information on customer account movements in both the appendix to the presentation and also in the other file [inaudible].
Daniel Butcher
All right, thank you Lawrie, let me check on that. And just maybe one follow-up on con call that you mentioned you got to your target of 1 million tonnes. So congratulations on that. Previously you sort of given your target for contracting for FY ‘23, 5 to 6. We haven’t mentioned that. Are you at that target now in case anything about looking at the FY ‘24 how you’re progressing, there given only four and a half months away from FY ‘24 starting?
Lawrie Tremaine
Yeah, look we’re well progressed. So this financial year about 6 million tonnes is locked in being delivered today. And really the logistics issue that we were challenged by, you know we’ve overcome. So it’s looking really good. We’re well progressed on the next financial year. But what we are dealing with right now is the intervention or the dealing with governments and just how we get the coal in by the various suppliers. So again, you know, I feel confident about getting that coal in that, you know, clearly we have to deal with the government at this point in time.
Daniel Butcher
Okay. I can sneak one last one in. And as kind of alluded previously. Reasonable pricing of gas such as a long-term potential price cap that might come in. can you give us any color for your discussions with government, about how they’re viewing reasonable cost of supply, what they’ll be looking at to measure that given as a very wide range of potential marginal sources of supply and so forth?
Frank Calabria
Look, we know what they’ve articulated and now they’re in a process of consultation but what they said it would be associated with a reasonable price that delivers a return on a long run marginal cost of a next marginal development. But I think our view is that government are taking a broad view to make to assess that right now. But that’s the premise upon which they went into that.
But I can’t really shed any more light on that we’ve made our submissions. And I genuinely think that governments will be thinking, the government will be thinking, how do they set that that encourages the investment to flow. I think everyone was just aware that that’s what – that’s what’s needs to happen. Sorry, I don’t have any more color than that, Dan.
Daniel Butcher
Yeah. Okay, thanks very much for all the stuff.
Frank Calabria
Thank you. Thanks.
Operator
Thank you. Your next question is from Gordon Ramsay from RBC. Please go ahead.
Gordon Ramsay
Thank you very much. Frank, I’m interested in your comment about the Eraring battery being very well in advance. And you previously commented about costs going up within pricing was high or has been very high. Just interested to see if there’s any kind of change in the costs in that project and your viewpoint, and while they’re still looking at 460 megawatt phase one project?
Frank Calabria
Still looking at a 460 megawatt phase one project, you could probably track where lithium is in those key indicators. So the costs are, I think, probably similar to when we were the last commented if that makes sense. We did talk about escalator, they haven’t really moved since then. The business case for those, and in terms of the need in the market and the various revenue sources has probably in our view, firmed up to be stronger.
And as a result, that’s why we feel confident that we head into it right now and the market need for that. And that’s what’s supporting our investment decision. But we’re not seeing the costs come down, we’re just seeing the business case strengthened to the various sources. Greg, did you want add nothing?
Greg Jarvis
Nothing to add since we’re bedding down the final pieces that we since we last looked at it, we had no additional increasing costs. So the business case is looking good. And Frank’s got it right. We’re also looking at the revenue side assumptions as well.
Gordon Ramsay
Okay. And just on that, a fewer has to extend the life of Eraring this flexibility in the delivery time for those batteries then?
Frank Calabria
Yeah, so for the battery we’re looking for, you know, the completion of that project prior to 25 before Eraring comes out of the system. So that’s why we want to get on and get on with this project.
Gordon Ramsay
Okay. And Frank just one or more for you, just on the proposed changes to the ADGSM in terms of timing of notice and potential intervention in LNG supply contracts. Can you just comment on you know your view on that and how it could impact APLNG?
Frank Calabria
You know look, firstly, we think that ADGSM should be the last resort mechanism, we don’t think it should be, you know, used as a mechanism to manage the market on a quarterly basis. So I think that could get very complex. There are other mechanisms also in place that AEMO has now implementing, you know, for those tighter periods in the winter months, and we’ve been there more set up to manage that sort of peak requirement, if that makes sense.
So yeah, we wouldn’t want to see this as an ongoing quarterly notice period, preferably to think about it being used as a market management mechanism, and it should be used as that last resort. I don’t know Andrew, if you had any other comments associated with that practically or?
Andrew Thornton
Then one I would make is just helpful to see the clarity around the LNG producers being treated equitably in the sense of if one project is short, they have an obligation to go and seek that volume commercially from others who may not be.
Gordon Ramsay
Okay, thanks for that.
Frank Calabria
Thanks, Gordon.
Operator
Thank you. The next question is a follow-up from Rob Koh from Morgan Stanley. Please go ahead.
Rob Koh
Good morning. Thanks for indulging me in another one. I guess I wanted to ask a more of an ESG related question. You’ve talked about retail tariffs moving up to help you recover costs and that’s great. But that does also come at a customer hardship cost. And I guess the cost of living pressures economy-wide are also going up. So just maybe to get your thoughts on where you’re at with your customer hardship programs. I know they’ve always been a big focus for the company. But yeah, just any incremental thoughts on that, please?
Jon Briskin
Yeah, Rob it’s Jon here. I may answer that. And I think you’re right to pick up that point, it is really important that we are supporting customers as they’re facing a range of cost of living pressure issues. In terms of a hardship program, we have seen growth in customers on that program, we’ve been proud of the support that we do to that.
So we have invested over AUD 20 million into that hardship program. And you should know that we have made decisions in the past as prices rise, including the recent one across the July price increase and the cash increases just in January. Well we actually haven’t passed on any of that increase to customers in our hardship program. So, we are conscious that we need to support those that are most vulnerable.
The second aspect of that is also providing support on the broader customer base, whether that’s through our the collection practices, deferrals, energy efficiency advice, we’ve got a lot of work we’ve done on rewards like fuel offers and other sort of loyalty and rewards to help more broadly with cost of living pressure. So we are certainly conscious of and I think it’s a great point to call out.
Rob Koh
Yeah. Thank you, Mr. Briskin. I appreciate that. Maybe just continuing on to that into the longer-term, when you think about your customer book, do you think about providing incentives or support for customers to transition to more electrified features versus gas?
Jon Briskin
Yeah, we’re sort of considering a range of things. I mean, we’ve worked with the New South Wales Government on things like low income, solar housing programs. And you know, there’s certainly formation of certain discussion papers and policy positions on electrification in the homes in place like Victoria and some of the councils that you see. So we’re thinking those programs through, looking what we can do to support with solar battery and VPP. And you know and how do we sort of amortize potentially some of that capital costs through the transition.
Rob Koh
Okay, great. Thank you so much. Much obliged.
Operator
Thank you. There are no further questions at this time. I’ll now hand back to Frank for closing remarks.
Frank Calabria
Okay, thank you very much and thank you all for your questions and attention this morning. Clearly, as always a lot to digest in the energy markets and across the sector. We clearly see momentum in the business, both across both businesses clearly you’ll digest both first and second half and also looking forward. But we’re feeling very confident about the outlook for the business and feel well placed to capture value from the transition. So thanks very much for your time and attention this morning, everyone.
For further details see:
Origin Energy Limited (OGFGF) Q2 2023 Earnings Call Transcript