Thursday 2 July 2020

Hydro's wheeling and dealings

FORMER US Defence Secretary Donald Rumsfeld famously distinguished what is known from what isn’t.

There are some things that straddle both categories — things the government knows but we don’t, but should.

The circumstances surrounding the second Bass Strait interconnector Marinus is a case in point.

Legislative Council independent Ruth Forrest finally managed to get an answer to a Question on Notice as to why Hydro Tasmania’s balance sheet lost $200 million — or about 10 per cent of its value — in the 2019 year. Such a large amount begs an explanation.


Initially, Energy Minister Guy Barnett said it was a commercial in confidence matter, but a second question elicited an expansive answer from Premier and Treasurer Peter Gutwein.

State Government usually removes most of Hydro Tasmania’s underlying profit each year, so it always struggles to build up its balance sheet. Sometimes, there are movements in assets or liabilities that impact on the balance sheet, but not the underlying profit used to calculate how much the government extracts.

The 2019 year saw such an event when Hydro recorded an increased liability due to onerous contracts. An onerous contract is where Hydro may, for example, agree to an offtake agreement with a wind farm generator to buy electricity or renewable energy certificates at a set price for a set period. Hydro thereby assumes the market risk.

If prices fall, Hydro ends up paying more than the current market price. The contract becomes onerous. Each year when market prices are less than the price in the offtake arrangement, Hydro subsidises the generator. Future expected subsidies are recorded as a liability.

In the 2018-2019 year the liability for onerous contracts increased by $196 million to a total of $323 million at June 30, 2019.

Most relate to offtake arrangements to “assist renewable energy projects to be built, financed or partially sold”, according to the answer the government gave Ms Forrest. Various contracts have been entered into from 2009 to 2017.

The 2017 arrangement was with Westcoast Wind to enable construction of the Granville Harbour wind farm.

This was done, at the behest of government, by ministerial direction. The reference to an offtake arrangement to enable partial sale of a project probably relates to the Woolnorth/Musselroe wind farms. Hydro sold a 75 per cent interest to Shenhua Clean Energy, but Hydro agreed to assume most of the market risk.

Project Marinus appears to be a project in search of a large government subsidy to transmit government subsidised power northwards.

Little wonder privateers are keen to build — the government bears all the risks. Why not grow bananas in large fully subsidised greenhouses and underwrite transport costs to mainland markets?

To date, Project Marinus has been promoted by TasNetworks, which has evolved more than 20 years ago from Transend, a transmission company with no debt, into a company owning all the distribution poles and wires and $2 billion in debt, milked by governments as a ready source of working capital, but now up against the wall needing new sources of revenue in an ever changing world.

Most Marinus discussion sidesteps the matter of Hydro.

Apart from onerous offtake arrangements, Hydro locked in interest rates used to calculate the Basslink fee for the full 25-year term, meaning expected future losses from a higher rate adds an extra liability of $371 million to Hydro’s balance sheet.

Hydro will end up paying more in penalty interest than the original Basslink cost of $875 million.

The third scary liability results from other onerous contracts. Hydro contracts with third parties to fix electricity prices for various amounts of electricity over various terms. If there are adverse market price movements, expected future losses are recorded as a liability. At June 30, 2019, the net liability for electricity price derivatives was a whopping $742 million, a rise of $270 million for the year alone.

This will be offset against future income.

If prices and interest rates move in a more favourable direction, then the liabilities will fall. If rates and prices were to move in the other direction after a contract was arranged, then we would see financial assets. This rarely occurs.

Add the three abovementioned liabilities together, and the total is $1436 million — almost as much as Hydro’s net worth.

Most people are unaware of Hydro’s various wheeling and dealings. These need to be put on the table as part of any discussion about Tasmania’s energy future.

(Published in The Mercury 2nd July 2020)



  1. What you mean to say John is that the Government/Hydro is driving the Tasmanian community further and further into debt, as Tasmanian taxpayers money goes to private company profits!!

  2. John
    Whilst I agree these deals need scrutiny. Given these contracts are required to be remarked at the known market value each year and audited as such, I don't see how you can use subsequent changes in prices (market value), as you do above, to make an assessment on the reasonableness of decision making in the past?

    1. Your point is valid.

      Each decision is probably reasonable in isolation, but when viewed collectively maybe not? I guess that’s what risk management is all about.

      It’s just that the price punts invariably lead to losses (increased financial liabilities). I’m not sure why this should be sso?

      The government wanting to sell half the annual output to MI’s at a heavily discounted price whilst buying power(?) and energy certificates from REs at a high price, makes hedging prices even harder?

      The Basslink fee swap (the interest rate hedge) started off as a hedge against construction costs but by the time Hydro signed up for BL at financial close in Nov 2002 the hedge was $150m + under water. These costs weren’t included in the decision to proceed . If they had BL wouldn’t have gone ahead and gas would have filled the gap as Duke fully expected at the time they decided to proceed with the gas pipeline.

      The hedges were then all wrapped up in the subsequent BL fee swap over the full 25 year term which has led to huge losses. The point here is that a hedge may appear reasonable at the time (the BL construction cost hedges) but if it become too large to close out, it becomes the raison d’etre for proceeding with a project, hoping that interest rates might change and the loss can be clawed back, rather than ‘fess up to a $150m punt that went horribly wrong.

      On that basis BL started life on a dodgy footing.

      Is Marinus a case of déjà vu?

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  4. John
    Have you read the report by Bruce Mountain, Victorian Energy Policy Centre, entitled "Marinus Link & Battery of the Nation: Wrong Way, Go Back"
    It suggests a potential stranded asset, as batteries can deliver the peak load far more cheaply, and be co-located with renewable energy in Victoria more efficiently.
    Your analysis would be appreciated.