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Origin Energy recently announced the early closure of its Eraring Power Station. This will reduce Origin's carbon emissions, whilst allowing the company to focus on obtaining low or no emission sources to replace capacity.

As an operator of a coal-fired electricity generator, Origin Energy is one of Australia's largest carbon emitters. While the company has long positioned itself to transition to clean electricity generation, the absence of policy direction from successive Federal Governments has seen this transition evolve more slowly than expected. As State Governments have taken the lead on energy policy, the transition is now progressing apace.

Despite reducing its emissions by c16% over the FY20 and FY21, Origin remains a significant carbon emitter. Data from the Clean Energy Regulator's National Greenhouse and Energy Reporting indicates that Origin was the fourth largest carbon emitter in FY21 (on a combined scope one and two basis). Notably, the top three are other coal-fired generators.

Of the company's c17mt CO2-e of scope 1&2 emissions in FY21, 86% of these emissions come from the Eraring Power Station. On February 15th, Origin Energy announced that it had informed the Australian Energy Market Operator of its intention to close Eraring in August 2025 - the earliest possible closure date given the required 3.5-year notice period.

While the closure of a coal-fired generator has obvious significant environmental benefits, there are social impacts to consider. Accelerated renewable capacity undermines the economics of baseload generators. The company explained that the reason for the accelerated closure was in part attributable to the economic impact of growing renewable penetration in the National Electricity Market (NEM).

Renewable generation, particularly solar, is most productive in the middle of the day. Growing volumes of generation from renewable sources have seen demand for grid electricity decline in the middle of the day.

Electricity prices at these times fall to low or even negative levels. Further, the NSW Government's Electricity Infrastructure Roadmap will drive an acceleration in the supply of renewable energy that will likely drive average prices lower still.

Increasing renewable volumes are reducing demand for coal-fired generation in the middle of the day.

The low or negative prices in the middle of the day result in financial losses for baseload generators like Eraring. Baseload generators rely on higher prices during the peak and shoulder periods of the day to recoup losses and generate an adequate return. Unfortunately, the introduction of capacity from Snowy 2.0 in the latter part of this decade may also pressure these peak and shoulder prices, further undermining the financial sustainability of baseload generators.

A significant reduction in Origin's emissions profile will result over time

When Eraring is closed, the company's scope 1 emissions will fall by an estimated 95%. How far the combined scope 1&2 emissions fall remains to be seen and will be dependent upon the sources of energy Origin accesses to replace the Eraring volumes.

The company has highlighted several potential sources of capacity that will compensate for the loss of Eraring and a number of these are low or no emission sources. These include a proposed 700MW battery at Eraring, the additional renewable assets being added to the NEM, the potential expansion of the Shoalhaven pumped hydro project, and Snowy Hydro capacity.

Additionally, the ambition to orchestrate 2GW through a virtual power plant provides further flexibility in the form of additional firming and demand management.

Ultimately, while purchases of coal-fired generation from the pool will remain a feature for some time, Tyndall expects Origin will deliver ongoing reductions in emissions intensity following the closure of Eraring. Importantly, over time we expect that this improving environmental footprint and leadership in the transition to clean energy will be reflected in Origin's share price with a progressive re-rating of the stock.

Social impacts front of mind for Origin

While the early closure of Eraring provides significant environmental benefits, this development will also have a material social impact on Origin's workforce and the local community.

The labour force directly impacted includes 240 Origin employees as well as several independent contractors that work at Eraring from time to time. On average, there are c200 contractors on-site on any given day. The workforce includes administration workers, multi-skilled engineers, boilermakers, and electricians. We would note that many of these skills have application outside of the generation industry.

Origin is highly cognisant of the implications for these workers and their families and recognises the role Origin must play in ensuring a just and equitable transition for them. Importantly, Origin intends to support its workers with reskilling and career support. The broad principles to apply here are individualised consideration of needs and preferences, in full awareness that different workers will have different priorities. The company will seek to transfer personnel within Origin where possible. Where this is not possible, Origin will assist in identifying external opportunities. Recognising the heightened impact the closure may have on apprentices, their needs will be prioritised.

The company has also stated that it will continue its existing community support programs such as local sponsorships and the relocation of the Myuna Bay Sport and Recreation Centre. Further, Origin has committed to invest $5m in local community support over the decade to 2032.

Our discussions with the company around these issues reinforce our belief that Origin operates with a high level of integrity. The company is acutely aware of the role it needs to play in ensuring that the energy transition is an equitable one for all the various stakeholders, including those employees that will be significantly impacted.

Environmentally compelling, socially aware

In conclusion, the early closure of the Eraring Power Station is a net positive for Origin shareholders in our view. We expect the market to reward the declining carbon emissions intensity over time. While the impact on the community and workforce is unfortunate, we note that Origin's intended efforts to retrain and repurpose its staff highlights the integrity with which the company behaves and the importance it attaches to its social licence to operate.

Author: Tim Johnston, Deputy Head of Equities