Pulling plug on electricity means NSW people lose out

Bookmark and Share Governance & Service Provision and Energy | Alan Moran
Sydney Morning Herald 29th December, 2010

The parliamentary impasse between the Premier and the opposition over whether the electricity industry sale should be examined reignites an issue that Kristina Keneally thought she had buried. The real issue is the loss of value to the people of NSW. This largely results from state and federal carbon emission policies.

Sales of generation trading rights value the assets of the state's coal-based electricity generators at about $3.5 billion. The cost of replacing those assets is at least $12 billion, which means the state has sacrificed over $8 billion in wealth.

Origin Energy bought the 2800 gigawatt coal powered Eraring Power Station plus a hydro scheme at Shoalhaven with a capacity of 240 gigawatts. TRUenergy, a subsidiary of China Light and Power, bought 2400 GW from the Delta Energy coal-powered portfolio. Origin says the price it paid was equivalent to $313 a kilowatt; TRU may have paid a little less.

The generation trading rights sales leave the government running the power stations and guaranteeing their output to the buyers. The buyers are also responsible for fuel contracts. In effect the process is equivalent to a sale of the power stations but without the new owners having the ability to drive down labour costs. Over-staffing in the NSW system is considered to be less than was the case with the Victorian stations when they were government owned but, nonetheless, applied to all coal-based generators, this maintenance of over-staffing may mean a sacrifice of about $1 billion in sales value.

At about $300 a kilowatt, the price paid for the coal-based generators is very low. A new coal power station would cost over $2000 a kilowatt. Though Delta and Eraring are not new, they are sound assets with a lot of remaining life. If the price of new assets was discounted, the present generators' worth, as unregulated businesses not subject to a special tax risk, would exceed $1000 per kW.

One thousand dollars a kilowatt would put the value for the whole 12,000 gigawatts of the NSW government-owned coal generators (including Macgen, Delta and Eraring) at about $12 billion. But based on the prices realised, the worth of the assets is one third of this, under $3.5 billion.

Contrary to the statements of those directors of state-owned businesses who resigned, the low prices were not due to an incompetent sales process. The prices were achieved in a competitive auction. The value of the assets was discounted, mainly to offset the risk of a carbon tax or similar measures that would sharply reduce the value of coal-based power stations.

It is likely that a much higher price would have been achieved some years ago. But that was before the calls for a carbon tax or cap-and-trade became increasingly shrill. The fact that a higher price was previously achievable means that the underlying cost of the risk of a tax would have been incurred by the buyers and not, as is now the case, the sellers.

The loss of income that the sale reveals, $8 billion, amounts to more than $1000 for every person in the state, overwhelmingly as a result of a prospective carbon tax. The NSW government has been stridently in favour of additional emission control measures so it cannot hang the costs of this on the Commonwealth. Moreover, the $1000 hole in the wealth of every person in NSW that the sale exposes represents only a downpayment on further losses and costs that will be incurred if present carbon tax and emission reduction policies are maintained.