ERM Power has been shortlisted to bid for Macquarie Generation, the largest generator in the national electricity market. AGL is also believed to have been shortlisted.
Other potential bidders for power stations being sold by the NSW 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. Mitsui and Co acquired a stake in its local portfolio recently.
Macquarie Generation owns the Bayswater and Liddell baseload power stations in the Hunter Valley, which have a combined generation capacity of 4640 megawatts.
Built in the mid-1980s, Bayswater is the bigger of the two, with four units each of 660 megawatts capacity. 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 big slice of the retail market in NSW, Victoria, South Australia and Queensland, so a transaction could concern the ACCC.
ERM is smaller, with no competition concerns. It has forecast strong growth, flagging 17.5 to 18 terrawatts of power demand to meet its sales within two years or so, 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. The remaining debt for this purchase is to be retired by the end of next year.
"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 reduction in prudential and working capital.
Soft wholesale power prices, along with the loss of output from two generators, resulted in MacGen's net profit falling to $41.3 million in the year to June, from $120 million a year earlier. The introduction of a price on carbon resulted in a write-down of asset values, which is expected to be reversed if the price is removed.
Liddell has had significant downtime. Bayswater generates most of the group's output.