Ann: ERM Power announces LGC Fulfilment Plan for 2016, page-24

After owning for a few years I think most of us have an average above yours.

The reality is that the electricity industry here is a very difficult thing to understand. Someone else mentioned the fact that the way it works is that you all get the price that satisfies demand so you in fact get the marginal price. Big coal fired power then makes the most ...

I think a few on this forum really understand the industry - they are the ones that have enabled me to grow my understanding.

The biggest problem is that there are many factors and these are all moving parts. Not the least of which are accounting conventions that really mess with the situation. So as they have purchased power forward they in fact have to compare those contracts with spot pricing - in so doing they are always recognizing a notional profit or loss on something that isnt so. In reality the reason for this is although they have matching supply contracts the user does not guarantee usage to match the exact contract so they dont get to value their supply agreements - They know what the contract usage is but it does not match to the derivative ...

So in this situation often the business reports historical profits that have little relationship to how well the business is performing.

The business has had a few issues:

1. Energy supply is a bad word and as renewables keep pushing up the price mix the dislike of the industry gets greater.
2. The country usage has been dropping steadily since it peaked in 2007/8 at around 210 terawatt hours - its now at 197.6. The more renewables you invest in the more supply but the mix in costs to produce and whether it can do baseload becomes more complex.
3. It does not contest the retail user market so has less customers but probably cannot access the high rates area...
4. As the retail customer gets hit with an ever increasing cost per unit the incentive to supply yourself gets higher. Whilst ERM does not contest the retail market the other players obviously become more competitive in the business market.
5. The definition of retail probably dates back to the seventies - If you have a residence on the property its retail - unless you get another connection installed and can separate your supply boards ... So whilst my business probably uses more than double what we use in the house I get slugged with an ever increasing rate based upon usage. where in the world do you get charged for using more - its a form of social engineering. So once you realise that the Tesla powerwall 2 will save you money and give you an effective return on investment more will install them. In my case I supply the grid during the day and get paid peanuts but use at night when they have excess capacity and get charged 40c per Kwh...
6. In my opinion retail investors have no idea how well or badly the company is doing and over the years just loved the dividend flow... In those days it was fully franked ... Now its unfranked and we dont have certainty around the level. The new tax cahrge of $37 million is cash out so we dont understand if that will impact on a dividend ... So we may get franked dividends but will they be lower ...
7. The move to USA is a long term investment and the whole company is in its own words in transition.
8. Ever since Oakley came off contract it has disappointed ...
9. They were going to enter the gas market and have not...
10. They were going to produce gas ... two failed investments later they are no longer in the market...
11. The company has had two , probably 3 days when the marketprice has dropped dramatically and given that they raised capital to take a punt at NSW electricity assets and failed has left plenty of shareholders having paid around $2.40 per share and are probably very unhappy. Actually this stock is priced well below its IPO price of $1.65 ( Think thats what it was). This stock always seems to have many that just get out. Given that its last year low was 74c I am not surprised that many have taken profits and gone away.
12. The most disturbing is that there are too many moving parts to accurately predict the performance ...