EPW (ASX) 3 Brokers downgraded

Originally posted by Brumbypat ↑

I just see it as EPW saw the loophole, took advantage and now others have sour grapes.
I'm assuming EPW plan is to take the franked divs now, holding the certificates and selling once the price is over their target mark.

From the Origin energy website: (https://www.originenergy.com.au/business/commercial-and-industrial/context/lrec.html)

"The LRET creates a financial incentive for large businesses investing in the growth of renewable energy through Large-scale Generation Certificates (LGC or LREC). These certificates are traded through the wholesale market and as with other commodities, demand and supply impact price levels. “Liable entities” are incentivised to acquire and surrender a certain amount of LRECs in order to avoid paying a large-scale generation shortfall charge."

So if the govt changes the rules because of this move by EPW (as in your example above) that will mean there is less supply available to be traded, and therefore a higher price on the certificates in circulation?

I think EPW are backing themselves in that the certificates are going to be worth significantly more in a couple of years than they are now.

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Brumbypat - I think you might have got the wrong end of the stick so to speak. EPW as per their announcement is hoping that the value of the LRECS goes down in the next 3 years so that they can then go out and purchase them cheaply and hand them to the regulator to get their penalty back (assuming govt has money - interesting but if that happens it also means ERM will pay $37m less tax in the future 3 years which means an impact on franking credits doesn't it - this seems like a short term fix without regard to long term issues)... EPW are not betting on the LRECS getting more valuable, in fact there is a cap on the price. If the price goes above $92.86 then every retailer will choose to pay the penalty which is cheaper. EPW are betting on the price going down for whatever reason. This assumes that there will be more supply than demand and hence prices drop. Unless the rules change, there is a legislated cap on the price of certificates and they will not go anywhere to $92.86 or above.

I think the government may change the rules to limit how much retailers can pay a penalty on - one of those loopholes that they missed and EPW has now shown it. Its quite possible that LREC prices stay high and which case EPW has given up a lot of earnings for nothing.. only time will tell. If you see the media reports - the regulator is not happy as that was not the spirit or the intention of the legislation... that's whats at issue here. you and I are paying higher prices for our electricity so that retailers like EPW have to buy certificates to support renewable energy - EPW is not doing that whilst others are....and not just for a little bit - but a big bit. Question you have to ask yourself is why as EPW gone out so heavy on it - suggest you get your hands on some research reports - they are very informative and have a general theme that EPW's margins on their Australian customers have dropped from $4.50 in FY16 to maybe <$1.00 in FY17 - which is their concern - we wont know if they are right until Thursday.

3 Brokers downgraded, page-27