The absence of a coordinated transparent energy policy at the Federal level means trying to find a place for Project Marinus in Tasmania’s future is like a search without a map. That unfortunately has been the adhoc pattern of energy policy in Tasmania over recent years.
The unbundling of Hydro into generation, transmission and retail businesses in the late 1990s was driven by the ethos at the time; that corporatised businesses run like those in the private sector, doing deals with the private sector, was the way to unlock value, encourage efficiencies and deliver a better deal for all of us.The report card to date indicates this hasn’t occurred..
Over the last 20 years or so our State’s energy businesses have largely remained in public hands. Tasmanians have a special attachment to Hydro. We refrained from selling grandma as many others did, but with three government electricity businesses pursuing their own ends with no overall plan , and with private companies searching out and finding niche areas to get access to regulated and at times guaranteed revenue streams, has meant that Tasmanian taxpayers have been paying a huge price.
Basslink, originally floated as a $450 million project in 2000 morphed into a $850 million by the time contracts were finalised almost 3 years later. A further 3 years elapsed before project completion. The final cost was $875 million. At the end of the 25-year contract in 2031, Hydro will have paid for the interconnector almost 4 times over, yet it still won’t own it. The project would never have proceeded when project costs doubled but for the fact Hydro had taken out contracts to hedge interest rates before finalisation of the deal. Abandoning the project would have meant having to ‘fess up and fork out considerable amounts to close out the hedges. Ouch. Better to proceed and keep them hidden.
In the early 2000’s Treasurer and subsequent Premier Lennon was on a rampage. Not only would Tasmania get an electricity interconnector but also a gas pipeline. Current talk of Marinus and green hydrogen has a déjà vu feel.
Hydro was instructed to enter a joint venture with Duke Energy in 2000. Converting the existing Bell Bay power station from oil to gas and adding a further 3 portable generators was enough of a carrot for Duke Energy to proceed with a pipeline via its wholly owned subsidiary Tas Gas Pipeline (TGP). When the cost of Basslink doubled Duke felt sure they were on a winner as Basslink was unlikely to proceed, potentially making the pipeline valuable. They spent $450 million in 2002. Hydro signed a Pipeline Capacity Agreement (PCA) to guarantee revenue flow for TGP.
But Basslink did proceed, ironically because the final business case assumed large amounts of electricity produced from the Bell Bay gas fired power station would allow surplus energy to be exported. That was the deal clincher This hasn’t eventuated. Basslink has been mainly used to import electricity. It will never make a profit. Electricity generated from gas is expensive. The business case also ignored declining hydro inflows due to climate change, preferring instead to use long run historical averages.
Hydro’s joint venture with Duke was abandoned in 2006. The value of its pipeline plummeted, cushioned only by the existence of the PCA. The PCA still exists. It will be renewed in 2022. Hydro doesn’t want it. The government requires it. It costs Hydro between $10 and $15 million per year judging by the onerous contracts notes in Hydro’s financials. It is in effect a subsidy to the large gas users Grange Resources at Port Latta and Bell Bay Aluminium. Without Hydro’s reluctant benevolence, TGP now owned by Palisade Investment Partners would need to write back the value of its pipeline or massively increase gas charges to other major users.
Palisade is also the recipient of another government directed handout from Hydro. It has agreed to a long-term deal to buy renewable energy certificates from the 112MW Granville Harbour Wind Farm now owned by Palisade. With the forward price for certificates falling, Hydro are committed to paying well above market price for the certificates. Current indications from Hydro’s financials are this will cost Hydro between $15 and $20 million per year. Palisade can boast to potential investors that its renewable energy fund (which includes the Granville wind farm) is making a 15% return per year. It will only create ten direct jobs.
HT isn’t the only entity signing up to offtake agreements which quickly become onerous contracts. Aurora Energy agreed to purchase renewable energy certificates from the 144MW Cattle Hill windfarm in the Central highlands at a price, as described in its Annual Report for 2019, as “materially higher than the forward market prices and the economic value that Aurora Energy can obtain from the product.” It looks like another government directed handout, this time to Goldwind Australia and its partner Power China Resource Limited, a subsidiary of the state-owned Power China. The value of the onerous contact at 30th June 2019 was $33 million which probably implies a handout of about $5 million per year. That’s a lot of bottom line for Aurora, which is essentially a paper shuffler owning little more than a computer system with an incredibly voracious appetite for software updates. It’s profits mainly comprise government compensation for community services obligations (discounts etc) which is dutifully almost all returned to the government via income tax equivalent payments plus a dividend equal to 90 per cent of the balance.
Aurora Energy as mentioned, is now but a shell of its former self, stripped of its poles and wires (transferred to TasNetworks) and the Tamar Valley gas fired power station it completed after Babcock and Brown when bust during construction, but subsequently transferred to HT in 2013. Poor old HT had to write back the value of the power station by $100 million, pick up an extra liability for onerous gas contracts of $100 million plus take over $205 million of Aurora’s debt.
Energy policy in Tasmania has enriched a few at the expense of the majority. The business case for Basslink was dodgy. It will cost $1.5 billion more than if we had built it ourselves. The converted Bell Bay Power station quickly became an expensive white elephant. The newer Tamar Valley gas fired power station built by Aurora Energy for $300 million is now worth $30 million. The Pipeline Capacity Agreement is a constant and costly reminder of past government interference, which shows no signs of slowing as Hydro and Aurora are both forced to help guarantee returns to investors via offtake arrangements. Our big chance for some good fortune disappeared when the carbon tax was removed by the current government’s Federal colleagues.
It’s not that government assistance as part of an overall plan is bad policy. It’s the ad hoc approach to policy that’s the problem. Policy on the run can have unforgiving and expensive consequences as we have seen over the last 20 years.
Pretending Project Marinus is the path to salvation is a story we’ve heard many times before.