Electricity futures prices for 2027 have fallen 20% or more in New South Wales and Victoria since March 2026 because of new renewable supply and good power station reliability. With a well-supplied grid and rollout of new batteries, volatility has also fallen.

Why it matters: AGL’s (ASX.AGL) earnings outlook has worsened as lower prices and volatility hurt revenue from power stations and batteries. With a high proportion of fixed costs, the impact on profits is magnified.

  • We cut our medium-term EBITDA and EPS forecasts by 14% and 37% on average after incorporating lower futures prices. We forecast AGL’s retail price, net of transmission fees, to fall about 20% by 2029 to $100 per megawatt hour, before a full recovery to about AUD 130 by 2033.
  • We expect an earnings recovery from fiscal 2030 as competing coal power stations, Yallourn and Eraring, close and power prices rise. Accelerating demand from data centers and EVs should also be supportive, and so too could elevated Asian LNG prices if they persist.

The bottom line: We reduce our fair value estimate by 14% to $10.30 per share. The stock is slightly undervalued, given expectations that electricity prices will recover over several years. We expect wholesale electricity prices over $110 per megawatt hour, underpinned by the cost of bringing new renewable energy online with backup from batteries and gas peakers. At this price, AGL makes solid profits.

  • The electricity price recovery could be delayed if Yallourn and Eraring extend, if demand growth doesn’t eventuate, or if new renewable supply accelerates. We increase our Uncertainty Rating to High, from Medium, to better reflect high operating leverage and volatile electricity prices.

Renewable additions weigh on electricity futures and AGL’s earnings outlook

AGL Energy is one of Australia’s largest integrated energy companies. Earnings are dominated by energy generation (wholesale markets), with energy retailing contributing just a fifth of operating earnings. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

AGL Energy’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market.

AGL Energy’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 80% of AGL Energy’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market.

Bulls say

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive.
  • Its balance sheet is in relatively good shape, positioning it well to cope with a tough earnings outlook.
  • Its low-cost coal-fired power stations underpin solid earnings for the group.

Bears say

  • The regulatory environment is unpredictable and has a significant impact on AGL Energy’s earnings.
  • AGL Energy’s gas costs are rising as cheap legacy supply contracts end.
  • Banks plan to phase out lending to coal power stations in the 2030s.

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