Weaven's foresight pays off big time

Australian
Wednesday 5/12/2007 Page: 40

JUST over two years ago, when Gary Weaven's Industry Funds Management wrapped up control of Pacific Hydro in a deal that valued the company at $780 million, the talk in the market was that he overpaid big time. Put aside for a moment the fact that his average entry price into the stock was much lower, given IFM was an early investor and owned 34 per cent at about $1 a share compared to the $5 a share acquisition price. Then consider that a third of the company's Australian assets are wind farms of a similar size to the Queensland Stanwell wind project acquired last week by Transfield Services for $450 million.

Throw in this week's decision by the Rudd Government to sign the Kyoto Protocol, which significantly broadens Pacific Hydro's ability to generate carbon credits from its offshore developments, and it's not much of a stretch to say the company is worth more than double its value in 2005. Weaven won a bidding war with Spain's Accione to buy 100 per cent of the company and his foresight has paid off in spades.

Pacific Hydro already sells carbon credits into the European trading system from its small Fiji hydro projects, generating a few million dollars worth of credits, and will now be able to generate significantly more from its Philippine and Chilean ventures. The company is one of the first direct beneficiaries of the Government's move, but others can now quickly use the protocol to access offshore carbon abatement investments to lower costs. This is precisely why former environment minister Malcolm Turnbull urged John Howard to sign the agreement once he had agreed to implement a carbon trading scheme, because it had the immediate benefit of helping Australian companies to lower costs.

This said, Pacific Hydro sees a more immediate upside from another Rudd initiative to increase the renewable energy targets from the highest existing state scheme around 15 per cent to 20 per cent. Signing the agreement does at least give business more certainty that Rudd will move quickly to develop a carbon trading scheme, backed hopefully by significant reduction targets by 2010 even the likes of Alcoa, which is engaged in its standard game of brinkmanship with the Victorian Government, trying to get taxpayers to subsidise its electricity costs.

The reality is that while Alcoa's smelter is likely to be grandfathered in a trading scheme, electricity costs will rise and the burden should be shared with other companies. In rough terms, coal-fired power costs $39 per megawatt hour, gas around $42, nuclear anywhere between $45 and $75, wind $85 and solar $150. If you assume a tonne of coal attracts maximum carbon costs of, say, $20 a tonne, then the maths don't look so good for coal because its costs would jump to $59 an hour. Gas is about 40 per cent carbon-intensive, so its costs would rise by $8 an hour to $50 and so forth.

The sooner companies can work around these figures, the better for all concerned. It is also far better to work from a market-based system than myriad different subsidies to alternative energy forms, and worse still to offset the costs of the big electricity users like Alcoa which would be a subsidy on top of a subsidy to everyone's detriment but Alcoa's. Carbon-based pricing will increase costs, as by definition will Australia's signing the Kyoto Protocol, but it will also significantly expand business options to offset these costs in a way which may actually be beneficial to the global environment.