Australia’s coal phase out could occur within 15 years – these ASX stocks could be left vulnerable

Nick Sundich Nick Sundich, December 20, 2023

Australia’s coal phase out could occur within 15 years – at least if you are to believe the Australian Energy Market Operator (AEMO). Few would deny that the eventual phase out was inevitable, although perhaps not this fast, especially since the war in Ukraine led to surging energy and hence coal prices. This begs the question as to what will happen to companies affected, both ASX coal stocks and power stocks that rely on coal to deliver electricity to consumers.

 

The coal phase out may happen sooner

It is easy to forget that the Australian phase out was previously scheduled for 2043 but was bought forward. And this is only a prediction from the AEMO in a binding report issued earlier this month, not a binding ruling. A prediction based on the view that rising maintenance costs, coal supply shortages, as well as wind and solar becoming cheaper, will all lead to this inevitability.

There are some coal plants scheduled to close even after the initial deadline, with one example being Alinta Energy’s Loy Yang B plant in Victoria which is only forecast to close in 2047. At the same time, some are closing sooner, such as the Eraring Plant in NSW’s Hunter Valley that will close in 2025. Furthermore, some plants have already closed, such as AGL’s Liddell plant that shut in April.

What will this mean for ASX stocks with an interest in coal? Let’s look at coal stocks first, then energy stocks reliant on coal.

 

How will coal stocks be impacted by the coal phase-out in Australia?

As long as they can diversify outside Australia, and demand from other countries hold up, coal stocks shouldn’t really be impacted. Even in a doomsday scenario, companies that specialise in multiple commodities like BHP should only see a minor impact.

For energy companies, the phase out will present significant challenges, especially for companies heavily reliant on it. There will need to be new investment in renewable energy sites, as well as investment in closing the coal plants down. We won’t delve into how each and every utility stock will be impacted, but we think it is fair to say some individual companies will have to pay several billions of dollars. The figure of $20bn was floated about as an argument for why Origin Energy (ASX:ORG) shouldn’t accepted a takeover offer from Brookfield and EIG. This deal was rejected, and a new way to find that money will have to be sought – and sooner rather than later.

Let’s finally address how the phase out will impact renewable energy stocks. You might think this will be great news for them. Upon closer examination, not necessarily. It is inevitable that even more investment will be needed in renewable energy plants to ensure that the energy market can cope with demand. AEMO’s report predicted that we would need 6 gigawatts a year, up 50% from the 4GW annual expansion in 2022. Presently, it is barely keeping up with the former figure due to slow approvals, rising costs and social license issues.

 

The phase out is coming, like it or not

However long it would take, the phase out is coming. Nothing in AEMO’s report changes that. It does mean that companies with management that previously thought they could leave it to the next generation of management may now have to deal with it themselves. Otherwise, they may not be able to retire so rich from bonuses and converted share options after all! It should also make investors think twice before chipping their hard-earned money into any of these stocks and expecting an investment that you can just hold forever without any worries.

 

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