Good morning, everyone, and welcome to the Origin Energy 2024 full year results presentation. This is Frank Calabria, CEO of Origin, and today you'll hear from me and our CFO, Tony Lucas, with the outline of today set out on slide two. This will be followed by an opportunity for you to ask questions to me, Tony, and the executive leadership team here at Origin: Greg Jarvis, John Briskin, Andrew Thornton, James Magill, Kate Jordan, Sharon Ridgway, and Samantha Stevens. So now just turning to the introduction. Following which, Tony will take you through the financial results.
Just firstly, the key message has been a significant uplift in earnings since 2023, a recovery in energy markets driven by a lagged higher wholesale recovery of electricity prices that flowed into customer tariffs from the prior year. We also had LNG production up 3%, pleasingly, and the share of Octopus Energy, Energy, Octopus Energy earnings were lower than the prior year. The prior year did benefit from the same effect that we described in energy markets, but a year earlier, which is the lagged recovery of higher wholesale prices. We're very aware that many of our customers, and indeed many Australians, are experiencing cost of living pressures.
We continue to support our customers in a number of ways, including increasing financial support for those experiencing hardship, and we'll talk a little further about that in the coming slide. It's been well reported that we worked with the New South Wales Government to extend Eraring, which we believed achieved the right balance and continues to support security of electricity supply through the transition. We've been busy executing our energy transition strategy and investments in storage and renewables over the last six months, and I'm pleased to say that we've increased our shareholder distributions for the year. Turning to the financial highlights, you can see the statutory profit, underlying profit and underlying EBITDA are all up, with the underlying profit increasing from AUD 747 million last year to AUD 1.1383 billion.
It's obviously been driven by the increase in the underlying EBITDA that you can see there, which achieved AUD 3.528 billion for the year. That has coincided with those cash flows coming in, with a reduced, call it reduced debt, as measured by the adjusted underlying EBITDA, are now down to 1x. You can see there our return on capital employed has achieved overall 15%. The energy market sits just above 10%, and integrated gas is above 20%. And there you can see the dividend, the final fully franked dividend of AUD 0.275 per share, taking us to AUD 0.55, fully franked for the full year.
I mentioned one of the key drivers of the significant uplift was really in energy markets, and the contribution towards that growth has really come from the electricity margin improvement. I did mention it earlier, but those higher wholesale prices you saw in FY 2022 and FY 2023 have flowed through to the customer tariffs that are set by the regulatory process effective in July each year. That's why you can see graphically there, how that's flowed through and how that can play out on a year-to-year basis. We also did have lower coal prices, coal cost in the year, and what we've seen in the FY 2024 year was that those lower commodity prices then ultimately have translated through to the regulated tariff just gone by in July. In Eraring, we ran Eraring harder.
You can see output's up by 2.1 TWh. Our Eraring has performed, continued to perform very well, and that has put downward pressure on electricity prices for customers. I've talked about that extension with the government. That's out through to August 2027, and remains consistent with our 2030 emissions reduction targets. Touched on earlier about both customers and communities, and Origin being in a strong position to be able to support them, which is very important to us. And when it comes to customers, we certainly seek to understand the needs of our customers deeply. Energy affordability is a key consideration for many Australians, but also for the energy transition more broadly and how we plan for it.
We have no customer paying above the default market offer, and specifically for those customers experiencing hardship, we have spent AUD 50 million in the 2024 financial year, providing support in a range of means, and we expect to actually make a similar amount of spend this year, helping those experiencing financial hardship. We contribute to communities in a number of ways. You can see there the contribution our foundation makes, but also what we do for indigenous suppliers, regional procurement sources, and also what we do through our employees as well. So we continue to work with communities, both local and more broadly, given the footprint of Origin's business, and it's an important thing that we achieve and act on every single day.
Just looking at our ambition and strategy on slide nine, that's the framework you would have seen before, our ambition to lead the energy transition, and our three strategic pillars that are-- should be familiar for people that have seen prior presentations for Origin. And on the next slide, the scorecard of the targets that we'd set ourselves medium to longer term, when we launched this strategy in 2022. We will cover most of the points that are covered on the achievements at 30 June 2024. Going well on many, few challenging-... and, one in particular that we will not achieve by 2025, which is the first one, and we'll touch on that as well. So that's there as the scorecard against which we measure our execution of the strategy we set in 2022.
Just turning to the electricity market, and this builds on really the message that really we said at the Investor Day, and just to maintain that context, you can see just the electricity market in transition. Two key factors behind that: the variability on intraday basis, and you can see just how much that's changed over the last four or five years. And secondly, the underlying increase in electricity demand through to 2030, based on AEMO's data, a 16% increase, and it won't stop there, it'll go well into the next decade. So that even though you will see a lot of demand growth over this decade, it will continue well into the future and certainly surpass the ability for distributed energy resources like solar and batteries to absorb that. So we'll see quite a lot.
That provides opportunities, value of the existing assets, growth in renewables, growth in long and short duration storage and energy. And you can see an increasing role for peakers, batteries, VPP, and long-duration storage as we see those prices moving around on a regular basis. In terms of the existing portfolio, that's really highlighted by the 3 gigawatts of gas-fired generation. We now have our VPP operating and delivering value today. It's 1.4 gigawatts. We've got pumped hydro Shoalhaven, and as I mentioned earlier, Eraring, that plays a valuable role and continue to have flexibility for a coal-fired power station that enables us to move those units up and down. What we've spent our time busily working on over the last six months has been really accelerating what complementary renewables and storage to this portfolio.
We now have 1.5 gigawatts of committed battery projects. They're both under construction, and in the case of the Supernode Battery, we're tolling. So they're all underway. They'll be progressively introduced into operation over the coming years. I think Eraring Stage One and Mortlake are due to come in middle of the, the FY 2026 financial year, with Eraring Battery Stage Two, and Supernode, soon after. We are actively working, South Australian battery opportunities right now. We made our submission for access rights in the South West REZ for the 1.5-gigawatt Yanco Delta Wind Farm and, moving through the process on that. And in addition to that, we have a much broader portfolio of wind and solar developments of 2.6 gigawatts, and we will continue to, focus on growing the VPP.
Our developments are consistent with the 2030 emissions reduction targets, and we continue to see opportunities in the market. Turning to gas, and this is where there's an intersection between both electricity and gas, but firstly, if you have a look at the... It will play a critical role, and the way that that intersects into the prior slide on electricity is, if you look at that chart there that's been produced by AEMO, which highlights, during peak days over the coming decades, just that the peaking plant output forecast will, will increase threefold, and, that will be this increasing role. And if you wanna see the role that it plays, importantly, have a look at the South Australian market, which is in advance of the other states in the NEM. So it'll be a long-term support for renewables.
Gas will need to be supplied for those days. That means storage needs to be available for peak periods, and we're seeing that even through the winter peaks in Victoria today. The constraints on pipeline from north to southern states plays into that, and so therefore, that will be important. But overall, we'll need more supply into the market, particularly to service those markets to flow to south, southern states. And looking at the timing of that, that supply and those constraints on the pipeline, we certainly feel that LNG imports are gonna play a major role to secure or so, reliability of gas supply in those markets. When it comes to the way energy markets manages that gas supply, you've seen this chart many times before.
Just to remind you, it's a combination of assets, contracts, and expertise that enables us to bring that all together. In addition to that, we're focused on a pre-FID project, Golden Beach. We've been involved in it since its early stages. We have both offtake for storage and gas on that project and an ability to invest in equity. It is pre-FID, but we're working through that right now with the company to advance that project. Storage will be needed and is in the Victorian and New South Wales market, so it's a good opportunity. Turning to customers, and very pleasingly, we've been able to grow our customer accounts by 135,000 in the year. We continue to improve our customer experience. We have a strong brand.
It is underpinned and very pleased to say that we have Kraken, Loop, the VPP, and data and analytics capability. The expansion into our own sales channels, where I think we're doing sales of close to 95% through our own channels, and also those partnerships that are continuing delivering those outcomes, which we'll go through later in the presentation. We do continue to strive to improve our performance, learn every day, understand our customer needs, and where we don't get that right, continue to take action to improve further, and that's very important as we continue to grow our retail business. In Origin Zero, that's the business that serves our mid-market and large business customers and clearly does that through the core provision of commodity. We now have 14% of our customers on broader services. That's trebled in the last year.
We made an investment in ClimateTech Zero, and we can see value now, you know, through the distributed energy resources, e-mobility, and also tailoring commodity supply for different sectors and those that are growing. And it's obvious, it's underway in terms of transitioning to Kraken now. On APLNG, we've released our latest audited reserves report. We have greater than 15,000 petajoules of reserves and resources. 50% of those are available beyond the long-term export contracts, which provides an opportunity. Great to see that we've increased production over the year by 3%. I mentioned earlier just how critical gas will play a role in the transition, and also very pleased to see that 25% of our sales are allocated to the domestic market, equating to 150 petajoules.
For Octopus Energy, the growth continues to be very exceptional. 35% increase in U.K. retail customers, growing international retail customer accounts by almost a million. In the U.K. market, they now have 12.4 million customer accounts. The Kraken platform has contracted to 51 million accounts. It's obviously targeting 100 million. It's grown by 60% in the last financial year, and 13 of those are now operating on the platform, and you'll find that over the next 12 months, a number, a lot of the 51 million will be transferred into it actually being operating from just the contracts being written. And they've made entry into water and broadband, and in fact, they've won a couple of small accounts now in the U.S. or the North American market.
The UK retail and Kraken businesses are positive cash flow businesses, and they fund the energy transition through both the international retail businesses and also the energy services businesses. So it's enabling them to have these two profitable businesses, really self-fund a lot of the organic growth that's going on across energy services in international retail markets. Just a reminder that we took a $540 million investment that increased our stake to 23% at a valuation of $7 billion US. So really, just to finish this section, you see this slide from the Investor Day, just to really highlight combination of an energy markets business, both supply and customers, underpinned by a platform, positioned well, got the APLNG world-class resource and LNG asset and exposure to global growth. With Octopus, it's a very strong balance sheet.
We have the privilege of thinking about how we utilize wisely the cash flows combined, and that makes us, I think, quite unique in our ability to both invest and capture future growth opportunities, but also fund the increased shareholder distributions that you saw that we announced today. So on that note, I'm going to pass over to Tony, who will take you through the financial review.
Thank you, Frank, and good morning, everyone. Firstly, it's an honor to be presenting my first year-end results for Origin. I'll start with the profit bridge. Underlying profit increased AUD 436 million, with higher earnings from energy markets, improved commodity hedging, and LNG trading results in integrated gas. This was partly offset by lower earnings at Octopus Energy and APLNG. Tax on underlying earnings increased by AUD 102 million due to higher earnings from energy markets. This was slightly offset by lower interest expense. Moving to cash flow, operating cash flow was up AUD 1.7 billion to AUD 1.1 billion, reflecting higher cash flow from energy markets, commodity hedging and LNG trading, and an improved working capital cash flow. I'll address working capital on the next slide.
Tax payments were higher, reflecting higher earnings and higher unfranked dividends from APLNG. We also incurred additional costs associated with the proposed acquisition of Origin and costs relating to the implementation and stabilization of Kraken. Capital expenditure for the year was higher, with a larger proportion allocated to growth, including the Eraring and Mortlake Batteries. Sustaining capital expenditure was broadly consistent with the prior period. We also completed the acquisition of the Yanco Delta Wind Farm, and as Frank highlighted, the top-up of our investment in Octopus Energy, which increased our investment in that business from 20% to 23%. Just turning to energy markets, cash conversion, and working capital, this chart shows energy markets EBITDA, which is represented by the black line plotted against cash flow. Over time, operating cash flow will approximate EBITDA. However, there can be timing issues from year to year.
You can see in financial year 2024, working capital benefited from the AUD 600 million received in advance from the Queensland Government relating to the financial year 2025 energy bill relief program. These funds will be distributed to Queensland retail customers, and this benefit will therefore unwind throughout financial year 2025. We also received a first net refund from our LGC short surrender strategy, and we expect a further net cash benefit of AUD 300 million from this strategy over financial year 2025 and financial year 2026. These cash flow benefits were partially offset by higher receivables due to higher bills and slower mass market collections from retail customers, due to the cost of living pressures, additional compliance measures, and a delay in reaching full system functionality in Kraken....
During the year, we also took the opportunity to pre-purchase $232 million worth of green certificates at lower prices for future surrender obligations beyond FY 2024. Looking forward to FY 2025, assuming price volatility does not increase materially and excluding the impacts of the $600 million bill relief, we anticipate improved cash conversion in FY 2025 for energy markets. Moving on to APLNG. APLNG distributed $1.38 billion to Origin, reflecting stable production and lower commodity prices compared to the prior year. APLNG continues to generate strong cash flows. On a 100% basis, $7 billion of cash was generated after paying Queensland royalties of around $900 million.
Investing cash flow was some AUD 550 million, and debt servicing, including principal repayment and interest payments of just over AUD 1.2 billion, allowing for total distributions of AUD 5 billion. As previously foreshadowed, APLNG has now fully utilized its carry forward tax losses and commenced paying company tax installments in fin year 2024. Included in the distribution from APLNG was the equivalent of AUD 132 million of fully franked dividends. From 2025, from fin year 2025, we expect higher tax paid at APLNG and a higher franking percentage of distributions from APLNG. The tax burden will continue to shift over time from Origin to APLNG. Getting to the balance sheet.
Our balance sheet continues to be in a strong position with leverage low at debt to EBITDA ratio of about 1x, reflecting both strong cash flows from energy markets and integrated gas, and lower level of debt following a number of years of debt reduction. We have now commenced investing for growth with the construction of the Eraring and Mortlake Batteries underway and the acquisition of the Yanco Delta Wind Farm. These investments are expected to lift this ratio into the lower half of our target range. Turning to dividend, the board has determined a fully franked final dividend of AUD 0.275 per share, taking full year dividends to AUD 0.55 per share. The full year dividend represents an adjusted free cash flow payout ratio of 73%. This is consistent with our policy of a minimum of 50%.
The dividend is fully franked, and we expect dividends to be fully franked for the foreseeable future. Turning to capital allocation, we have a rigorous investment evaluation process and apply a disciplined approach to investment decisions. Our approach to capital allocation ensures there's strong competition between investing in growth and returns to shareholders. Consistent with the approach I outlined at our recent investor briefing, the decision on balance sheet funding versus utilizing third-party capital through either contracting, tolling, or offtake agreements, is based on the benefit of operational control. Assets such as the recent retail aggregator acquisitions, brownfield battery sites such as Eraring and Mortlake, enhance our portfolio returns and benefit from operational control, and we'll look to finance these assets on balance sheet.
Where we're able to replicate control through contracting, we'll seek to use third-party capital and underpin the asset with a tolling or contracting agreement, and that's the approach you saw us take this year with the announcement of the Supernode Battery in Queensland. For renewable assets such as Yanco Delta, we may acquire the development opportunity on balance sheet, but we'll move to utilize third-party capital prior to the construction phase. We'll underpin the asset with an offtake agreement. We've shortlisted key contractors on this project and commenced early-stage financing discussions on the Yanco Delta project, consistent with this strategy. Turning to the Energy Markets bridge. Energy Markets earnings increased AUD 617 million to AUD 1.65 billion.
Electricity profit increased AUD 1.1 billion, reflecting a recovery of higher wholesale prices flowing into customer tariffs, and the lower coal costs associated with the legislated coal price cap. These benefits were partially offset by higher energy procurement costs, with a non-repeat of trading gains and a roll-off of a long-term capacity contract. Gas profits declined by AUD 263 million to AUD 689 million. This was driven by a non-repeat of AUD 320 million of trading gains in the prior period. This was associated with the elevated gas prices and JKM and subsequent JKM hedging benefits that we received, when the market gas prices were quite high. This is partially offset by higher business and retail customer tariffs repricing due to the higher current and prior period costs.
Cost to Serve was up AUD 214 million, driven by an increase in higher bad and doubtful debts of AUD 57 million, which was partly due to higher bill sizes and the cost of living pressures. AUD 50 million in higher labor costs associated with increased volume of activity and additional temporary resources post the migration of the Kraken system. Frank will cover Cost to Serve in more detail in the next section of the presentation. Turning to Integrated Gas, Origin's share of APLNG earnings were down AUD 310 million, with lower global oil and gas prices impacting LNG revenue. Production was up 3%, reflecting strong field performance, with fewer scheduled maintenance disruptions and ongoing reduction of well workover backlog.
Operating costs were AUD 41 million lower, 41 million lower, driven by a lower level of gas purchases and a one-off exploration write-off in FY 2023, and partially offset by slightly higher power prices. Integrated gas other was up AUD 342 million. Oil, gas, and foreign exchange hedging results in a net loss of AUD 70 million, which was up AUD 276 million from the prior period. LNG trading activities generated a gain of AUD 87 million, which was up AUD 29 million from favorable hedging locked in during that period of extreme price disruption we saw in global gas prices, and we expect a gain from LNG trading this year of between AUD 400-450 million and AUD 50-100 million in FY 2026. Other Origin-only costs reduced AUD 36 million, reflecting the exit of our upstream exploration assets.
Turning to Octopus Energy. Origin share of Octopus Energy underlying EBITDA was AUD 55 million. The result reflects lower earnings from the UK retail business and energy services business, partly offset by higher earnings from the Kraken licensing business and the international retail and energy services businesses. The reduction in UK retail business earnings reflects the non-repeat of the lagged recovery of the higher wholesale prices in FY 2023 and higher costs associated with renewable energy and regulated energy efficiency costs. This was partially offset by earnings benefit from very strong customer growth. The result reflects a full-year contribution from the customers acquired from Bulb and a part-year contribution from the customers acquired from Shell, and the benefit of some 600,000 customers who chose to switch to Octopus during the FY 2024 period. The licensing business improved its contribution, reflecting more paying customers.
Kraken earns recurring revenue from licensing the platform to utilities, as well as one-off fees earned throughout the period of the customer migrations. Recurring revenue continues to grow as accounts are migrated onto the platform, while the business maintains strong profit margins. The international retail business continued its strong growth trajectory and added almost 1 million customer accounts across seven non-UK countries to have now around 1.4 million customer accounts at the end of the financial year. Octopus increased its investment in energy services business as it rapidly scales that business. That business supports customers in electrifying their homes by installing distributed assets, and it manages GBP 6.7 billion of generation assets and around 20,000 electric vehicles as a major leasing provider in the UK.
Operating costs increased in Octopus for our share of AUD 121 million, driven by strong customer growth and investment in scaling those international retail and energy services businesses I spoke about. I'll now hand back to Frank.
Okay, thanks very much, Tony. Now we'll just quickly run through some of the operational slides that that provide some further information and and drivers of the business. Turning to energy markets, and now I'm on slide 33, it really just highlights the movements in electricity forward prices, coal prices, and the electricity gross profit margin. You'll see in FY 25 forward prices, they moderated. As you can see, that's flown through to the tariff that's just been recently determined. We have largely contracted our coal now for FY 25. It's at AUD 30 a tonne higher than FY 24, and you can see just really in the electricity gross profit margin, the trend of that over time, and you can see FY 24 was very strong, in excess of AUD 40.
We previously guided the medium-term target range of AUD 25-AUD 40 a megawatt hour, and FY 2025 will sit within that range. If you look at the gas margin, once again, it does highlight the underlying prices. You can see what international gas prices have done over the last two years or so, and you can see they've also moderated over the last 12 months from the very high prices in 2022 and early 2023. And they've also been driven down by the government price cap on large producers. You can see, therefore, the gas gross profit margin trend, similar to electricity, and that's showing that it has moderated off the highs of 2023, where Tony talked about the trading gains that were delivered.
And now 2025 will move back into that range of AUD 3-$4/gigajoule, which you can see, is where it largely has been historically, except where you saw that market disruption in 2021, 2022. Looking at retail, good to see the, the Origin brand, holding its strength. We continue to have now, Kraken and the new retail operating model is now in place. It's delivering underlying improvements. You can see that through improved customer experience and, in particular, the simplifying of the energy specialist experience and end-to-end processing. The benefits continue on the next page. Customer growth up 135,000 accounts for the year. We've increased the speed of campaigns and products and our ability to personalize and segment our offers, and our churn benefit to market, which is around 7%, has continued to improve.
So good to see that with the implementation of Kraken operating model, delivering lots of benefits that are flowing through to the business... Our community energy services business, think about that as a residential embedded network business, has continued to grow the customer accounts. The only reason for the margin coming off in 2024 compared to 2023 was really that we'd had a legacy supply contract, so continuing to see underlying strength in that business. Broadband has grown its accounts, as you can see now, to 152,000 accounts, and now have commenced the cut over to Superloop in July, which we're underway with. And we're seeing this benefit now that emerges through churn of having customers bundle with broadband, which is pleasing to see.
You can see that we continue to grow our products and solutions for customers. Turning to Origin Zero, it's growing a suite of, a broad suite of services. Remembering the core business of commodity, and this is really what we're doing beyond the commodity business there. You can see now we've really grown the number of large businesses on the VPP. They're connected to our Origin Loop business, and so that's actually driving both scale and, and value for us. And we've doubled, more than doubled our EVs under our subscription business and signed up now over 150 business customers through leasing and subscription products.
So we really are growing our e-mobility business, and you can see there that when we're taking, offering services beyond the commodity, we've now more than doubled to greater than 14% with take-up of products like distributed energy resources, energy efficiency, offsets, and digital insight subscriptions. So continuing to scale and grow the Origin Zero business. Now turning to retail, and we show this as the. We've obviously highlighted the benefits of Kraken and the operating model now turning to cost. We're on a path. We're very much focused on benefit realization. There are underlying improvements there, but clearly, it's taking longer on cost.
We are confident we will come down from FY 2024, but in relation to the original target we'd set ourselves in FY 2025, we are not going to achieve that, and that's been impacted by a couple of features, really. One is that, bad and doubtful debts, they've grown, with higher bill sizes and also cost of living, so there's an industry impact. It's also a different regulatory context, and it's taken us longer to tailor our collections processes as we've gone through a major transformation. We've now strengthened these processes, and we're seeing better early collection results. The second is, in relation to labor. There's a volume of activity. We're certainly embedding AI and Kraken functionality to reduce labor, and we've reduced that from a peak by 17% to date.
We will continue to go after that and see line of sight to further improvements. And we've also invested in growth and some compliance-related activity as well. You can see, compared to 2018, we've delivered a benefit in the underlying cash costs, if you ignore just the bad and doubtful debts for the moment being a market factor and some of the growth. So we're down AUD 50 million. Clearly, over a long period of time, there's a lot that's gone on in the business, and the retail business is performing strongly.
We now see line of sight to further improvements to our cost to serve, and expect modest improvement in the FY 2025 financial year, but further improvement in FY 2026 and targeting, based on the current market conditions, AUD 100 million-AUD 150 million reduction from 2024 to 2026. The reason really just around the current market conditions is really just watching collection-related activity that's associated with cost of living, but there will be underlying improvements. In any event, it's just that will go to the target when we have a look at that. Integrated gas. It's a strong resource base, as we highlighted earlier.
We have highlighted on the chart there in 41, just the gray box you can see there in the far right column highlights the resources and reserves that it provide additional opportunities beyond the life of existing contracts. We have a large resource base that's near existing infrastructure and provides a great opportunity for us to tie in new, the tying in of new wells at a low cost. The other thing that's occurred is the strong field performance, and we gave further detail in the Investor Day, has just enabled the deferral of exploration and drilling activity. So there's not been very much exploration and drilling activity over the last 12 months. Turning to 42, you can see the operated and non-operated production really benefiting from a whole range of optimization activities in the field.
We've had fewer scheduled maintenance disruptions. We've reduced the workover backlog. And you can see that graphically on the right-hand side, that operated production over the course of the last two years. There is one notable disruption that occurred with a LNG vessel power outage, which did cost about 9 petajoules of production. You can see just the strength of the rebound to that production that occurred. So you can see... By mid-December, we were back up, and in fact, I think we had our record day in mid-December, and that's continued to strengthen.
Turning to the revenue line, you can see the underlying LNG contract prices, which really are driven by oil prices, and that's lower in the 2024 year at $86 a barrel, compared to $103 a barrel in the prior year. You can see also that the sales to the domestic market are below, remain well below those international netback prices. That's been. It's those prices that have really driven the lower revenue this year. There were higher spot cargoes, and it's worth noting that the LNG SPA between APLNG and Sinopec, which goes through periodical price reviews, either party would be able to call a price review notice in the second quarter of this financial year.
Our OpEx and CapEx of $4.10 a gigajoule, in 2024, you can see there is up on 2023, really driven by non-operated, activities and development activities, some operated well on exploration. We have also got, some higher operating costs from power, so they, they're probably the two key drivers, but we continue to maintain our guidance at $4 real between 2024 and 2028. Slide 44 just really takes through some of those underlying initiatives that go to delivering that very good production performance, but also, introducing low-cost supply in the finding and development of our resources. You can see there that some of the activities on the right-hand side have improved our mean time to failure by 19%. The artificial lift pumps have operated.
They've improved also our output by 5%, and also we've reduced standard well work over unit cost by 4%. We've got infrastructure, we've got technology, all driving towards improving the production and efficiency of the base, and you can see at the bottom of that slide, just the way we think about that, and Andrew Thornton talked to that on our Investor Day. Now, there's a number of other activities about how we find and develop that low-cost supply. The first tower units in Australia, we're continuing to trial new technology that prolongs the operating life of wells. We've successfully drilled one vertical and two horizontal pilot wells under the exploration appraisal program.
We continued to defer the operating drilling program ramp up, and that's really driven by all of the work on that left-hand side of that slide. We have an operating model review underway in integrated gas, and that's really focused on reducing future development costs and the life cycle costs of supply. Now, we've mentioned this previously in our guidance, but the year is upon us in terms of LNG trading through the very good work of the team, over the period of time that you can see there highlighted by that spike on the red line on in terms of the TTF gas prices and the difference between that and the Henry Hub.
FY 2025 has been substantially hedged at those very high prices, and as a result, EBITDA will be between $400 million and $450 million, and it's largely hedged. You can see there a contribution in FY 2026 that's about $50 million to $150 million because there was a lower proportion hedged at, into that year. We delivered $87 million in the year just gone by. This is underpinned really by that Cameron contract, where we purchased 0.25 million tons per annum at Henry Hub linked gas prices on a long-term, and it certainly will deliver a very good benefit for Origin over the next 12 months or so. Turning to Octopus Energy, continue to see the strength of their brand and how it is differentiated in the market, the customer-centric operating model.
They are very well recognized for their customer service and technology. They've adopted artificial intelligence in a meaningful way in terms of their customer service. They call that Magic Ink, and that's now driving an increasing number of messages to customers and servicing and responding to customers, and driving a higher customer satisfaction result on the back of that. Tony mentioned that there'd been a growth in customers, clearly materially. Nearly four million customer accounts have grown over the last 12 months. About one million of those are internationally, but when you look at the UK, in addition to the Shell acquisition, 600,000 customers have grown organically, and chose to switch to Octopus in that financial year.
When it comes to Kraken on the next page, you can see similarly another exceptional growth story in terms of the number of live accounts that have grown, but also we're now the 51 million accounts entering into the U.S. market, and now just bringing those accounts through to the revenue as implementations take place. The Kraken suite is then extended in KrakenFlex. Two aspects to that, think of SmartFlex in the context of sort of devices connected in the home, not dissimilar to the Loop, very similar case, and they've got 160,000 devices connected, much more higher proportion of EVs, given the penetration in the market in which they're operating.
Then they have contracted their Flex service out to a lot of larger grid-scale asset providers, and that's called InfraFlex, and there's six GW contracted to that, so continuing to grow the Kraken business. International retail I touched on, it's grown by over one million accounts. You can see the markets in which they've operated. So 190% uplift, you can see, they really are delivering that growth. And then on energy services, it's really heat pumps, EV, fleet and chargers, and solar sales. The EV fleet now that's under management in the UK by Octopus has 20,000 contracted vehicles. The heat pump market is earlier stage, but they are at the forefront of that through their own technology and also their installation capability.
Now just turning to outlook, the guidance energy markets FY 2025 is expected to be between AUD 1.1 billion and AUD 1.4 billion. That's down obviously from the result this year. Two key drivers, really, the outcome of the, wholesale component that was determined in the FY 2025 tariffs that declined by AUD 20 a megawatt on average, and there's a slide in the appendix that gives a bit more detail as to how that's made up. And, we, in addition to that, we have the coal purchase cost being higher by about AUD 30 a ton. They're the two key drivers. The cost to serve is expected to modestly improve, in the 2025 year, and obviously, we'd mentioned earlier that would be another AUD 150 million reduction between, by 2026.
Octopus Energy's earnings and their share of them was, is due to be higher, and between AUD 100 million and AUD 200 million, and that's largely driven by the REGO prices that they purchase being lower. And also they continue to benefit from the customer growth and the customer migrations. In terms of guidance for integrated gas, you can see there, between 685 and 710 petajoules, CapEx and OpEx at AUD 2.83 billion, unit CapEx and OpEx guidance of AUD 3.90-AUD 4.30. And the ambition there is to maintain that cost of supply, as I said earlier, at AUD 4 a gigajoule real on average to 2028. And the LNG trading really just highlights what I'd said earlier regarding the guidance in that regard.
So just last slide really is, look, we see lots of opportunities in the energy transition, choosing to invest in those, in a thoughtful way. Our customer position, the world-class platform, we're on our way in terms of driving the execution of our strategy. Octopus continues to grow, APL and G performing well, and the strong balance sheet puts us in a position to continue to take opportunities to grow value for our shareholders. So thank you very much for that, and we will now turn to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Tom Allen from UBS. Please go ahead.
Good morning, Frank, Tony, and the broader team. Just on the gas portfolio margin, you're guiding a moderation from $4.20/gigajoule in FY 2024 into a $3-$4/gigajoule target range next year and into the medium term. Is that gas margin guidance based on assuming gas procurement costs remain unchanged from current levels? And how should we interpret the upside risk to those margins, just given that Origin has a large inexpensive gas sales contract at GLNG that we estimate expires in May next year, and you've closed out the lattice gas contract. These alone could have translated to margin expansion into fiscal 2026 and beyond that might have pushed you beyond that $3-$4/gigajoule range. So it does imply there are other down drivers to the margin.
Hoping you can just add some color there to understand the various pressures.
Yeah, I'll just open up. Thanks, Tom, for the question, and an insightful question as well. You're right, the core is really predicated, if you think about over this, this year, is predicated based on where gas prices are. You are correct that the GLNG will come out in 2026. We do set that range, and you've seen that move, you've seen that we've moved within that range. It remains our medium-term target, but you are correct to point out that there would be a benefit from GLNG coming off as we currently see it. Tony, did you have anything else to add on what else might be driving the margin?
No, that, that sort of covers it. We had quite a large trading gain in the energy markets gas book as a function of that dislocation of gas prices that you saw in 2022. And those contracts have sort of wound out, and that's caused us to come back towards long-term average. And as Frank highlighted, the GLNG contract it would impact the year 2026 rather than the year 2025.
Yeah, and would represent potential upside, all other things being equal, but we need to continue to manage all other things, Tom. So that's, that's the basis of giving the guidance now.
That's clear. Thanks, Frank and Tony. Just on CapEx, over the last 12 months, Origin's announced the Walcha Energy and Yanco Delta transactions, committed to Eraring Phase Two and the Mortlake Battery. Have you secured all the development options that you need, or are there further scale opportunities on the horizon that might be incremental to the potential opportunity that you've called out at Golden Beach? I'm just looking for a broad guide, if possible, on how we should think about the total capital demands on the business-
Yeah
... including major growth over the next couple of years.
Yeah, I think that you should be. Look, we'd set out with an objective coming on the back of the bid, where we felt pretty confident about moving on the battery storage opportunities, and you'll see now that we've set our position in New South Wales, Victoria, and Queensland, and we have South Australia underway. We don't have immediate plans to build or contract more beyond that, but it is a dynamic market, Tom, and that is that we have also got the, I suppose, luxury, that we have a lot of sites where we've got expansion capacity, so we haven't had to think about that other than when we want to take those opportunities.
But our focus right now is delivering on that, call it the 1.5 gigawatt into the portfolio and the South Australia opportunity, and then we, we remain, able to invest more in that should we choose. But at the moment, you shouldn't interpret that we're actually committing to anything beyond. One of the key things for us is we've got obviously three gigawatts of OCGT. We now have 1.5 gigawatts of batteries, and we've got 1.4 gigawatts of VPP that's growing. We will continue to explore OCGT opportunities, though, in the market, but I don't think you should feel that they are immediate, commitments by Origin, but certainly we'll explore those, Tom.
On renewables, on Yanco Delta, it is the main, it is the main priority for us right now in the stage of the transition and the maturity of that. And we previously guided that that would be AUD 300 million-AUD 500 million in the development phase, and you should think about other capital then being in the, you know, third-party funded. And so I'd be really just looking at that as the window of capital at the moment, but continue to explore opportunities, Tom.
Thanks, Frank. If I may sneak one last one. You've called out the price review with Sinopec can be called in 2 Q this year. Are we right to assume that the LNG contract with Sinopec has customary constraints around the maximum price change that can be passed through the LNG SPA, at this point?
Oh, I can't give any further detail on the contract based on that, Tom, so I don't think you should make assumptions about what's in the contract, but it's certainly got clauses in there that are familiar to the LNG market. But, yeah, I don't think you should make assumptions about what terms are in there.
That's understood.
Okay.
Thanks, Frank. Thanks, Tony.
Thanks.
Thank you. Your next question comes from James Bann from Citi. Please go ahead.
Good morning. A bit of a leading question, just around the VPP. I'm wondering, when you assess yourselves versus your competitors, where do you think that you are, versus particularly the tier ones on how mature that VPP is?
Yeah. Do you want to make some comments, Tom? Yeah, I'll make some comments. I think what Origin has done really is concentrate on mopping up really all of the, I guess, latent controllable demand that already exists in the market, and that's why we've quickly grown to 1.4 GW. We would have the largest VPP, I think, in Australia, certainly on a residential basis, even perhaps globally on a residential basis. You know, to compare us to the number that, you know, Frank called out for Octopus, we have some 390,000 devices connected. So I feel like we're quite advanced. We've also got a strong offering into the Origin Zero business.
We control a number of assets in both the FCAS markets as well as the energy market. So I feel like we're in a pretty good position on that. Yeah, and James, just in terms of the maturity of it, it's operational, it's delivering, we can see the value, we can see the benefits to customers where, and you would expect to see... You know, we've launched recent products, and we'll continue to have more products that come on the back of that, but it's, we think we're ahead, but you never want to be complacent 'cause we actually want to continue to grow both capability and scale.
Yeah, got it. Look, yeah, where, where I'm coming from is, you know, you call out the 1.4 gigawatts of VPP, which is growing 1.5 of batteries, three of OCGT. Slide 11, you know, you look at how volatility has changed in the market over the last half decade. There's quite a bit of demand growth out to the end of the decade. A lot more variable renewables going to enter the system by the end of the decade. What I'm trying to get at is this long capacity position that you've got, how well positioned you are competitively, to be able to capture those opportunities in a more volatile market, because your FY 2025 guidance for electricity gross profit is in the middle of your range, your target range.
Yeah.
Look, the real world is obviously much more complex than my spreadsheet is.
Yeah
... but, you know, very mechanically, it looks like you can outperform that gross profit as the market becomes more volatile.
Yeah, I think when we think about the FY 25, there's no benefit of any of those batteries coming in, and you've got the emerging benefit coming out from the VPP, which is contributing, but we would expect to grow over time. The growth in that VPP and any new assets that we're bringing in would not be within the way we've guided to that range. So you're right, we do expect to do better than that, but we're also acknowledging that we're bringing in assets to achieve that, particularly as the case goes for batteries. So we want to make sure that not only do we get that benefit, but we get the returns on that, and we're confident based on the way the market's playing out. Looking out of the window today, you can just see how things change.
You know, today there's not much sun, there's not much wind, and so as a result, you'll see that, I'm pretty sure Greg would tell you there'll be higher prices, but this market is moving. I think anyone, and I'm sure all of you are observing it over the last month or so, you'll have seen that it has really moved around, and we just don't see that abating. That's gonna continue to be the case, and we think between the combination of the gas-fired peakers, the batteries, and the VPP, in addition to operating Eraring for as long as it's needed in the market, and makes sense, puts us in a good position. The point to round out on this is you need to do a number of things well. We need our operating assets to be reliable.
We need to be able to capture those. We need to be doing well in the retail. We need the storage. We need all of those things to operate. So yeah, we feel like we're positioning ourselves well for the future.
Perfect, thanks. That's very clear.
... Thank you. Your next question comes from Dale Koenders from Barrenjoey. Please go ahead.
Morning. Maybe to dig in a little bit more, Energy Markets' guidance for FY 25, presentation deck suggesting this is assuming top half of, gross margin ranges in electricity and gas already. I know you've called out the cost out and, and PPP benefits, but, the risk is that's industry-related and competed away. So when you look at FY 25 EBITDA guidance, is that a good medium-term outlook for the business? And if not, why not?
I might get Tony then talk about then FY 2025 and what you might see, and so, yeah, we'll go through those drivers so you get a sense. Yep.
Yeah, so I mean, what you saw this year really was, you know, you had a dislocation in energy prices, which lagged through to the tariffs. So we would look at fin year 2025 as more sort of a normalized year. There's probably elevated cost to serve in fin year 2025, which we think will get out of the business. And so really, any of the growth that we call out, whether it's the investment in the Eraring batteries, Mortlake batteries, and some of the opportunistic aggregators that we've brought would all add to that gross margin. I think if you thought about the business on a long-run basis, you'd have to think about it as what's base, and then what we're adding as growth.
And when we talk about that long-term margin, we refer to it as the base.
Just adding one point to that, Dale, clearly, it's also predicated on a, you know, there's competition in the market, there's always things that can happen through conduct and competing and all those aspects. We should never forget that, but you're right, that, you know, is there a, is there a - can people compete that away? I would say that we think about the base as being a genuine base, but we do need to watch conduct and market and competitiveness. That's probably the only other factor. That and reliability of plant in year would be the two other things that you would want to focus on, but those growth aspects are still set above it, and the cost out beyond.
Okay.
Yeah.
Okay. And then secondly, slide 25 suggests the business is significantly undergeared. I guess the question's relative to your AUD 0.55 dividend this year, do you think about that, you know, being sustainable on an absolute basis, given a sort of a flatter outlook for energy markets earnings? Or is it still sort of growth to that number and, and higher returns as sort of been alluded to at the Investor Day?
Well, we'll make decisions, and Tony might want to add some comments on that, but we will make decisions on distributions each year. We certainly took the range, if you could say, out of the distribution policy for a couple of reasons, because we can see, we certainly have strength, but secondly, you can have working capital move around, and as a result of that, you wouldn't want to be trapped by a range when you can see just what's happened with working capital in the last couple of years. So it's certainly an opportunity available to us, Dale. The build-out of the CapEx that you can see at the moment would, Tony said earlier, take you into the lower half of the range of our target of the two to three times.
So we'll just have to make an assessment each year on that. We genuinely are going to make the best decisions every year for returns and allocating capital to shareholders.
Okay, thank you.
Yeah, no, I'll just reiterate that. We will be in the bottom end of the range with those capital programs, and we would assess future opportunities against returning to shareholders, as we talked about in that capital allocation process.
Thanks, Dale.
Thank you. Your next question comes from Nick Burns, from Jarden Australia. Please go ahead.
Yeah, thanks, Frank and team. Maybe just another question on CapEx for energy markets. Can you just talk about how much you intend to invest in FY 2025 into growth projects? And then also just on Octopus, you called out the fact that it is cash flow positive at the moment, but if there is a desire by Octopus to further accelerate growth, do you expect Origin will continue to maintain its 23% shareholding? Thanks.
Yeah, okay. So maybe we might go to just the... We'll deal with Octopus, the back end of that question, if that's okay. Did-- Tony, do you want to just talk about the growth CapEx for 25 and just so people-
Yeah. So, we've called out the, obviously, the Eraring Stage One battery. We've got Eraring Stage Two, and Mortlake batteries. I think we've called out, I'm trying to think exactly what the number is for FY 2025, what falls in FY 2025, 'cause we've called out the total CapEx spend on that.
Okay.
I'll have to take that on notice.
Just take it on notice, and we'll just see if we can give an answer before the end of the call, or at least a rough order of magnitude, so you know. I mean, clearly, though, the key growth aspects, just to be clear, Nick, that are coming out are really Eraring and Mortlake, and they don't conclude till sort of the middle of FY 2026. So, if I was looking at that, we're talking, yeah, we'll just come back to a number rather than me just sort of run, do it on the run. As it relates to Octopus, I think the base case is that we would hold our shareholding, but we do assess that quite objectively every year, you know, so every opportunity that comes before us.
And so that's it. Therefore, I think it's the best base case assumption to make, but it's not automatic that you would think that we would just follow every investment. But it just comes down, once again, about the valuation, the attractiveness of that, and the opportunities before us. To date, you could see we have followed our money, and we've grown to that 23%. But yes, that's the best. And that's probably one of the reasons why you also wanna make sure you've got balance sheet capacity, and therefore, that goes back to us allocating dividends, and we'll make good decisions from time to time and just assess them. Okay.
All right.
We'll come back. Okay, thanks.
Thank you. And look, maybe just a question on Eraring. Just, following the, agreement with the government about the extension, so you've made the call on, early closure date now of August 2027, but it could potentially be as late as April 2029. Just wondering about the implications for coal contracting, workforce retention, depreciation rates, et cetera, on, you know, in terms of the timeline, when do you make a decision on when the right closure date actually is, and, or how late can you make that call, if you like?
Well, clearly what we've done is we've announced that the closure will now be August 2027. We would have to continue to assess that over the coming years. We certainly are now focused on FY 2026 coal, so that's where our horizon is. We're out at least till August 2027. We'll be making those assessments. You would expect, like previously, not to actually butt up against the timing of that at August 2027, so I'd expect us to assess that in advance for the benefit of our workers and the people that are all associated with the plant.
Probably best way to think about that is, you know, when you're getting towards the end of 26, you're 12 months before, you don't wanna be-- you wanna be really doing those things, not much earlier than that, so we'll have to assess it at that time as best as we can.
That's great. Thanks, Frank.
That's probably, yeah, and that, it, we'll... A bit, you've watched us do it already. We clearly have reached agreement with the New South Wales government. It would require us to be assessing the market and also the government as well.
Thank you.
Thanks.
Thank you. Your next question comes from Gordon Ramsay from RBC Capital Markets. Please go ahead.
Thank you very much. Just wanted to just deepen, delve into the Cost to Serve, the change in guidance there. Just wondering, Frank, if you can provide us with any kind of feeling for what has driven it more. You know, you've talked about bad and doubtful debts, regulatory costs, and higher investment costs. If we were to look at all three of those as the key driver to the change in guidance, has been that bad and doubtful debt expense?
I might just... I might get John just to start off, and I can add any comments. But, John, why don't you just give a sense of orders of magnitude?
Yeah, sure. Sure, Gordon. In terms of bad debts, we're seeing a sort of what I would call sort of an industry cost that's grown, which is really in relation to high bill sizes, cost of living pressure. I probably attribute maybe half of that increase to that. The other aspect has been that, you know, we're clearly in a different regulatory context, and it has taken us a bit longer to get our collections processes right as we go through this major transformation. Right now, we've done a lot of work on strengthening those processes. We've put in place a really excellent collection decisioning tool that's delivering very, very good results in the early collection.
So we expect that those aspects will certainly flow through as we think through 2025 and 2026 as well. It's probably worth calling out that, obviously, labor costs we also see have increased. The aspects there, the high bill sizes has certainly driven a lot more customer activity. We're seeing a lot more calls and emails come through. And as we've rolled off our project resources and bulge workforce following the migration, we've seen a number of reductions, and as Frank mentioned, about 17% of our FTE have reduced from that peak. There is a lot of work in embedding automation. We have our AI capability that responds to prompts our energy specialists to respond.
We've only got that out to 17, so we've got a lot more to go in there. We certainly have got a lot more opportunity to reduce that labor. And probably the final thing is, you do point out, we have certainly invested as well as provisioned more in our compliance and regulatory space as well.
Orders of magnitude would be bad and doubtful debts and labor more than the others. Is that right?
Correct.
Yeah, so they're probably...
Yeah, they're probably, I would say, maybe 40, 40, 20, or something like that.
Yeah, something like that. 40% bad and doubtful debts, 40% labor, 20%, call it other related activity. So that'll give you a sense as to what's shifted, at least in the short term.
That's very helpful. Thank you, and gives us an idea going forward when you're reducing-
Yeah
... bad and doubtful debts. The other question I've got just relates to Eraring, and just, just wanted to get a feel for the commercial availability of that plant over FY 2024. I know there was the unit two maintenance outage, but was there any other kind of unplanned outage over the year, and did that possibly affect your margins that you realized in your, energy markets business on the, on the electricity side, obviously?
Yeah, Gordon, it's Greg Jarvis here. Look, the overall performance is still very good, but where we saw, we had some tube leaks, especially in the May, June period. I mean, that's to be expected with these units as they age, but, you know, we have these from time to time. So we did see that, but overall, performance is still good. We're still keeping the maintenance up to date. We're having a major
... coming up in the next month. So, but, you know, I mean, a broader comment is, I think overall, the market and coal-fired performance has actually gone pretty well. But, but all these units from time to time will have tube leaks and things like that. So, that's just, just normal operation with these units.
Thank you very much.
Yeah. So just because we said we'd round back on an earlier question, Tony might just, Nick's question really just in relation to that CapEx, just to give a-
Yeah, just Nick, on growth, what we call growth CapEx, so excluding maintain and sustain, we're probably expecting AUD 1.1 billion, maybe AUD 1.2 billion for FY 25.
Just so what projects that just so-
Yeah, so that would be more like battery, Eraring Battery, some pre-FID spend on Yanco Delta, some onshore wind pre-FID, and you've seen us with some offshore wind acquisitions in the Gippsland.
But really dominated by that, by the battery plant.
Yeah, the lion's share of it will be Mortlake and Eraring batteries.
Yeah.
Thank you. Your next question comes from Ian Myles, from Macquarie. Please go ahead.
Hi, guys. Can I just circle back to this cost to serve? Correct me if I'm wrong, bad debt is actually a recoverable item within the regulatory framework, and they're actually using revealed costs. So I presume you're getting that recovery in your revenue line. Can you sort of then go and also talk to that 150 reduction you're talking? How much is actually bad debt oriented versus actual cash cost-
Yeah
... of operating the business?
Yeah, good, good question.
Um-
Yep.
So maybe on, just on the first one, you're right, there is a lag effect in terms of recovery, as long as that's sort of an industry-wide cost, and clearly, we would see that there's a decent aspect of that increase, which is industry-wide. I'll need to give you a context. 2025 DMO, VDO, I think, would have a range of maybe AUD 40-AUD 50 increase in cost to serve. So you know, that's sort of flowing through, and then we'd expect, obviously, depending on where industry costs, that flows through into 2026 as well. Sorry, just on the second point-
So, when you sort of think about 100, 150, how much is your bad debts coming down? Which-
Yeah
... obviously, they won't be sustained, but how much is actual cash cost of people in the organization and IT systems, et cetera, et cetera?
Yeah. So we'll see more in 2025 on those aspects of bad debt as it relates to the non-market factors. So I would say, you'll see around, it will be under half of the 100-150, a bit under that, and then the sort of larger proportion will be across labor, discretionary spend, a number of other efficiencies that we're running.
Okay. And then if we think about Kraken itself, how's that actually delivered? I understand you've got some improved efficiencies and the likes, but you know, you've sort of missed your target. We look at the churn ratios, and it doesn't look like your churn from last year to this year's gone down. How can we measure the success of Kraken in the business?
Yeah. I think, Ian, what you'd look at is that Kraken certainly does deliver benefits beyond cost, but if I just sort of address the cost ones, we are absolutely seeing lower CapEx and technology spend as we see now. Underlying, we see simplification of our energy specialist processes and their experience. We're increasing to the other aspects. We're increasing the speed of which we can now release our campaigns and products, our personalization and segmentation, which is also creating value for the retail business in the sense of our EBITDA growth year on year.
We're seeing improvements in customer happiness that does go to stickiness, that goes to our churn differential, and while market churn and our churn went up slightly, market churn went up more, and the gap between those has widened year on year, and you'll see that as partly attributed, or in fact, probably mostly attributed to a number of the things that we've done through Kraken. And overall, when you sort of step back, we're growing, we certainly grew across every one of our product lines in 2024, and you know, so we're on a path.
Okay. Then from a, I guess from a cost point of view, or let's say the energy market, wholesale section, the business obviously is coming down. One of the points you've made in the past is volatility is continuing to grow in the market, and you've got large book of open-cycle power stations and batteries, et cetera. Why aren't we seeing more of that coming through into that growth in that EBITDA or gross margin profitability, that range could exceed AUD 40 over time?
Yeah. Okay, good. Tony might kick it off-
Yeah
... and we can add some comments.
So, Ian, the way that we get the benefit from the peaking plant really is through the forward price curve or through the tariff. So as the market becomes more volatile and the demand for capacity products like caps goes up, then that's reflected in both C&I and residential tariffs, and essentially we're sort of along that asset class. Once you get into the actual year, depending on how the book's positioned, on the day that you get quite a lot of volatility or higher energy prices, depending on the retail load, that may or may not be a longer position than that retail load. Now, if it is a longer position than the retail load, then we'll get an incremental benefit in that year.
What, what we do get impacted by, and we have to really manage, is that as Eraring becomes sort of end of life, and we've sort of experienced this in FY 2024 and, you know, also a little bit this winter, is that when you get these days that Frank talked about, where you get very still, days, you get not a lot of sun, the energy price is quite elevated, and we'd really need, you know, Eraring to run reliably through that. And as it reaches end of life, we are finding that it does trip a little bit more, and so we just need to manage that. But primarily, we'll get the benefit of increased volatility through the forward price, rather than, you know, in the year.
And, Ian. Okay. Just in addition to that, just in the year, we have to make an assessment at the beginning of the year when we give you guidance, and this is one of the reasons why the breadth of the range is what it is. And so we're making assessments as to how we pick that up. You're absolutely right about the trend, and then we've just got to make sure we continue to be on the right side of all of those events, and that's what we work hard to do. But that's one of the reasons why the range is what it is.
Okay, and just one final question: Your franking balance has doubled.
Yeah.
How much is too much in franking credits before you have to start thinking about giving more back to your shareholders in some version?
Yeah. So we're well aware of coming from no franking credits to coming a long way. I think you still just have to, knowing we've got them, then that goes into our consideration, but I don't think you make all of your capital allocation decisions completely on franking credits, but it certainly goes into our thinking about the returns to shareholders relative to other opportunities. That's the simple. It's a consideration, absolutely, Ian, but it can't be the sole determinant of creating value for shareholders.
No, no, appreciate that. Okay, thank you.
Thank you. Your next question comes from Rob Koh, from Morgan Stanley. Please go ahead.
Good morning. May I direct my first question, I guess, to your new CFO, and congrats, Mr. Lucas. Just wanting to understand a little bit more on some of the finer points of your debt. I guess, with the debt to EBITDA as at FY 2024, should we-- we should be making the adjustment for the Queensland policy benefit that washes out. And then with the tolling projects coming through, like the Supernode Battery, are they being capitalized for credit rating agency purposes?
Okay, thank you for the congratulations, Rob. Much appreciated. So yeah, the first question is on debt to EBIT, EBITDA. We've included the AUD 600 million in that reduction in debt for this year. We would see that unwind through FY 2025, so we don't get to obviously keep that. We pass it on to customers, so you should factor that in.
On the tolling agreements, the way that we have structured those tolling agreements is that we are not the financial responsible market participant, and we've done the structure around those, which we capture all of the benefits that we would have, similar to the Eraring and Mortlake batteries, but at this stage are classified as a derivative transaction, so not accounted for in lease accounting.
Okay, great. Thank you. And then I guess maybe a question around Octopus. So I guess this is maybe a question for Mr. Briskin. I guess, and it's a two-part question, inevitably. Just the fixed costs of Octopus were about AUD 265 Origin share. I just want to understand how we should think about operating leverage as that business continues to grow. And then secondly, I think I heard Mr. Calabria mention that with the licensed accounts is 51 million signed up, but not all of those are actually switched on officially. How should we think about that kind of conversion time? And we still recognize fee revenue at the time of contract, so the contracted number is, I guess, still the relevant number. Is that right?
Yeah, just good day, Rob, it's John here. Just on your first question, we don't split out those operating costs by the business lines. But what you should think about is that the UK retail business certainly operates, as we've indicated in sort of previous presentations, at a strong cost to serve advantage to the Ofgem tariffs. We see high margins again in the Kraken business. There is a lot of investment that is going into international retail and is going into the energy services businesses. So those will also drive, you know, a fair component of those operating costs. I think the question on conversion time, I mean, it really depends.
New markets typically will take longer for migration. Existing markets will be quicker. You know, we know that in the U.K., they were able to move E.ON and then EDF, obviously in quicker time frames. I think you should sort of factor in probably sort of in general, maybe a two to three year lag on that.
We will see a lot of the 51. Were we expecting that a reasonably high proportion of the 51 will convert to be revenue earning this?
Correct.
Now, Rob asked the question about FY, when's FY revenue recognized? It's not until it starts. So how does that work?
Well, no, it's primarily now switched from sort of more of, I guess, the upfront migration fees to the ongoing fees, and therefore it switches towards the back end of the implementation. In fact, post-implementation, those fees typically will now kick in.
Yeah. So there's a reasonable amount-
Yeah
... of fee revenue to come in as a result of those completion of those implementations?
Yeah. Yeah. Okay, that's very helpful. Really, appreciate that. Maybe, sorry, if I can just squeak in one more for Kraken Australia. The Ergon transition, I believe, seems to have gone well. Should we be thinking that adds to Kraken scale within Australia, and so there's some potential benefits to both Ergon and Origin?
Yeah, that, that's exactly right. So, so that's now—I think they've announced recently, that's now all complete. I think that happened relatively quickly. And clearly, you know, we both benefit from the continuous development of the product. It's as we talked about in the past, purpose-built for the utilities industry. You know, it's got cloud native AI. Like, I think it actually continues now to get better and better, and especially in the Australian market with more scale.
Cool. Cool. Thank you so much.
Thank you. Your next question comes from Reinhardt van der Walt from Bank of America. Please go ahead.
Morning, Frank and Tony. Thanks for taking my question. Just looking at your comment about retail tariffs being in line with the DMO for all customers, I think at least seems like, you know, this implies your back book is maybe priced a little bit below some of your competitors. You know, in this industry, obviously, churn is still, I mean, in the scheme of things, quite low. Elasticity is, is fairly low. You know, are you confident that this really competitive retail pricing strategy is actually going to translate into customer growth? And if so, how many churn cycles do you think it's going to take before you actually see a volume impact?
I'm happy to take this question. So, there's probably a couple of aspects to this, Reinhardt. I think there's both a strategic aspect in terms of the long-term value of that customer book, but also a conduct aspect as well. You know, we advocate strongly for a DMO or VDO that appropriately recovers the costs for running an energy retail business. We look annually whether or not it does. It's not a strategy that's set in stone. From time to time, we could, if we don't think that there is appropriate recovery or the recovery is too low, we may have to reprice.
Having said that, what we do see the benefit of is the dispersion of offers between our between our customer cohorts is certainly not as large as others, and therefore, we don't see the impact on churn that, you know, you see. In our book, that sort of differentiation saves us, grows our volume, and over time, we see that growing our customer lifetime value. So it's a strategy we certainly will continue until we see that, you know, the DMO or VDO is, you know, if it isn't priced appropriately.
Okay, understood. Thanks. And, I mean, how much of this, this strategy is driven by, you know, maybe anticipation of building out retail VPP capacity under orchestration?
I mean, not specifically in relation to this, but we are, maybe the other way to sort of think about this is that we are very targeted with our segmentation and offers, and we have strong channels that are able to either attract or retain those customers that sort of feed nicely into our VPP. I mean, there'll be examples like our EV Power Up tariff that targets specifically, obviously, EV customers. We have a number of, you know, other tariffs that we use or other product propositions that we use, that we use to attract those customers. So it's not necessarily, you know, insofar as our pricing strategy, not necessarily driving the VPP sales, but we do that more through targeted offers.
Got it. Thanks. Maybe just a question on Eraring. So obviously, the coal cost relief is rolled off, but I presume you can probably run the asset a little bit more freely now in FY 25. Does your guidance have any kind of assumption around better portfolio optimization of Eraring, or are you assuming that it's basically a consistent sort of generation strategy?
Yeah, look, it really depends on the market. Last year, we certainly ran it harder, 'cause we were - we did have a contract in place with government on under coal, so we are free to run that differently. It really depends on the market... certainly have the freedom-
Okay.
to run it. Yep.
Got it. Okay, that's fine. And so APLNG, the sign-up pack contract, you call that when the price option emerges. But can you just give a sense of how long it'll take for the earnings impact to hit after a negotiation?
Oops.
Yeah. It's Andrew Thornton here. So I mean, it's a pretty typical SPA and price review clause. So, you know, very specific definitions around how that, how the process works, what contracts are included, et cetera. And without talking specifically about the, the terms, it works in a typical way in that, sure, if the price review is called, and we've said that can happen in the second quarter, then the outcome of that would occur fairly soon after it's called. So you would expect if it was called and if there is a change to have some impact on the 25 view.
Perfect. Thanks a lot.
Thank you. Your next question comes from Henry Meyer from Goldman Sachs. Please go ahead.
Morning, all up at APLNG. As we think about the reduction in cash costs over the next few years, are you able to step through the key drivers for that trajectory from here? Perhaps touching on well availability, changes in work over activity, how the ramp up in drilling CapEx could look and be offset over the near term.
Yeah. Hi, Henry. So I mean, in terms of our ambition, we've said that that's to maintain at less than AUD 4 a gigajoule on a real basis, on average, for the next few years. In the short term, and it's kind of probably time-bound in the sense of in the short term, the way we'll keep under and hit that ambition is by optimizing the base. And when we say that, we mean all the existing wells and gathering lines and facilities that we have. We're doing, I think, a good job on that, and then but there's still room to go. There's room to further optimize wells, and that'll be what keeps us up around that 700 petajoules for the next couple of years.
And then at some point, you know, drilling will, will ramp up, or at least it'll need to ramp up if we want to stay at the 700 petajoules. That's going to be a question for, the joint venture as to, if and when, and, and it'll be assessment of the cost of those new wells and, and what the market conditions are, at that time. And so what we've highlighted, I think, on, on, on the slide there in terms of what we're working on, is really thinking through what the, you know, the future costs of development will be and trying to make sure that when we do get into a position of having the opportunity to increase drilling, we've lowered the development, the cost of those development packages at that time.
It's a, you know, short-term focus on optimizing the base. That's a very low cost to supply. We've had some success there, and then over the medium term, it's thinking about how to, you know, when we do have to ramp up or get the opportunity to ramp up, how we do that at the lowest possible cost.
Got it. Thanks, Andrew. And in that room to move, how optimized would you consider the current well fleet and infrastructure position is? Like, is there much scope to continue improving well availability, MTTF, brownfield projects, over the next few years as well?
Yeah. So, it's a good question. If we, if you had asked that question a couple of years ago, we would have said the obvious one is to reduce the wells offline through additional workovers, because you know, you might recall we had the flooding and some other challenges out in the field. We've sort of chewed through a lot of that inventory. There's still some more to go, like if this time next year, we'll hopefully say to you that we further brought down the well offline inventory, but that will at some point start to come to a natural level where it's hard to go further below that.
I think where there is a lot of remaining upside is continuing to lower the flowing bottom hole pressure of on a, you know, across a broader range of our wells. To do that, you need to have some pretty, you know, stable conditions. It's hard, and we saw that with the, with the, the dead ship incident. It's hard to do that when you're turning the field, you know, ramping it up and down all the time. You, you have that rewatering in the field. It's hard to get to the, that lowering of pressure. So that's, that's a, that is—remains a, a big opportunity.
I think then over a slightly longer timeframe on mean time to failure, you've seen that we have had some good success this last financial year to increase the mean time to failure of our well fleet. For me, that's the largest opportunity we have to really drive optimization of the base, and that's where we'll need to spend some money on better artificial lift systems for the maturity of our fields at that time. But that should be a, you know, a long-term opportunity to really drive, increase the mean time to failure, which ultimately will result in lower workover costs.
Great. Thanks, Andrew. And if I can squeeze in another quick one, on Octopus, just within the FY 25 guidance, are you able to add any color on how that split of earnings could be between Kraken and Energy please?
Well, we should see an uplift in UK retail. Part of that will just be additional customer volumes coming through, but also, we expect some lower REGO costs. And Kraken will continue to grow as more customers come up. I don't think we're guiding really to the splits between those two. But maybe the final aspect will be that there will be continued investment in international retail and energy services, so that will offset some of the sort of underlying increases you'll see in those businesses in the first two.
Okay, that's helpful. Thanks, all.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Calabria for closing remarks.
Okay, thank you very much for your questions and your time this morning. You've obviously seen a significant uplift in profit this year. We've guided a moderation in energy markets, but remember, we've got LNG trading coming in this year and continued strong performance in production and cost at APLNG. We're investing in batteries and renewables. There's a lot of tailwind opportunities in the energy transition, but you should continue to think of Origin as making good decisions to allocate capital between the growth, operating our existing business better, and utilizing the balance sheet to make the best decisions for our shareholders. Thanks very much, everyone, for your time this morning.