Victorian woes set to cost NSW

Threats made by Victorian generators that they could go out of business if they aren't given a generous bail-out in the proposed emissions trading scheme has led to caution within the NSW Government that the state's taxpayers will bear the brunt of the cost of the carbon tax.

Even though the Senate yesterday voted down the Federal Government's proposed carbon pollution reduction scheme, it is expected to be presented again to Parliament early next year, setting the scene for a double dissolution.

The Federal Government has signalled it is more concerned about the heavily polluting brown-coal power generators in Victoria's La Trobe Valley, indicating that they would gain a large portion of the trading permits to be set aside for the power industry.

As a result, the NSW Government and NSW electricity generators fear that they will be financially penalised, which could have an adverse impact on the value of the state-owned industry in NSW.

"The Federal Government seems to have taken it for granted that as the generators in NSW, and also in Queensland, are government-owned, that they will continue generating, no matter what the outcome of the allocation of permits is," one electricity trader said.

NSW Government officials refuse to comment on negotiations with the Federal Government over the issue, apart from saying that talks are ongoing, although privately, officials have been expressing concern for some weeks.

The NSW power industry also has a further exposure to costs due to large supply contracts held with the Tomago and Kurri Kurri aluminium smelters in the Hunter Valley.

Macquarie Generation has indicated that it has the liability to comply with the emissions trading scheme and holds the provision of carbon permits relating to the contract it holds with Tomago.

Delta is also believed to have a similar liability under its supply contract with Kurri Kurri.

In its annual report, tabled last week in State Parliament, Macquarie warned that it would face "significantly reduced earnings and value" if it could not reach an "equitable arrangement" with the counter party to its electricity supply contract. There is also concern that any emissions trading scheme could reduce the value of electricity generators to such an extent that debt covenants would be breached.

The three state-owned generators - Macquarie, Delta Electricity and Eraring Energy - posted sharply lower profits in the year to June.