GNE - Genesis Energy

[winner (n)]

Apparently electricity prices are going to rise as El Nino bites in the first half of 2024

Is that good for GNE

[Waltzing]

Power demand to drive tecnology is only going to increase... is there enough water, wind and sun to automate society... just how many wind and solar systems are going to be needed to get to NET Z.

https://www.cnbc.com/video/2023/12/06/ai-and-big-tech-could-make-the-water-crisis-worse.html

[winner (n)]

The steep ESG discount slowly unwinding .......share price handing to 3 bucks ......and probably even higher when the new strategy is seen to be working

[Plata]

Apparently electricity prices are going to rise as El Nino bites in the first half of 2024

Is that good for GNE

Prices below the cost of thermal have demonstrated a positive effect on FCF. Have prices above the cost of thermal done the same? Naturally you would think if market price got above thermal cost they could make some extra coin selling excess capacity into the market. Yet in the last dry year 2020/2021 that never eventuated despite Huntley burning a HEAP of coal at low coal prices. So who knows really, I never really unpacked what went wrong that year. Might be worthwhile.

[xafalcon]

Prices below the cost of thermal have demonstrated a positive effect on FCF. Have prices above the cost of thermal done the same? Naturally you would think if market price got above thermal cost they could make some extra coin selling excess capacity into the market. Yet in the last dry year 2020/2021 that never eventuated despite Huntley burning a HEAP of coal at low coal prices. So who knows really, I never really unpacked what went wrong that year. Might be worthwhile.

There is no E in Huntly......

Part of GNE strategy reset was to stop being the generator that automatucally steps in to fill the energy gap when the wind isnt blowing and the hydrorology is bad. So the past will no longer be a guide to the future

Now, GNE will sell future supply options to the other generators so they can cover their own dry year risk. The cost will include coal stockpile holding costs, CO2 emissions costs, generation costs and a margin.

Price will presumably increase like an aeroplane ticket, so an "emergency" spot purchase could be very lucrative for GNE

I'm not sure how this will affect the current Max Bradford electricity market pricing mechanism, which produces perverse outcomes in a commercial market like we have now (it was different when the government owned all the power generators, the market pricing mechanism was better suited to this situation)

If other generators choose not to pre-purchase their thermal supply options, GNE will only supply their own customers. I'm assuming the other generators were fully informed in confidence when the strategy was being developed, as their silence has been deafening

There is a good presentation by Malcolm John's on the Sharesies YouTube channel, posted about a week ago. It gives me confidence that company value will rise once the (share) market understands the changes (Huntly is a NZ electricity necessity that must be funded by all generators, and the deployment of solar JV and self funded battery storage at Huntly) and sees them in action

[Shareguy]

There is no E in Huntly......

Part of GNE strategy reset was to stop being the generator that automatucally steps in to fill the energy gap when the wind isnt blowing and the hydrorology is bad. So the past will no longer be a guide to the future

Now, GNE will sell future supply options to the other generators so they can cover their own dry year risk. The cost will include coal stockpile holding costs, CO2 emissions costs, generation costs and a margin.

Price will presumably increase like an aeroplane ticket, so an "emergency" spot purchase could be very lucrative for GNE

I'm not sure how this will affect the current Max Bradford electricity market pricing mechanism, which produces perverse outcomes in a commercial market like we have now (it was different when the government owned all the power generators, the market pricing mechanism was better suited to this situation)

If other generators choose not to pre-purchase their thermal supply options, GNE will only supply their own customers. I'm assuming the other generators were fully informed in confidence when the strategy was being developed, as their silence has been deafening

There is a good presentation by Malcolm John's on the Sharesies YouTube channel, posted about a week ago. It gives me confidence that company value will rise once the (share) market understands the changes (Huntly is a NZ electricity necessity that must be funded by all generators, and the deployment of solar JV and self funded battery storage at Huntly) and sees them in action

Great post xafalcon. Agree Huntly is a NZ necessity. Other providers need to pay for the insurance of having them on call.

[Basil]

Yes interesting post but as you say, the silence from the other Gentailiers is deafening which got me wondering how do you see this playing out xafalcon ?

Suppose we're in winter next year and Transpower signals an imminent supply crisis coming up and the other Gentailers haven't kowtowed to GNE's demands and purchased the cover, what then ?

Surely GNE can't allow blackout's ?  Does it then demand a punitive rate for spot generation like $500 mw/hr? 
Please paint me a picture of how this play's out, I'm curious. 

[LoungeLizard]

GNE SP up nearly 7% since the announcement of the strategy reset. Some were predicting the SP would plunge to $2 but the market obviously saw things differently. GNE, imo, remains the best of the sector in terms of yield, value and growth prospects. I would not be surprised at all if the SP is around $3 in 12 months time.

I'm no expert on the electricity spot market (lucky we have one or two here) but it would seem to me that it operates like any other market, in accordance with supply and demand. We have seen extraordinary spot rates from time to time in periods of peak demand and low supply, so I don't see the fundamentals of that market changing, unless the Government intervenes in a very heavy handed way, which is unlikely.
 GNE will be in a strong position during future "energy-gap" periods, and together with their increasing investment in a mix of renewable assets (which will ultimately generate a greater return) I see it's medium-long term prospects as being very healthy.

[winner (n)]

The so called 'ESG discount' unwinding nicely

As such target is about 320/330

Even more if interest rates fall quite a bit from current levels

[Plata]

Yes interesting post but as you say, the silence from the other Gentailiers is deafening which got me wondering how do you see this playing out xafalcon ?

Suppose we're in winter next year and Transpower signals an imminent supply crisis coming up and the other Gentailers haven't kowtowed to GNE's demands and purchased the cover, what then ?

Surely GNE can't allow blackout's ?  Does it then demand a punitive rate for spot generation like $500 mw/hr? 
Please paint me a picture of how this play's out, I'm curious. 

I doubt the other generators would say much about it, but GNE likely would have. The lack of mention of their market security options announced ages ago in more recent updates is slightly embarrassing and so I would imagine they would have mentioned literally any success if there was any to discuss.

As per transpower website they cannot compel generators to provide power. But I imagine there is an implied compulsion to prevent them to avoid political and consumer fury.

As for a "punitive rate"... In the last dry year the demand for thermal was so high that the third rankine had to be pulled out of storage to assist. So we had tight supply and significant excess capacity being sold into the market for a prolonged period of time. Yet EBITDA that year was only ~430 million from memory. If GNE has the ability to charge punitive rates going forward, I would ask what was different the last dry year that prevented them doing it then. Perhaps at the time they did not want the negative publicity from "holding the market to randsom". Are the happy to do that now?

[Plata]

The so called 'ESG discount' unwinding nicely

As such target is about 320/330

Even more if interest rates fall quite a bit from current levels

Somewhat amusing the second the Craig's guru throws in the towel and slaps the discount on it things start going the other way. Will be interesting to see where she ends up, I'm picking this ends up in the 2.70s for most of the Dec-Feb period. Certainly feeling increasingly smug about that DRP purchase recently.

[Basil]

Assuming 100% imputation credits.  $3 would be a gross yield of only 6.5% 
Current yield at today's closing price is 7.7%
Not much of a premium on 10 year Govt stock or risk premium for execution risk.
John's talks a big game.  Talk is one thing, executing on time and budget and getting forecasted generation and acceptable prices from assets is another.
Aluminum price under a fair bit of pressure...what happens to returns if the smelter at Tiwai point is closed ?
This is not without risks.

[kiwi2007]

Price/yield over the last few months seems pretty well correlated to much of the bond market.

[LoungeLizard]

Assuming 100% imputation credits.  $3 would be a gross yield of only 6.5% 
Current yield at today's closing price is 7.7%
Not much of a premium on 10 year Govt stock or risk premium for execution risk.
John's talks a big game.  Talk is one thing, executing on time and budget and getting forecasted generation and acceptable prices from assets is another.
Aluminum price under a fair bit of pressure...what happens to returns if the smelter at Tiwai point is closed ?

This is not without risks.

Except that if the pivot to renewables goes well, together with a continuing premium for Huntly, GNE could be a vastly more profitable organisation in the coming years, meaning that the yield will, over time, shift upwards along with the SP. That's the holy grail - a good yield plus a sustained lift in the SP. In the long term, I think that scenario is highly likely.

[xafalcon]

Yes interesting post but as you say, the silence from the other Gentailiers is deafening which got me wondering how do you see this playing out xafalcon ?

Suppose we're in winter next year and Transpower signals an imminent supply crisis coming up and the other Gentailers haven't kowtowed to GNE's demands and purchased the cover, what then ?

Surely GNE can't allow blackout's ?  Does it then demand a punitive rate for spot generation like $500 mw/hr? 
Please paint me a picture of how this play's out, I'm curious. 

As I said in my post, I don't even know how the new strategy will work with current electricity market pricing mechanism (which heavily favours non-combustion generators)

If this is truly an El Nino period, the first signs of "how it will play out" will become evident late summer/early autumn. Hydro storage in SI is already below average, and average wind speed falls through summer. If rainfall is below average, as El Nino would cause, hydro storage would fall quite quickly until minimum safe storage levels are hit. This is when we would start observing the new strategy in action

Would GNE actually follow through on it's proposal? Unknown. Would the government step in and direct a publucly listed company to generate more power? Maybe,  they own 51%, but it would set a terrible president. Would the government initiate a review of the electricity market? Probably. Is this actually what GNE wants to achieve? Probably. Do I have any inside information? No