Another coal power victim of declining demand?

The banks have sent in the receiver to Redbank Power Station. Is it another victim of declining demand, growing renewables and the carbon price?

The 150 megawatt Redbank NSW black coal generator has been placed into receivership.

With speculation rife that the 1000MW Wallerawang Power Station will be shut down by new owner Energy Australia, this appears to reinforce perceptions that coal generators are being severely squeezed by the drop-off in electricity demand.

However, Redbank is not another victim that can be claimed by the growing solar sector, the carbon tax, energy efficiency or wind power. Instead, Redbank Power Station is likely to plow on operating without much changing other than its owners.

As detailed in Hugh Saddler’s regular CEDEX updates published in Climate Spectator, NSW black coal generators have borne the brunt of the drop away in Australian electricity demand since 2008. Their higher costs relative to Queensland and Victorian generators meant they were the first to be knocked out as electricity demand declined and additional renewable energy was injected into the grid thanks to the Renewable Energy Target. 

Yet Redbank’s problems appear to lie further back in the heady days of cheap debt that fuelled the rise of Babcock and Brown’s infrastructure ventures, before it all ended in tears with the Lehman Brothers collapse.

According to data from NEM Review, Redbank’s electricity output for FY13 was pretty much on par with prior years, running at a highly respectable capacity factor of around 75 per cent. In addition, Redbank’s earnings excluding debt payments for the 2013 financial year were actually slightly up on FY2012. 

Redbank was originally part of debt-laden Babcock and Brown Power. This was subsequently taken over by creditors, who restructured the assets into the current company we know as Alinta Energy. But they left behind Redbank Power Station in the shell of the old Babcock and Brown Power listed entity, still saddled with huge amounts of debt.

Back in late 2010, when the newly restructured entity of Redbank Energy was taking shape, and well before it became evident that depressed electricity demand was a long-term structural change, Bankwest pulled the plug on Redbank’s liquidity facility. This meant they lacked the cash to pay their bills on a short-term basis.

At this point the rest of their lenders could have foreclosed. But in March 2011 they agreed to hold off on foreclosure for 12 months to allow Redbank’s owners to either sell the business or find someone else brave enough to take on their debts. Twelve months passed and they still hadn’t managed to do this. A series of further extensions were granted by the lenders in the hope the owners might find a way to pay back the debts. In May 2013 the lenders patience had run out and no further extensions were granted. This then led to them sending in the receivers this week.  

Redbank Power station is the most emissions-intensive black coal generator in Australia. Yet even with the carbon price in place and depressed wholesale market conditions the power station is still very much a viable asset. According to cost data prepared for the Australian Energy Market Operator, with the current fixed carbon price in place Redbank’s operating cost per megawatt-hour is around $29.50. Meanwhile, the baseload contract price for NSW electricity is about $54 leaving them safely cash flow positive. 

What we can expect from the perspective of the electricity market is a very orderly process where Redbank plows-on generating emissions-intensive electricity. Meanwhile behind the scenes the receiver will find someone else to take the asset off the hands of the banks and other creditors. This is pretty much what the receiver from KordaMentha told ABC yesterday.

This process will serve to illustrate what a spectacular waste of money the Energy Security Fund component of the carbon price really was. The prior Labor government, against the advice of Ross Garnaut, decided they would hand the most emission intensive coal generators cash and free permits to the value of $5.5 billion on the guise this was necessary to ensure the lights stayed on.

Redbank was lucky enough to be a recipient of $8,766,418 plus 74 cents in cash prior to the introduction of the ETS, as part of this Energy Security Fund. In the meantime they and the Victorian Brown Coal Generators have passed on almost all of the extra cost associated with the carbon price. And at the end of the day the creditors have still foreclosed and, guess what, the generator has miraculously kept on producing power.

The thing is bankers don’t behave out of spite at government policy. If an asset produces more cash than expenses, they keep it running. So it will be with Redbank Power Station, much to the disappointment of other power generators and the environmental movement.