How will falling electricity prices impact ASX energy shares like AGL?

Will Aussie energy stocks wither under these newly proposed electricity prices?

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ASX-listed energy shares are in the spotlight today amid the release of a key regulatory determination.

The Australian Energy Regulator (AER) — a government agency responsible for overseeing Australia's electricity and gas industries — has tabled its draft of the default market offer (DMO) for 2024 to 2025. Barring any changes, this document sets the maximum electricity prices energy retailers can charge nationwide.

As you can imagine, what the regulator decides in the DMO can greatly impact ASX energy shares — essentially capping profit margins. So, is there enough meat on the bone for companies like AGL Energy Limited (ASX: AGL) and Origin Energy Ltd (ASX: ORG) to make a living?

Consumers to dodge another cost of living zap

Many households across Australia can breathe a sigh of relief at what their electricity bills might look like in the year ahead — but not all residential customers will be as lucky.

According to the release, most residential customers can expect prices by as much as 7% from 1 July 2024. The largest proposed decline in residential electricity prices would be experienced by customers falling within the Endeavour distribution zone.

However, in the sunny state of Queensland and across regional New South Wales, customers will likely be slugged with a 2.7% increase.

The variance across capped prices is due to ranging costs in different regions depending on network, environmental, and retail costs.

Despite a steep drop in wholesale electricity prices since 2022, the full reduction won't be passed along to customers due to persisting costs for the provision of power. The release notes that inflation and interest rates have pushed network costs higher.

Small business customers could be the biggest winners. The proposed changes would see a business in the Ausgrid distribution zone pay up to 9.7% less than the previous year.

'Reasonable profit' for ASX energy shares

What does it all mean for the potential profits of listed energy providers?

Well, AER chair Claire Savage explained what margins could look like under these new prices, stating:

Our draft determination should still allow a retailer to recover their costs and make a reasonable profit with a retail margin of 6% for residential plans and 11% for small business plans. These are higher margins than we see in other markets, such as Victoria, where strong competition remains.

For context, AGL recorded a net margin of 3.1% for the 12 months ended 31 December 2023. Based on the above comments, the changes would suggest a 6% to 11% margin is feasible for an ASX energy share, depending on the customer mix.

However, RBC Capital Markets analyst Gordon Ramsay doesn't see it as a bright spot for AGL or Origin Energy. Ramsay notes that the changes don't accommodate cost increases for these companies. As such, the analyst noted:

We expect this to lead to a narrowing of the captured margin in FY25, and we therefore forecast falling energy markets earnings for both Origin and AGL.

Despite the commentary, shares in ASX energy giant Origin are up 0.7% to $9.10 this morning. Likewise, the AGL share price is 2.5% higher at $9.00 per share.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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