The Snowy back on the chopping block?

The recommendation by the Commission of Audit for an early sale of Snowy Hydro has obvious attractions to both federal and state governments.

Despite the failed sale in 2006 during the drought, the sale should be a relatively painless thing for them to do (at least compared to the more controversial elements in the budget).

Snowy Hydro is now fully corporatised and jointly owned by by the Commonwealth (13 per cent), NSW (58 per cent) and Victorian (29 per cent). It generates on average around 4500 gigawatt hours from the Snowy Mountains scheme and in recent years has acquired a number of gas peaking plants to complement its role as a peak power provider.

It is currently spending $400 million to upgrade various assets – to be completed by 2017.

This gives Snowy Hydro the third largest installed electricity capacity (but is much lower ranked by energy generated). It also operates Red Energy as a wholly owned subsidiary, retailing electricity and gas to consumers in NSW, Victoria, ACT and South Australia.

The Commission of Audit recommended Snowy Hydro be one of four “short term” privatisations. It argued that Snowy Hydro operates in the highly contestable National Energy Market and concluded “the public interest case for ongoing government ownership is not strong”.

The contentious issue of environmental flows has been largely locked in as a result of the 2002 joint agreement which now sees 212 gigalitres a year flow south to the Snowy River below the dam at Jindabyne. This is 28 per cent of the natural flow – a seven-fold increase on the 4 per cent of flows that occurred prior to the agreement.

Another 70 GL in savings flow west to the Murray, which contributes to the more complex settlement being implemented under last year’s Murray Darling basin agreement. With the water allocations locked in, the challenge for a private owner is to maximise the amount of hydro power generated and time it to attract premium peak prices.

The 2013 State Electricity Commission of Victoria holds that state's equity and in its annual report has revalued its 29 per cent share as worth $764 million on a current value basis (NSW reports on book value). By comparison the Commission of Audit said the net asset value of the 13 per cent Commonwealth share was $233 million. This would equate to a value of $1.8 billion for the whole entity compared to $2.6 billion by the SECV method.

With the 15 per cent "incentive" agreed at COAG the higher valuation would deliver a potential return to NSW of around $1.75 billion and Victoria around $900 million.

Currently, the Commonwealth and the states also share dividends equivalent to income tax. Once privatised this would all go to the Commonwealth – which is the theoretical basis for the 15 per cent privatisation incentive.

The key concern for environmentalists and farmers will be that any privatisation retains the water management arrangements in perpetuity and there is some mechanism to enforce them. In particular, Victoria will be keen to ensure NSW delivers the expected flows into the Snowy, as there has been reluctance in recent years to fully abide by the agreements.

Under the original agreement the governments collectively have committed substantial resources to the management of the Snowy River, including securing water entitlements (about $450 million), upgrades of infrastructure (about $125 million), developing water policies and significant investment into the science of the Snowy Mountain rivers.

There was slow progress in the early years which coincided with the prolonged drought. More recently, the flows have improved significantly and trials have been carried out making large, short releases to simulate the impact of flood events and restore the natural ecological cycles triggered by such “flushing events”.

In the process, generation was reduced by the equivalent of up to 150 gigawatt hours of electricity generation, which equates to up to 117.8 GL. One can imagine a private operator seeking to recover this generation and trying to push back on the water allocations and environmental flows.

The impact of climate change and the long-term pattern of reduced rain and snowfall on the mountains would also have a significant impact on the long-term value of the main assets.

However given the financial windfall for cash-strapped governments and the strategic (and historic) significance of the assets, it is likely there will be willing sellers and willing buyers. The allergic reaction that Commonwealth ministers seem to have to renewable energy may contribute to their keenness to offload Snowy Hydro.

The unknown is whether there will be the same groundswell of public anxiety that occurred in 2006 that killed off that sale at the last moment. With so many other national icons shutting down or under threat, the Snowy may not have the same resonance today.

Andrew Herington is a former Labor adviser and freelance writer in Melbourne.