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Election2019: Mixed outcome from renewables, EV plans

Morningstar Analysts  |  17 May 2019Text size  Decrease  Increase  |  
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Labor's sweeping policy recommendations on renewable energy would have a muted effect on utility companies, while the proposed electric vehicle target is both positive and negative, say Morningstar analysts.

The party targets 50 per cent of energy generated from renewable sources by 2030, versus the Coalition's target of 23.5 per cent by 2020 and the current level of roughly 20 per cent.

Labor also proposes that 50 per cent of all new cars sold in Australia will be electric by 2030, along with a $200 million investment in national vehicle charging infrastructure.

In broad terms, if implemented, these would see major investment in wind and solar generation, likely continued subsidies for these sources, and allocation toward EV development.

Labor's renewable energy policies don't seem too bad from the perspective of the utilities. Labor has ruled out reintroducing a carbon tax or raising any revenue from climate policies.

That's good news for the dominant electricity generators AGL Energy (ASX: AGL) and Origin Energy (ASX: ORG), which are major polluters.

The main threat comes from subsidised new renewable energy taking market share from incumbent power stations and depressing wholesale prices. But the transition to renewable will be gradual; likely more gradual than Labor hopes.

Though it will be difficult to reach the 50 per cent renewal electricity target within the proposed 11 year timeframe.

Renewables to steadily displace thermal power 

Electricity generation renewable target

 

Source: AEMO Integrated System Plan 2018

Even if this optimistic target is hit, AGL and Origin will still have considerable time to sweat their existing coal- and gas-fired power stations, while investing in renewables and complementary assets.

Labor's policy is likely only a minor negative compared with the status quo. A potential benefit could come from increased electrification of transport — more trains, trams and electric vehicles — which could see electricity demand surprise on the upside.

Spark Infrastructure (ASX: SKI) and AusNet Services (ASX: AST), which own distribution and transmission networks, shouldn't be adversely affected by Labor's policies.

Further, solar and batteries are only a threat if people start going completely off grid, which is surely a long way off.

With so many new wind and solar farms to be built, these firms will have substantial investment opportunities to strengthen their regulated networks and build unregulated transmission lines connecting new power sources to the grid.

For electricity generation, increasing buildout of wind and solar farms should reduce baseload demand from existing power stations but also increase the need for flexible gas-fired power to fill in when renewable output falls.

Some good, some bad implications of EVs

Morningstar forecasts electric vehicles, or EVs, will only account for 15 per cent of all new passenger vehicle sales globally by 2028. At present, they represent less than 1 per cent of Australian new vehicle sales, and a negligible portion of the total fleet.

Morningstar expects this to remain the case for the next decade, limiting the impact on dealership earnings. Given the lack of battery charging infrastructure, conducive government policy, and affordability of EVs, this is unlikely to rise at a rapid pace.

Singling out automotive parts company GUD (ASX: GUD) as one of the most severely exposed stocks under Morningstar's coverage, Morningstar says that the primary impact would occur outside the next decade.

Another company under Morningstar's research coverage, Bapcor (ASX: BAP) is the best-placed within the automotive segment when considering the potential shift toward EVs.

EV boost positive for lithium plays

Any upside to our EV forecast would also most strongly benefit demand for the crucial ingredient in this evolution: the lithium-ion battery.

We forecast lithium demand to grow three to four times 2017 levels over the next decade, well beyond consensus. Australia is the world’s top lithium-producing country.

More than 40 per cent of the world's lithium is produced here, followed by Chile at 35 per cent, and Argentina 11 per cent.

Galaxy Resources (ASX: GXY), with a market cap of $664 million, is Australia's largest lithium producer, with fully-owned facilities in Australia, Argentina, and Canada.

Orocobre (ASX: ORE), an $879 million business with lithium carbonate production facilities in Argentina, is the second-largest locally listed lithium producer. Its company headquarters are in Queensland.

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Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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