MacGen's cold carbon truth

Macquarie Generation looms large in Australia's electricity supply industry – and the signals it is sending out will not make comfortable reading for the Coalition government in NSW or for federal Industry and Climate Change Minister Greg Combet, whose electorate is where the big taxpayer-owned generator calls home.

If you are the operator of the east coast electricity market, the importance of MacGen's two big power stations, Bayswater and Liddell, near Muswellbrook, is that they provide 15 per cent of your supply (and 40 per cent of NSW needs).

If you are the NSW Treasury, one of the more important things about MacGen is that it has funnelled more than $2.5 billion in dividends and tax equivalent payments to state revenue since it was hived off from Pacific Power in 1996.

If you are Premier Barry O'Farrell and Treasurer Mike Baird, MacGen represents the jewel in the current privatisation box – worth maybe $5 billion or more on analysts' estimates in the proposed sale of what the Keneally government left of state generation assets after the 'gentrader' affair.

Macquarie Generation reaps a billion dollars a year in selling electricity – and, yell the Greens, emits some 24 million tonnes of carbon dioxide emissions annually from the combined Bayswater and Liddell capacity of 4,700 megawatts.

The cost of emitting that much greenhouse gas under the Gillard/Combet carbon tax scheme is a big contributor to the storm signals now being flown by the big ship of NSW power production.

When the carbon scheme gets underway in July, MacGen expects its initial cost will be $580 million a year, a lot more than it is currently paying to buy coal (for it which it presently outlays $350 million). And when the federal carbon price hits $40 per tonne, the payout to Canberra will be $1 billion a year.

What piques MacGen and other black coal generators in NSW and Queensland more than somewhat is that Gillard and Combet have devised a compensation scheme for power plants that leaves them out in the cold – first because the trigger for handouts is higher than their emissions intensity and second because the scheme to buy closure of some generation is skewed towards the brown coal operations in Victoria and South Australia.

Given the state of the wholesale electricity market, MacGen expects that it will be unable to recover between $115 million and $230 million a year of its carbon costs at the start of the federal scheme – and that, it says, means that the NSW government can kiss goodbye its revenue stream from the business.

The east coast market, MacGen points out in its new annual report, has been subdued in part by the Australian impacts on demand of the global financial crisis allied with rising local retail prices, the effects of demand management programs and by the federal renewable energy target eating some of the conventional generators' lunch.

(East coast wholesale power prices have fallen back to the levels of the start of the market a decade ago, well below the inflated levels of 2007 and 2008 when the drought curbed production of cooling-dependent generators at a time consumption was peaking. Current spot market prices are well below the cost of new generation entry for all technologies – hence the present drought in investment.)

The well-publicised pressure the global situation and Australia's dollar value is creating for the aluminium sector is not good news for MacGen either; its largest single customer is Tomago Aluminium in the Hunter Valley with which it has a contract stretching to 2028.

MacGen's directors says that the Keneally 'gentrader' deals have also left it at a disadvantage because it now has to compete with the privately-owned, vertically-integrated companies – Origin Energy and TRUenergy snaffled the Delta Electricity and Eraring Energy output – who "enjoy greater flexibility (plus) access to a range of fuel types and avenues for revenue".

The carbon pricing mechanism, they warn in the annual report, will have an impact "on profitability and hence the valuation of assets and potentially the lives of Liddell and Bayswater power stations.”

They accept that MacGen will "face a much more difficult time competing in the market when the carbon scheme starts".

MacGen chief executive Russell Skelton has told the media that Liddell power station might not be financially viable beyond 2022, although its engineering life, after a recent $100 million upgrade, should be until 2032.

This will cheer the Greens, who want to see Liddell closed, but it is hardly what O'Farrell and Baird want to hear as they consider the sale of the business.

The personal implications for Combet in his federal seat of Charlton, which occupies 688 square kilometres of the Hunter Valley, in the very difficult next federal election for Labor are not positive either.

He may live to regret his upbeat interview with the ABC in mid-July last year when he declared "Macquarie Generation is going to be in a pretty good position overall", claiming that, once he had bought out some brown coal power production in Victoria, "the black coal generators should be able to sell more in to the Victorian system."

This does not gel with the Macquarie Generation directors declaring, in their annual "statement of corporate intent” for the NSW government, that they are strongly of the view that "impairment of assets is inevitable given the current forecasts (of) the impact of carbon legislation".

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.