It may have garnered coverage in friendly media but the latest instalment of the campaign by foreign multinationals to receive billions of dollars in extra handouts under the CPRS is a debacle.
TRUenergy, owned by Chinese conglomerate CLP, and International Power, owned by British multinational International Power PLC, ramped up their rhetoric yesterday in a desperate attempt to scam further compensation from taxpayers under the CPRS for their coal-fired power generation assets, especially Yallourn and Hazelwood in Victoria.
Both companies want a tripling of compensation under the CPRS to $10 billion over the next five years.
The problem is it is too late: the best deal the government is going to offer on compensation for generators has already been finalised, or close to it, as the negotiations between Ian Macfarlane and Penny Wong come to a conclusion today. They won’t get an extra $6 billion-$7 billion, at least not over the next five years, but they are likely to get some extra compensation, possibly tied to investment in renewables or gas-fired power, which both are investing in anyway. The time to campaign for all those extra billions was a fortnight ago, chaps. Tomorrow’s full-page ads — presumably in The Australian and The AFR, to whom they gave the story today — are way too late.
The extra $6 billion-$7 billion demanded by the companies looked like an ambit claim, until TRUenergy suggested that if it failed to materialise there may be supply disruptions. TRUenergy’s CEO, Richard McIndoe, was at it again yesterday, claiming that the CPRS will cause “serious financial impairment of the assets of private investors, resulting in increased price risk for households and businesses as generators are forced to sell on the volatile spot market rather than through long-term contracts; reduced reliability of supply as power stations with shortened lives reduce maintenance expenditure; and failure to invest in new and replacement plant due to perceptions of sovereign risk” and would breach Australia’s bilateral investment treaty with Hong Kong.
International Power’s Tony Concannon trumped that, threatening to “walk away, simply exit the Australian market, hand Hazelwood to an administrator or try to recover some residual value from its asset by selling on to the spot market” — a result that could lead to “extreme market volatility”. The CPRS “really could have a disastrous outcome”.
Hazelwood is less than half of International Power’s assets in Australia, so “simply exiting the Australian market”, which according to International Power’s parent company in Britain has offered a “significant improvement in results across the portfolio” would involve a fire sale of Loy Yang B and gas-fired plants in South Australia and WA. And while Hazelwood is an ancient, filthy plant that should have closed years ago and is likely to close in the next five years anyway, International Power PLC itself said in a presentation to investors this month that Hazelwood was “30% forward contracted for 2010”.
So if International Power “simply exited the Australian market” it would, by its own admission, breach several substantial contracts. It would also, necessarily, turn its back on the emerging markets of NSW and Queensland, which are privatising some or all of their power assets. International Power also owns one of the country’s biggest energy retailers, Simply Energy, with more than 400,000 retail customers. Simply Energy would have to shut down as well.
Both companies have again been caught out failing to advise investors of what they claim are near-existential threats to their Australian businesses. Neither company had disclosed to investors the issues they are publicly raising today. Crikey asked both companies early this morning why they had not told investors of their concerns. International Power said it “has highlighted the difficulties of the CPRS in a number of investor forums and management statements. We will further update shareholders when the exact design of the CPRS is known.” CLP had not replied by deadline.
International Power appears to have been especially remiss in failing to tell investors either that it may have to abandon its Australian operations, face compensation claims for breaching contracts, and withdraw from competition for NSW and Queensland energy assets, or that its Australian CEO was incorrect to cast doubt on the company’s continued Australian operation.
In truth, of course, this is a badly timed, blatant scare campaign undone in one case by the company’s own statements from a fortnight ago and in both cases by the fact that neither business is concerned enough to warn its investors.
In a policy process marked by the extent and undisguised nature of special pleading and rent-seeking, TRUenergy and International Power have managed to reach new lows.
I’ve been arguing in these threads for the need to ensure business viability of the energy/mining sectors, and against the simplistic bolshevik-like tendency for some of the far left to treat the sector as villains needing to be defeated. It’s not just a question of whether you drive or use compact-flourescent light bulbs; the whole economy and so almost all sectors of society have benefitted from coal exports.
I would, however, be a bit disappointed if the energy sector started trying to hold public safety to ransom, in the way that unions have sometimes done in the past. It has been fairly obvious for a decade or more that some form of carbon penalty was on the way, and the bigger companies at least should have been planned for it before now. This should have been covered under the “Regulatory Risk” heading. And there are parallels with the too-big-to-fail financial institutions that waited until the GFC before revealing the stakes they were playing with, leading many observers to think that a more fragmented marketplace will be a necessity going forward.
The energy and mining sectors would do themselves much more favours at this point by suggesting creative models of carrot to compliment the stick and preserve their viable as business models. “Compensation” is not a carrot; it is merely exchanging the stick for a feather.
Maybe the power companies’ aim is not to get more compo but to scare the Libs into voting the CPRS down.
But I’ve never unerstood their problem: why don’t they just increase their prices to cover their increased costs? If their argument is as strong as they claim the regulators will surely increase their price cap by the necesary amount.
I don’t understand why this is only becoming a big story now. Its be mentioned within the industry for at least 6 months. Babcock and Brown Power mentioned the possibility of breaching loan covenants months ago (can’t find the link now).
Compensation will not change the price paid. Let me repeat compensation will not change the retail price. That will be set by the marginal cost as it is currently. The cost to generate an extra MWh of electricity. That generation will be subject to the full carbon cost.
What really matters is if the asset breaches its loan conditions (LVR) then it goes into administration at which point it’s not clear that contracts with retailers will hold (funnily enough TRU energy is mostly internally contracted, so it means that TRU energies retail arm will be in big trouble).
The threat to only bid into the spot market and not contract capacity is I think a false one. Generators contract to ensure revenue and to get paid a premium over average prices. If the banks seize the power stations is there any basis to assume that they would not run the asset according to best practice? OR that they wouldn’t try to sell it on to someone who would?
However if what they say is true and the capacity won’t be contracted in the future a long hot summer will bankrupt every retailer or retailers will refuse to sign up customers or retailers will need to raise prices enormously to guard against sky high prices. Average prices are $45/MWh. Administered pricing only occurs once prices average about $450 for a week. Given that the price is much higher at high demand periods and retailers could be losing enormous sums.
some of us mensheviks think they’re villains too James
Somewhat of a pyrrhic victory all the same, SBH, if you should ever defeat them. But that doesn’t give them open slather to behave like the US car industry.