Backers wary of generators going bust

Australian
Friday 12/9/2008 Page: 4

BANKS and other financial backers of electricity generators believe there is a significant likelihood one or more power companies will go broke if no compensation is provided under an emissions trading scheme. A PricewaterhouseCoopers survey of 15 banks, investors and analysts of the electricity sector found most financiers were still willing to lend to the sector, but were now charging a risk premium because of the current uncertainty over the industry's treatment under an emissions trading scheme from 2010.

The survey is included in a supplementary submission to the Rudd Government's green paper by the National Generators Forum. It indicates investors are already looking to reduce their exposure to coal-fired generators, and that most had not started factoring in the risk of a carbon price until 2005. The main threat of liquidation would be triggered by a major devaluation of generators' assets if an emissions trading scheme rules out compensation when the final terms are announced by the Government in December.

This would trigger accelerated debt repayments under the existing financing and hedging arrangements negotiated by the power companies, with some generators understood to be highly geared and at significant risk of loan defaults. Most financiers thought breaches of the financing arrangements were likely if no compensation was provided, with insolvencies rated as a possibility. The NGF has warned the financial stress would impact on investment in new technology.

"Shifting between technologies is not costless and simultaneous significant funds and lead times are required to decommission existing generation and replace it with new generation," the submission said.

One of those surveyed was Sajal Kishore, associate director of Fitch Ratings, who said while the questions were biased in favour of a negative response, the sector faced worsening financial stress and uncertainty. "The real thing is whether the generator is able to pass on those costs or not," he said. A coalition of energy providers has supported the introduction of a trading scheme but said the scale of the transition required structural assistance for the power sector.

The electricity supply association, electricity retailers, NGF and the gas pipelines association said a modest target for 2020 was required to "allow the wider economy greater opportunity to adjust to one of the most fundamental structural adjustments ever applied by fiat". Generators are already unable to negotiate hedge contracts beyond the end of the year because of uncertainty about the carbon price.

"To enable generators to write future hedge/bilateral contracts, the emissions cap and trajectory needs to be announced as soon as possible, and permits made available," their joint submission said. "Currently, there are very few hedge contracts being offered beyond June 2010 because the cost of greenhouse gas emissions is unknown."