Origin's Geodynamics write-off

The speculation has been strong for a while and now Origin Energy has all but confirmed the worst kept secret in the geothermal sector: it has run out of faith in Geodynamics.

After recently deciding to opt out of paying a share for a cost overrun for the latest drilling campaign, today the company wrote off the entire value of its Geodynamics JV. Origin said the move was made as joint venture activities have “not met expectations for a timely and commercial development of the geothermal resources.”

In all the impairment after tax for the total write-off of its Australian geothermal operations was $33 million. The operations include its 30 per cent share in the Innamincka Deeps JV with Geodynamics, 50 per cent share in the Shallows JV with Geodynamics and its own GEL-185 project. The $33 million charge comes after it last year recognised an impairment loss of $214 million in relation to its Geodynamics JV and investment in Geodynamics stock.

The one time darling of the geothermal sector in Australia, Geodynamics is now unfortunately the ‘darling by default' (everyone else has put geothermal on the backburner). Hopefully something can still come of its latest well (Habanero 4) and with hopes so low, at least it's unlikely to disappoint.

On that note, there is at least some positive news, with a report this morning from Geodynamics suggesting the “target fracture zone has been intersected in line with prognosis.” This is a “significant milestone”, the company added. The news sent the company's stock soaring 28 per cent in morning trade – although Origin didn't exactly trumpet the news of its write-off, so many investors might not have caught up with that development just yet. Regardless, the latest drilling update is at least a ray of light.

Transform Solar

Origin's solar PV joint venture, Transform Solar, has met the same fate as its Australian geothermal operations, with the company writing off the entire value of its investment – $135 million after tax.

Transform Solar advised in May that it had “decided to discontinue production of its Sliver photovoltaic modules”, so the impairment news was expected. Although given it retains Sliver's intellectual property and still expected to continue development at a laboratory scale, a full write-off wasn't necessarily on the cards. In May, Origin said the carrying value of its Transform Solar interest was $134 million, so we're not sure where the extra $1 million came from, but perhaps it's just Origin adding an exclamation point to the news.

Solar rooftops

Origin's solar retail business was also a laggard in the 2011/12 financial year, with installations less than half of the record rate of last year – 16,009 versus 36,840. The result pushed revenue for its non-commodity businesses down by 50 per cent to $213 million.

The company blamed policy changes, including changes to the Renewable Energy Certificate multiplier and feed-in tariff schemes across all states, for hurting demand during the period.

Given Origin is the second largest player in the sector it is worrying news for the maintenance of strong growth rates, although it could just be that some of the decline has been an erosion of market share, rather than a major reduction in the growth of the market.

We know that the Queensland solar rooftop market has certainly had a great year and maybe Origin's presence there isn't as strong as it is in NSW and Victoria. It should also be noted that the rush for solar panels in Queensland came at a time when Queensland Premier Campbell Newman had declared war on Origin, claiming they were ripping off customers. That press can't have helped.

RET, wind farms

Origin Energy boss Grant King has made no secret of his company's desire to slash the current fixed large-scale renewable energy target. He has also said in the past that there will be major challenges reaching the target, yet today the company has outlined $65 million in pre-tax impairment costs for the “de-prioritisation of certain sites” as part of its portfolio of wind power opportunities and said its “current and future LRET obligations are covered until FY2017.” This doesn't really marry with the notion that ‘the RET can't be achieved'.