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Saturday 22/5/2010 Page: 2
IN TERMS of emissions per unit of energy produced it is the most polluting power station in the country, pumping out 3% of Australia's greenhouse gasses all by itself. Everybody wants the brown coal-fired Hazelwood power station closed down, the questions are: how soon, how much will it cost and what precedent will it set? Hazelwood, which supplies a quarter of Victoria's electricity, was one of the oldest, dirtiest, coal-fired power stations in the OECD in 2005 and is becoming an embarrassment.
Built between 1959 and 1971, the plant is however, making its owners - UK-listed utility International Power (92% ) and the Commonwealth Bank (8% ) - an embarrassing amount of money. Australia was the most profitable of IP's holdings last year, delivering 27% profit growth, without counting the boost from our strong currency One manifestation of global warming here is demand for more air-conditioning - a virtuous circle if you're a coalfired power generator.
IP CEO Philip Cox told investors in March that periods of "exceptionally high temperature" in Victoria and South Australia had helped boost power prices in 2009. Hazelwood got special mention for delivering "substantially improved availability compared to 2008." The plant's load factor - how much time it spent On - jumped from 75 to 85% and electricity prices rose from $43 to $45 perMW hour.
In the UK, IP's shares have, climbed steadily since the financial crisis and its credit rating is stable. Its AGM in London this week went smoothly. Hazelwood's bankers in Australia refinanced $742 million in loans in January (a short-term reprieve until June 2012 and at an interest rate 1% higher, which IP attributed to uncertainty about emissions trading).
In IP Australia's accounts, filed at the end of April, directors said they were unable to determine any financial impact of proposed climate policy on its Australian assets. (IP's Australian directors must be getting edgy about climate risk though; the company gave them extra indemnification this year.) IP subsidiary Hazelwood Power Finance reported that the carrying amount of assets whose value could be affected by the abandoned carbon pollution reduction scheme was $2 billion as at December 31 - up $26 million on a year ago. But an IP spokesman said this could not be taken as a direct valuation of Hazelwood, which is owned in partnership with a number of other IP subsidiaries.
During the CPRS negotiations, IP Australia offered early retirement of Hazelwood and 70% - owned stablemate Loy Yang B, if an amount was paid to keep equity and debt investors "commercially whole to a pre - CPRS valuation." Which meant, buy us out at book value - certainly not market value, because who would buy Hazelwood in 2010? Blurring the figures, IP said the enterprise value of the two stations was more than $4 billion combined.
Under the Electricity Sector Adjustment Scheme negotiated with then opposition leader Malcolm Turnbull, the government buckled to threats from coal-fired power generators to run down maintenance of the electricity supply, or even "hand back the keys" to plants. Hazelwood alone stood to receive permits worth almost $1 billion, analysts at Innovest calculated - and this was before the compensation in the scheme doubled, jumping by $4 billion to $7.3 billion. ESAS flouted the principles in the Garnaut report, which rejected "inadequate" arguments for compensation based on the loss of value of emissions-intensive assets, unanticipated regulatory change or sovereign risk.
The review agreed the Latrobe Valley was a special case, but said public financial assistance should be directed first to low-emissions coal technologies (matched by industry) and, second, to the workers and communities affected by a transition away from brown coal. The Government's ESAS, in contrast, was a straight allocation to electricity generators conditional only on their agreement to maintain a reliable supply of coal-fired power for another decade.
Even sceptical opposition leader Tony Abbott could do better than that. His Emissions Reduction Fund - to rise from $300 million to $1.2 billion a year by 2020 - would buy abatement projects volunteered by business. There is a wide expectation the fund would start spending in the Latrobe Valley. The Australia Institute estimates retiring brown-coal-fired power stations could create deep and early emissions cuts for as little as $6 per tonne. IP estimated the cost at $20-30 a tonne - still relatively cheap for the volume of abatement on offer.
IP's original offer remains on the table, but a spokesman said no negotiations were under way. As Hazelwood becomes a green cause celebre, everyone wants to throw money at IP. This month Environment Victoria stepped tip its campaign to close the plant by 2012. A report by Green Energy Markets said Hazelwood could be shut down and replaced with a combination of gas, renewables and improved energy efficiency for around $320 million a year - multiplying the plant's emissions (16.2 million tonnes a year) by a presumed carbon price of $20 a tonne. That would add $36 a year to their electricity bills.
But does IP deserve the money? The company was pushing its barrow again this week. Website CE Daily revealed a confidential IP submission that found its way to the Department of Climate Change and its website. It attacked a crazy idea from the PM's Energy Efficiency Taskforce to reform the National Electricity Market Management Company so that it promotes, rather than impedes, energy efficiency.
"(IP) rejects any proposal to introduce climate change policy, under the guise of energy efficiency measures, which has the potential to destroy the value of existing investments in the generator sector." IP says its quote was taken out of context and the company supports both energy efficiency and action on climate change. They didn't say: as long as it costs us nothing.
Paddy.manning@fairfaxmedia.com.au
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