Genex Powers Up Pumped Hydro

This story features GENEX POWER LIMITED, and other companies. For more info SHARE ANALYSIS: GNX

Genex Power is positioned to benefit from changes occurring in the National Electricity Market. Canaccord Genuity initiates coverage with a speculative Buy rating.

-Material opportunity for electricity storage sourced from low-cost technologies
-Catalysts include finalisation of K2-solar development and potential announcements on energy offtake
-K2-solar development financial close targeted for mid 2018
 

By Eva Brocklehurst

Genex Power ((GNX)) has an investment proposition in the Australian utility sector that is unique and simple, with its pumped hydro development at Kidston in Queensland. Canaccord Genuity believes the proposition positions the company to benefit from changes occurring in the National Electricity Market and initiates coverage with a speculative Buy rating and $0.40 target.

Globally, solar and wind are the two leading generation technologies, in terms of new additional capacity, and the broker suggests the penetration of intermittent electricity sources will rise substantially, given bipartisan federal support for Australia's international emissions commitments amid state schemes designed to facilitate new developments.

Embracing intermittent sources, in conjunction with a gas shortage, provides a material opportunity for electricity storage, particularly when sourced from low-cost technologies such as pumped hydro.

The last pumped hydro project in Australia was built over 30 years ago and a recent screening study from the Australian National University identified some 22,000 potential sites and only one of them has been the subject of a detailed feasibility study so far. The 50 MW Kidston stage 1 solar project (K1-solar) is in production and momentum is building for the stage 2, 250 MW development and co-located 270 MW solar (K2-solar).

Genex Power was floated in mid-2015 on the potential of pumped hydro, utilising the abandoned Kidston gold mine. At that point the investment basis was centred on the exploitation of an oversupply of base load coal-fired generation capacity and escalating peak power prices. The proposition has now moved slightly to take advantage of the solar opportunity although the broker suggests the basic premise of the original thesis still holds.

Industry needs energy policy certainty and the broker is encouraged by the sort of support provided by Infigen ((IFN)), AGL Energy ((AGL)) and Origin Energy ((ORG)). Canaccord Genuity concludes 2018 will be an exciting year for Genex Power amid support by the generation industry for the federal National Energy Guarantee.

Over coming months the broker will be on the look out for the finalisation of capital expenditure for the K2-solar development and a potential announcement on energy offtake and partnering for both the solar and hydro aspects.

Valuation

Canaccord Genuity values the company's three key projects using a free cash flow-to-equity model and assumes a 50% sell-down of K2-solar for a developer margin. Generation from K1-solar commenced this month and a $110m budget was funded through a $100m debt package plus a $8.9m grant. The efficient funding model, significant tax loss credits and a relatively high contract price has driven the broker's valuation to $40m for the asset.

The company is targeting financial close for the K2-solar development by mid 2018. Assumptions are largely in line with K1-solar but the broker allows for some economies of scale and further reductions in solar capital expenditure. Nevertheless, these will be more than offset by lower electricity price assumptions and a lower proportion of debt funding.

Pumped Hydro

Pumped hydro offers scale for intermittent supply from wind and solar at a lower cost than batteries. Enhancements and cost reductions from batteries assist but do not currently have the scale required to maintain grid stability and reliability.

Pumped hydro is responsible for around 97% of worldwide energy storage and while grid-scale batteries are expected to make inroads in the longer term, significant cost improvements and even larger storage capacity is required for this to happen.

Hence, the company's Kidston development has first-mover advantage. Over 7000 MW of solar developments have been proposed in Queensland but to Canaccord Genuity's knowledge only Kidston has an associated pumped hydro project. The broker envisages a high level of interest in Kidston by energy offtake and potential equity partners.

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