ERM Power has been shortlisted to bid for Macquarie Generation, the largest generator in the national electricity market, with AGL also believed to have been shortlisted.
Other potential bidders for power stations being sold by the New South Wales government include offshore groups Shenhua (China) and Ratchaburi (Thailand), while the renewables portfolio on the block is likely to be of interest to groups such as Hydro Tasmania.
Others such as International Power are no longer believed to be involved in the transaction, with Mitsui & Co acquiring a key stake in its local portfolio recently.
Macquarie Generation owns the Bayswater and Liddell baseload power stations in the Hunter Valley, north of Sydney, which have a combined capacity of 4640 megawatts.
Built in the mid-1980s, Bayswater is the bigger of the two, with four units each of 660 megawatts of capacity, while Liddell was built in the early 1970s and comprises four units each of 500 megawatts.
Both AGL and ERM are expected to be keen bidders. AGL already has a large exposure to the retail market in NSW, Victoria, South Australia and Queensland, so a transaction could have ACCC concerns.
ERM is smaller, with no competition concerns. It has forecast strong growth, flagging 17.5-18 terrawatts of power demand to meet its sales within two years, which would put it within reach of Macquarie's output.
ERM has assessed a number of generation deals in the past few years, opting to buy only a further 70.8 per cent in the Oakey Power Station in Queensland, with the remaining debt for this purchase to be retired by the end of 2014.
"At the right price, generation can ... deliver significant vertical integration benefits," ERM chief executive Trevor St Baker said.
These include an "internal" hedge with sales and generation largely matched in-house, accelerated sales growth, greater contracting flexibility and a significant reduction in prudential and working capital.
Soft wholesale prices and the loss of output from two generators resulted in Macquarie Generation's net profit slumping to $41.3 million in the year to June, down from $120 million a year earlier.
The introduction of a price on carbon resulted in a heavy write-down of asset values, which is expected to be reversed if the carbon price is removed.
Liddell has had significant downtime in recent years, with Bayswater generating most of the group's output.