The $30 billion government bail-out for power companies

Climate Spectator research has found the vast majority of private sector-owned power capacity in the National Electricity Market was purchased after 2007 and in full knowledge of the extra competition they'd face due to the Renewable Energy Target. Would it be good government policy to give them a multi-billion bail-out from declining power prices?

Private sector businesses have either acquired or constructed over 20,000 megawatts of fossil-fuelled power plant capacity since after 2007, when the Labor Party committed to substantially expand the Renewable Energy Target. This represents the vast majority of fossil fuel power plant capacity owned by the private sector in the National Electricity Market.

Climate Spectator has compiled a detailed listing, in the table at bottom, of where companies have paid for power stations after 2007 in the full knowledge that there would be a large surge in supply from renewable energy supported by the Renewable Energy Target. It’s worth noting this is also after the introduction of an emissions trading scheme became official government policy.

Why does this matter?

Well, just about every respected Australian energy market economic modeller estimates that repealing the Renewable Energy Target would probably end up costing them money through higher bills. Instead the main beneficiary of a wind back in the legislated target will be the existing owners of fossil fuel power stations.

According to analysis prepared by Hugh Bannister of Intelligent Energy Systems, abolishing the RET would deliver a $12.8 billion windfall to fossil fuel generators over the next 10 years in net present value terms, but cost consumers $500 million and renewable energy generators $7.7 billion.

Also, this doesn’t take into account the cost to taxpayers of having to make up the difference in lost abatement from repeal of the RET to achieve Australia’s international emission reduction obligations.

Given Direct Action is estimated to cost taxpayers around $58 per tonne of CO2 abated, the 62 million tonnes of cumulative abatement forgone to 2020 will cost taxpayers $3.6 billion. If we consider that the abatement would continue to 2030 then taxpayers would face a make good bill of $17.6 billion via Direct Action.

Now, owners of existing fossil fuel power stations claim that, because electricity demand has turned out to be lower than expected, the RET is causing an oversupply that represents a serious distortion of the market by undermining their power plant’s financial returns. They argue that the scheme must be wound back because it is distorting the power market too much.

Yet they should have anticipated all of this in purchasing nearly 20,000 megawatts of power stations, and no doubt many got a healthy discount on their purchase price to reflect the impact of government policy. Given they should have taken this into account, such a $12.8 billion value transfer to fossil fuel power station owners, plus an extra $17.6 billion to acquire forgone abatement, would be one of the largest government bail-outs for poor private sector decision making in Australian history.

Power stations bought or constructed in the east coast NEM after the decision to expand the RET

Year

Transaction

Power plant

Capacity (MW)

2008

Industry Funds Management buys Babcock and Brown Power's 73% share in Ecogen

Jeeralang A - Gas

212

Jeeralang B - Gas

228

Newport - Gas

510

2008

Origin Energy buys Uranquinty from Babcock and Brown Power

Uranquinty - Gas

640

2009

Energy Australia completes construction of Tallawarra

Tallawarra - Gas

435

2010

Origin buys trading rights and ultimately the underlying Eraring Power Stations assets from NSW Government. Subsequently upgrades the capacity of the power station by 240MW.

Eraring - Coal

2880

2010

Energy Australia buys trading rights and ultimately the underlying assets from NSW Government

Wallerawang - Coal

1000

Mt Piper - Coal

1400

2010

Origin Energy completes construction of Darling Downs power station

Darling Downs - Gas

630

2011

GDF Suez buys 70% of International Power and then remaining 30% in 2012

Hazelwood - Coal

1600

Loy Yang B - Coal

1000

Pelican Point - Gas

479

Dry Creek - Gas

156

Mintaro - Gas

90

Port Lincoln - Gas/Diesel

73.5

Snuggery - Gas

63

2011

TPG Private Equity acquires former Babcock and Brown Power assets via debt to equity swap

Northern -Coal

546

Playford B - Coal

240

Bairnsdale Gas

94

Braemar - Gas

502

2011

Arrow Energy acquires full 100% equity in Braemar 2 from ERM after acquiring 50% in 2008

Braemar 2 - Gas

519

2012

AGL buys remaining 68% share in Loy Yang A from other owners including TEPCO

Loy Yang A - Coal

2180

2012

Origin completes construction of Mortlake power station

Mortlake - Gas

550

2013

Redbank Energy, former shell of Babcock and Brown Power, put into receivership and seeking new buyer

Redbank - Coal

151

2014

AGL buys Macquarie Generation from NSW Government

Liddell - Coal

2000

Bayswater - Coal

2640

Total capacity that has changed hands or been constructed since 2007 commitment to expand RET

20,819