The NSW state election was, in effect, a ballot on a single issue: whether to privatise half of the states electricity distribution system. I won’t get into the politics of that choice but it is worthwhile making a few points about the sale.
Critics say that, collectively, the distribution system paid a dividend of $1.7bn to the state and that selling such a cash cow is bad business. They also suggest private owners would simply increase charges on a monopoly asset.
Rubbish. Network charges are regulated by the Australian Energy Regulator. Every few years, networks have to make submissions to the regulator arguing for more expenditure and therefore higher charges. In the past, those arguments have been easy to make because everyone accepted that electricity demand would grow like clockwork every year. Not anymore.
Electricity demand has fallen for seven years in a row, an unprecedented decline that has taken the industry by surprise.
The implications of lower electricity demand are alarming for network businesses who construct their networks to handle peak demand, the maximum level of consumption drawn on. Efficiency gains and, especially, the growth of rooftop solar panels, has reduced peak demand and therefore weakened the case for additional capital expenditure on the network.
The regulator knows this. It has explicitly warned networks that expenditure plans will be harder to accept and that the rate of return on expenditure will almost certainly fall. This is already happening, with the regulator slashing the expenditure plans for SP Ausnet (ASX:SPN) by 30%. Other networks are likely to see similar falls.
This means that the asset base of networks, from which their returns are calculated, will rise slowly in the future and the rate of return they will earn on that asset base will fall. Earnings have likely peaked. For the government, it means that the $1.7bn of dividends might fall in future. It’s not a bad time to do a deal.