AGL benefits as power prices rise

A rise in electricity prices has been the main driver of AGL's share price with the 'forward curve' for electricity prices rising 30% or more in recent months for most Australian states. This has been driven by expectations of a tight market for electricity as Hazelwood power station is closed.

The sharp rise in power prices over the past couple of years is a result of communities' decisions to increase the level of renewable energy in the system, but politicians failing to get the policy settings right over the last decade to implement a strategic plan for the industry to undertake the transition.

This means AGL is generating a form of super profits given its large, low-cost, baseload power generation capability.

This was a predictable outcome, however the solutions for the problems in the system are going to take many years to resolve. As these price increases start to get passed through to the customer, there is a risk of a political backlash.

While the fundamentals for the stock look very strong, the potential for an irrational regulatory response means we need to keep the holding size in our Ralton Australian Shares portfolio in check (despite our optimism). (VIEW LINK)