Will the next GFC turn out Vic lights?
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
Comments on this article
Thanks for such an
Thanks for such an interesting and useful article here. I love reading about power companies because I am working in this industry by myself. There exist many problems and we need to talk about them openly. Thanks for the awesome post one more time and keep publishing such nice ones in the future too.
Regards, Glen from casino games
so coal what is an answer?
I would rarther a little dammage than what we are doing?
we know we are not doing ourselves any good so what is avaible will (could) be better are you advocating we should not at least try?
@ Peter anti Nuc
Are you a POME ?as you are certainly not an accountant.
the goverment hrants that go into Nuc are HUGE, in NSW there is next to no FiTs bu tfor larger users of daytime power soalr works out fine, CO2 tax call it what you want Australia is actially lower tahn many but they call it somethibg else, the sun gives us so much every day for free, the tides come in and out four times a day and the wind blows (from alot of people as well)
GFC: gorgeous financial con
In response to Richard Koser's comment, I wish to point out that renewables are not quite "free" of toxic chemicals. For example, in a large wind turbine, there a several hundred kilos of rare earth metals. The process to extract these REMs is not only capital intensive, but also produces a rather significant amount of radioactive waste as well. These same REMs are also contained in solar panels. So even though "we don't have to dig it up or treat it with toxic chemicals" (the sun), in order to capture and harness that energy we will still be producing toxic waste by-products. Unfortunately, nothing that we create can ever be "pure" or totally harmless, either to ourselves or the environment or both.
Funding Nuclear
OK so we just give them the money or does it have to pass due diligence about the quality and risk of investment. I would like a return on my Superannuation money and so far nuclear has not been a good investment. There has been no private investment in nukes for a good twenty years so what are you going to do to mitigate the risk?
Will the next GFC turn out Vic Lights ?
Strange question................obviously not rhetorical as you failed to provide an answer.
Joseph Ellul seems to have done it for you.
The "Green Financial Capitulation" ( GFC)..........thanks for that memorable observation.
I am sure that had voters known the intentions of the present Federal incumbents then those who voted for them would have voted otherwise !
The "Green Federal Capitulation" (GFC).........apt...........but not as good as Joe's !
Quote: "...with the new Carbon Tax commencing in July , Victorian generators are facing unprecedented uncertainty..."...............................WHAT !!??
I was led to understand that the introduction of the "Carbon Tax" was PRIMARILY JUSTIFIED in that IT ENDED UNCERTAINTY...........! Don't tell me ! We've been lied to yet again about this self-destructive taxing mechanism !
Reply to Mark Duffett :
The superannuation of private citizens is just that.....private.
It belongs to the contributors !
It is NOT a government slush-fund.
The "Future Fund" exists solely to meet the cost of public sector superannuation liabilities ...............likewise , it belongs to them .....AND is NOT a government slush-fund.
Someone once said : "The problem with socialism is that they eventually run out of everyone-else's money ! "
I do hope you are not advocating that !
The "Norwegian Future Fund" is a REAL future fund !
You may be confused between providing for the future generations ( as the Norwegians have done & are doing ) and simply meeting your statutory obligations ( as Australia's Future Fund is doing.............hopefully !!! )
GFC: gorgeous financial con
Mr Herington, thanks for this. A great example of the 'stranded assets' phenomenon. The energy companies seem to be heading down a well0-trodden path: asset-strip, talk up catastrophe, put your hand out.
(How far behind the ball are Vic power companies in terms of investment in distribution? I've seen figures of $100bn investment required in the next decade across the country. Correlation to recent profits and executive salaries/bonuses? Worth a story?)
Joseph Ellull: I agree, let's cut the 'producer' diesel subsidies, FBT for company cars, support to the auto industry, AvGas subsidies and so forth, and save ourselves $12 billion a year. If we then charge the coal power stations for the people they kill with their second-hand smoke by, I don't know, taxing them, we might even end up with an energy system - and an economy - that doesn't go into cardiac arrest every time the Middle East has high blood pressure.
Mark Duffett, Peter Lang: you clearly love nukes and I'm not diametrically opposed, but do you really think there's no place for renewable energy in the country with the world's biggest untapped solar resource? The best bit about the sun is, we don't have to dig it up or treat it with toxic chemicals. Even better than the best bit, we don't have to look after the effluent for thousands of years. Even better than the better than the best bit, I can't imagine even the most brainwashed feddayin trying to car-bomb the sun.
What rent-seeker would have bought into Kennett's sell-off?
If they wind up taking a bath, investors who bought into coal-fired power generation over the last 2 decades have only themselves to blame.
Mind you, these investors still have the craven reliance of major political Parties on corporate sponsors to ensure taxpayers fund their escape.
Funding nuclear
Australia has one of the world's largest superannuation investment pools, a fair chunk of which is in the Future Fund. Time it lived up to its name.
Will the next GFC turn out Vic lights?
It's highly unlikely that the next GFC will turn out the lights but quite possible that the companies owning the power stations will go broke. The first thing receivers will do will keep the powestations going to recover some money. Also gvt will step in to stop the lights going out. It's the power station owners that need to worry not the general public so dont let doom and gloom stories from outdated powerstation owners be a concern.
Owners of coal stations have had fifteen years, since the Kyoto protocol, to prepare their business for alternatives to coal so don't feel sorry for their inaction!
Where would the money come from?
In the start of the post is this:
"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."
Given that the worldwide credit crisis is actually causing this problem how would you propose a nuclear power plant be financed? Even if we could get the Korean deal we would need to find 20 billion dollars from somewhere and another 20 billion to run them the same as the UAE. So how exactly would you propose to raise this money?
Power Play
We really have become captives of our own folly. The privatisation of the SECV by Kennett was never in the state’s best interests and destined to lead to huge hikes in power bills. On top of that folly, we now pay a further surcharge to appease the ‘renewable energy Green Gods. Time to stock up on ‘kerosene’ me thinks.
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Will the next GFC turn out Vic lights?
"
Will the next GFC turn out Vic lights?"
Only if we keep pushing irrational energy policies like renewable energy, CO2 tax at much higher price than any other country is paying, and anti-nuclear.
Will the next GFC turn out Vic lights ?
Coal burning power stations must keep burning during the day even though electricity demand is at a minimum due to green supply. The government is strangling coal power by making it inefficient. This is artificial and will continue for ever as green electricity is not constant and has to be supplemented by other convensional supplies.
So we now have 2 unsustainable systems, supported by tax payers. This will lead only to a similar economy to Spain.
Welcome to the Green Financial Capitulation (GFC)