Will the next GFC turn out Vic lights?

With the carbon price looming large, Victoria's coal power stations could reach crisis point much earlier than predicted, if a global credit squeeze hits and debt cannot be rolled over.

The executives of Victoria's power companies have come back from their beach holidays to a very chilly outlook for 2012. With the new carbon tax commencing in July, Victorian generators are facing unprecedented uncertainty and a massive challenge on debt re-financing.

The World Bank last week issued grim warnings that 2012 would see a world-wide banking credit crisis worse than the Global Financial Crisis of 2008. Speaking in Beijing at the launch of the Bank's six month forward look, lead economist Andrew Burns said:

''If there are countries that have important amounts of financing coming due in the months and years ahead maybe now is the time to pre-finance that debt, prepare the loans and get that money while financial markets are still relatively active."

In 2010 it was reported that the Latrobe Valley generators had a combined $9 billion in debt to be rolled over by 2015. Some power companies may already be close to insolvency, facing massive asset write downs on their power stations – in particular, Morwell, Hazelwood, Yallourn W and even Loy Yang A and B. The stark reality of the new carbon pricing regime is that, despite free credits being available in the early years, the viability of long-term operations will be closely scrutinised in 2012 as companies struggle with massive refinancing costs.

A month ago, Loy Yang Power's chief executive, Ian Nethercote, told The Sydney Morning Herald that the company had received a ''no action'' letter from the Australian Securities and Investments Commission, allowing it to continue to trade after debt totaling $565 million due in November became a current liability on its books. The company is hoping to get a substantial slice of the $5.5 billion in free carbon permits in order to keep Loy Yang A operating.

The federal government buyout of 2000 megawatts of capacity is expected to come largely from the Latrobe Valley, with some capacity also likely to close in South Australia.

Last year, companies were talking up the value of their assets, but the bleak outlook and competitive process means the buyout cost for the federal government may now be well down the low side of expectations. Wisely, the government has refused to give any indication of how much is set aside for the buyout in the budget contingency fund.

The timeframe for the buyout stretches to 2020 – partly to put a large part of the cost beyond the current forward estimates period and to assist an early return to a federal budget surplus. It also provides sufficient time for renewable energy supplies to build up and for two gas-fired stations in western Victoria to be commissioned to maintain supply.

However, the crisis for the state's power companies may be triggered much earlier if there is the predicted global credit squeeze and large parcels of debt cannot be rolled over.

Foreseeing this possibility, there have already been suggestions that the government may have to step in as borrower of last resort to either provide loan funds or a government guarantee.

A precipitate closure of a major Victorian generator due to insolvency would have dramatic consequences for the national grid. The only short-term offset would be the World Bank's forecast that economic growth in developed countries is likely to halve, thereby deferring major resource developments in Australia and dampening electricity demand. While this outcome could moderate any future supply shortages, it would be disastrous for bringing the federal budget back to surplus.

The politics of the climate change debate leaves the federal government little room to move. Any surge in borrowing costs or a levy to pay for a government guarantee (as charged to the banks during the 2008 global financial crisis) would put upward pressure on electricity prices.

The Opposition would be certain to pounce on any price increase, claiming it as a direct consequence of the carbon tax. Political expediency will mean they would downplay the European euro crisis, far from our shores, as the real cause. To minimise the political heat, the federal government will be tempted to absorb the costs and ensure funding is available at  favourable interest rates to avoid any flow on to consumer prices.

In July 2011, the owners of Hazelwood, International Power GDF SUEZ Australia, were forced to put out a statement denying speculation that financial pressures would force an early closure of the 1600 megawatt station. The company placed its emphasis on getting a generous closure package from the government:

"We have said on numerous occasions that we are open to the potential for a full-phased closure of older brown coal-fired plant over a sensible period of time in return for a financial package that respects our long-term investment in the asset".

Whether the banks will be patient enough to wait for this outcome remains to be seen. Snapping at the heels of International Power is Truenergy, which is keen to convert the similar-sized Yallourn W plant to gas and may well substantially underbid Hazelwood for the federal government money. This would leave Hazelwood marooned.

In May, the Victorian government beat a hasty retreat, terminating its involvement in negotiations over Hazelwood's future and publicly washing its hands of the problem. Premier Baillieu will be hoping that public anger about any looming energy supply crisis can be re-directed to Canberra. However, the public are unlikely to see it that way if renewable energy projects remain stalled and there are brown outs in 2014 – the next election year.

The message from the World Bank to everyone concerned is: refinance now, while there is still some credit in the marketplace. Down the track it looks like headaches all round.

Andrew Herington is a Melbourne freelance writer

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles