Apr 17, 2012

A new VIC power plant put on hold as Mac Gen cuts its assets by $700m

In Victoria, HRL announced yesterday that it would it was putting on hold its plan to build a new coal and gas fired power plant at Morwell following a decision by the Victorian Civil and Administrative Tribunal.

Amber Jamieson

Freelance journalist in New York

Energy company HRL announced yesterday that it was putting on hold its plan to build a new coal-and-gas-fired power plant at Morwell, Victoria following a decision by the Victorian Civil and Administrative Tribunal.

Late last month VCAT approved HRL’s plan to build a 600MWe project under its subsidiary Dual Gas — in May 2011 the Victorian Environmental Protection Agency had ruled that HRL was only allowed to build a 300MWe power plant — but stated that HRL could only proceed with construction when the federal government has entered contracts for the closure of other power plants under its Contracts for Closure program.

“VCAT in granting approval for a new 600 MWe project, has also imposed a new condition that effectively puts the future of the project in the hands of the Australian government and takes the commencement date out of the company’s control,”  said Paul Welfare, the general manager of Dual Gas, in a statement announcing a freeze on the project.

The VCAT ruling stated:

“Construction of the works approved by this works approval must not commence until such time as the Australian government has entered into contracts under its ‘Contracts for Closure’ program (or through any similar program or commercial agreement) which provide for the closure by 2020 of at least 600 MWe of coal-fired electricity generation in Victoria.”

As the summary of the VCAT ruling explains, HRL made its objections known before the condition was placed:

“Although such a condition was opposed by Dual Gas, the imposition of such a condition on the works approval will more transparently demonstrate a nett [sic] reduction in overall greenhouse gas emissions from electricity generation in Victoria, and more clearly facilitate the transition to a lower emissions energy sector.”

But Welfare claims the decision could have wider implications. “This condition is a major concern for this project, and it is unclear what it means for the future of Victoria’s Latrobe Valley,” he said.

HRL also owns Energy Brix, which runs a power plant in the Latrobe Valley that is currently one of the five generators under negotiations with the government to close under the Contract for Closure program. The government expects to officially conclude negotiations by June 30 this year.

June 30 is the same day that the federal government funding for the HRL power plant is due to expire. It is this “considerable uncertainty” about the project that has resulted in it being placed on hold, said Welfare.

The federal government promised $100 million funding for the HRL project under the Low Emissions Technology Demonstration Fund. However the application for that funding closed back in 2006 and HRL has had its funding deadline extended several times in recent years.

Federal Resources and Energy Minister Martin Ferguson warned earlier this year that this would be the final extension for the funding. Victoria also promised $50 million in state funding, but $30 million of that is contingent on federal funding.

Dual Gas did not respond to calls for comment before deadline, but we will update if this becomes available.

Meanwhile, the NSW-government owned Macquare Generation announced that it had cut its asset values by a third yesterday — from $1.8 billion to $1.1 billion — in preparation for the implementation of the carbon price.

Macquarie Generation is the largest power generator in the country, and our biggest emitter, and expects its carbon tax bill to be around $460 million annually based on the carbon price of $23 per tonne. Last year it produced 20 million tonnes of carbon dioxide.

“If similarly sized writeoffs are taken at the other two NSW government-owned generators, Delta Electricity and Eraring Energy, this would wipe another $1 billion off the value of government-owned assets due to the federal government’s new tax,” reports Brian Robbins in The Sydney Morning Herald.

Crikey will soon be launching a series examining how businesses and industry are responding to the implementation of the carbon tax. Stay tuned.

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4 thoughts on “A new VIC power plant put on hold as Mac Gen cuts its assets by $700m

  1. Hugh Saddington

    Hi Eponymous:

    The NSW Government announced price rises in the last week that included the full costs of Carbon Pricing – so if your hypothesis is correct that the generators won’t pass through the carbon price then the retailers will make winfall profits. Secondly the pool price determines dispatch and contracts for difference determines revenues for generators. The European experience was that the generators took the hand outs and passed through carbon pricing in full which companies are required to do in oder to meet their obligations to shareholders.

    If you take the time to read AEMO’s statement of opportunites, they see the NEM growing at ~2.5% per annum over its planning period. The cold summer (less air conditioning) we have had with flooding (less mining) has reduced the current FY use.

    If the Smelters do go, then there is less incentive to build new plant so the asset values of genrators will remain intact as there will be less technology substitution of fully depreciated plant.

  2. Eponymous

    Hugh, you have a few factual errors in your understanding.

    The full carbon price will not be passed through. It will be applied unequally to the MWh that come out of power plants, based on their CO2/MWh intensity. This will then change the bidding order into the NEM, meaning that generators have an incentive to not pass through the whole cost so that they still get despatched. From what I have heard some generators will wear as much as a third of the price which is broadly compatible with MacGen’s write down.

    Electricity bills are not rising because of the carbon price. 1 – it hasn’t been implemented yet (!!!) 2 – MANY reports show VERY CLEARLY that the reason is network investment.

    Electricity demand has not grown in the last 3 years. Aluminium smelters have declared that they will likely close in the next 5-10, freeing up as much as 25% of generation capacity.

    But don’t let the facts get in the way of your chosen narative.

  3. Microseris

    The HRL proposal was a turkey and the real reason it is shelved is they could get no private sector funding. Only the Fed & state governments had committed money. As you point out, the federal funding had been extended several times with Ferguson desperate to get the project up, whilst renewable energy projects in a similar position had the funding withdrawn.

    Ferguson is a coal industry stooge and I predict he will quietly retire after the next election only to take up some cushy consultancy position for some lobby group working for one the coal majors. Its they way it has always been.

  4. Hugh Saddington

    I just don’t see the rationale for this asset write down by Macquarie Generation – what am I missing from my understanding of the carbon pricing outlined below?

    Carbon pricing on the generators will be passed through – hence why our electricity bills are rising, as the NSW Governement announced this week, so carbon is not a cost on the generators. Also Generation has been given large assistance provisions under the carbon pricing legislation.

    No one is building any significant (on a NEMMCO market level) generation, renewables are impossible to build (the unique planning requirements for wind generation in NSW) and not cost competitive with coal base load. The removal of any subsidies for domestic solar will limit further growth of distributed generation at the end user, in any event, solar tends to impact peaking generation plants rather than baseload generators.

    So there does not appear to any short-medium term (5-7 years) significant change in supply side mix of generation plant. Any 20% renewables by the end of the decade (which includes the snowy mountain hydro system will be more than matched by electricity demand growth.

    So based on the above, I assume that the Macquarie assets will be running effectively for atleast the rest of this decade. Given this assessment, why is Macquarie writing down its assets?

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