Cheaper for power company to shut down its generators

Profit margins will continue to be squeezed.

THE largest electricity generator in the country, the NSW government-owned Macquarie Generation, has decided it is cheaper and more profitable to shut down some of its power generators and buy electricity from the wholesale market.

The disclosure was made by the company as it forecast a slide into losses over the next few years due to the carbon tax, rising coal prices and soft electricity demand.

Macquarie Generation is traditionally the most profitable of the NSW government-owned corporations and generates a high level of dividends, but it expects to pay no dividends to the government from June 2014 as profits collapse.

The carbon tax is only one factor in the foreshadowed reversal of fortunes, as steady rises in power prices have reduced electricity demand, while the strong Australian dollar has forced cuts to industrial output, which is also hitting demand.

Last week, for example, Hydro Aluminium said it would cut output at its Kurri Kurri smelter by a third, which may force down wholesale electricity prices as power sold previously to the company is sold into the market.

Another state-government owned power company, Delta Electricity, is believed to be the principal supplier to the Kurri Kurri smelter.

Macquarie Generation generates its electricity from coal and forecast rises to coal prices will squeeze margins, especially as the new Cobbora mine is developed near Mudgee.

Its decision to shut down generation capacity has meant it is close to running out of space to store any more coal that it has to stockpile.

"In the short term, Macquarie Generation's response has been to stockpile coal and replace with purchases of lower-priced spot electricity, thereby increasing gross trading margins," it said in its annual statement of corporate intent, tabled in NSW Parliament.

"In the medium term the challenge will be to commence higher consumption of purchased and stockpiled coal as power station stockpiles reach their physical limits. This is planned to occur from 2011-12."

The company is forecasting a collapse in profits, with losses anticipated from 2013-14. From a forecast net profit of $87 million in the year to June 2012, this will fall to a $35 million profit the next year, a $35 million loss for the year to June 2014, and rising to a loss of $56 million the following year.

Continued soft demand for electricity coupled with rising supply levels has forced Macquarie Generation to warn that future prices of its output, along with its share of the wholesale electricity market, will come under pressure.

As a result, profit margins will continue to be squeezed, as it encounters rising competition from gas-fired generators while the number of companies to which it is able to sell output has fallen, "with AGL remaining as the only significant non-aligned retailer," it said.

"As a result, Macquarie Generation might need to become a more active trader of the forward production ... in order to reduce the margin squeeze resulting from lower prices and restricted avenues to market."

The federal government is finalising negotiations with Victoria's power companies to provide them with funding to help them cope with the introduction of the carbon tax.