Basslink for Sale Chapter Three

 

The Basslink sale process has picked up speed.

We’re likely to see a new owner for Basslink in the next three months.

How the dust settles will affect Tasmania’s plans for the future shape of Tasmania’s electricity industry.

Marinus and the case for more Tasmanian wind farms

 

Project Marinus will unlock the value of Tasmania as a renewable energy powerhouse we are told. The basis for this claim is difficult to find. It is yet to be publicly revealed how consumers and government owned electricity companies, Hydro Tasmania and Tas Networks will benefit.

More wind farms will be needed and it is for that reason this blog takes a close look at Woolnorth Wind Farm Holding P/L (WWF) which has just released its  financials for the calendar year 2021.

WWF produces about 10 per cent of Tasmania’s electricity needs. In 2021 it received an estimated $95 for each MWh of electricity produced, a slight rise from $94 in the 2020 year.

WWF sells its output to Hydro Tasmania pursuant to a power purchase agreement (PPA). Without the PPA, had WWF sold its output into the spot market it would have only earned an estimated $60 per MWh (2020: $74 per MWh).

Hydro therefore subsidised WWF to the tune of $36 per MWh for 2021, an estimated $34 million in total.

The Shenhua Group a Chinese state-owned company owns 75 per cent of WWF acquired from Hydro which still owns the remaining 25 per cent. Shenhua bought its share subject to Hydro agreeing to the PPA.

Over the remaining term of the PPA Hydro is likely to pay subsidies to WWF which will be more than enough to repay WWF’s borrowings which at Dec 2021 stood at $239 million.

Had Hydro not sold its 75 per cent share it would have been able to repay the borrowings used to construct WWF. Instead, it pays subsidies to WWF to do the same thing.

It follows the pattern established by the Basslink deal, rather than the government owned Hydro building and owning the cable, it was decided to pay someone else to do it. The payments that have subsequently been made would have paid for the cable twice over. Apart from the two carbon tax years there’s not a lot to show from the now abandoned Basslink deal except Hydro with more debt and a community that has suffered as a result.

The pattern of privatising benefits and socialising losses is evident from WWF’s latest financials. In the absence of any clear evidence of how benefits and costs of the Marinus Project are to be shared one is left with the forlorn conclusion that past practices are likely to be repeated.

Tasmanian Budget delusions

 

Barely a year ago Treasury’s Fiscal Sustainability Report revealed large icebergs on the horizon which will require Tasmania to chart a different course. Captain Gutwein had a good view from the bridge of what lay ahead. Unfortunately he has since resigned his commission.

New Treasurer Michael Ferguson has not yet fully acquainted himself with the outlook from the bridge if his Mercury Talking Point article on 2nd June (Tassie has the lowest net debt in the nation ) is anything to go by.

“From 2022-23, we will achieve positive net operating cash flows. This means that the Government continues to live within our means”, Mr Ferguson stated.

Most people would assume this means operating receipts will be greater than operating expenses. Government accounting standards however allow net operating cash to include capital grants from the Australian government.

Needless to say, capital outlays on infrastructure for such items as roads and the Bridgewater Bridge for which the grants will be paid to us, aren’t included when calculating net operating cash.

Nor are equity contributions into government businesses such as Tas Rail and Tas Irrigation also sourced from the Australian government as capital grants.

Include all outlays and there are large cash deficits in every year and for at least the next 15 years according to the 2021 Fiscal Sustainability Report. There is no way this can be described as living within our means.

Debt deficits and the new Federation

What happened to the spring of hope we hoped would follow the Covid winter of despair?

The shortcomings of the existing system have become glaringly obvious. There was much talk about life on the other side of the pandemic, a place where we could build a better and fairer future on more secure foundations.  

However, two weeks of electioneering has confirmed that a move to a better place is too bigger task for our bickering political class. We are back to the same old ways of policy free mudslinging scaremongering and pork barrelling. We have learnt nothing.

There is a conspiracy of bipartisanship not to delve too deeply into important issues.

For instance, consider government debt and deficits and the all-important question of where money comes from. There has been so much to learn from how we managed the Covid crisis that should be front and centre of any election campaign. But discussion is conspicuously absent.

Most Federal government debt is not repaid. It is rolled over at maturity, replaced by new debt. As any Accounting 101 student knows debt may appear on the liability side of a balance sheet but so does owner’s equity. Debt that doesn’t have to be paid represents additional equity in the nation. Government debt is mostly owned by banks and large funds and are analogous to redeemable preference shares in Australia Inc. Interest gives the holder a regular return. The holdings can be sold at any time or redeemable at the end of the term, usually replaced with new borrowings. Debt may be owned by foreigners. But the interest on those borrowings is still paid into Australian bank accounts. If the owner wishes to repatriate the funds the Australian dollars are swapped for whatever currency is needed, so the interest always remains in Australia. Government borrowings should not be used an excuse for austerity by constantly raising the spectre of burdening our heirs and successors.

The Covid response required massive new borrowings. However, most of the new debt is owned by the Reserve Bank (RBA), our bank. We owe the debt to ourselves. The RBA now owns $288 billion of government debt. One third of government debt which is approaching $900 billion is now owned by ourselves. How is this a burden? Interest is paid to us. If bonds are ever redeemed the proceeds are returned to the government as dividends by the RBA.  This is the new reality. Central banks around the world are doing the same.

Basslink: Turning a blind eye to its lessons

 

A compulsive obsessive desire to ignore the lessons of history is slowly choking us.

If Tasmania is to become a renewable energy powerhouse, shouldn’t we have some understanding how existing wind farms and the Basslink interconnector work, who profits and who pays?

What’s the difference between regulated and unregulated interconnectors and what are the ramifications of the termination of the Basslink Services Agreement announced on 10^th February, an agreement covering an interconnector that was supposed to have a life of 60+ years but is falling apart after only 15 years.

Without stopping to analyse what went wrong with Basslink we seem to be careering ahead to build an even more expensive one, whilst the State refuses to face up the underlying fiscal sustainability of a government  which is gradually falling behind in attending to its core functions.

At the centre of energy policy is a Minister who is the shareholder minister in charge of Hydro, TasNetworks and the retailer Aurora Energy, and who pretends he is able to seamlessly resolve any conflict between competing parties whilst also looking after the interest of renewable energy proponents, consumers and Tasmanian taxpayers.

If it sounds too good to be true that's because it is.

Native forest logging mythology

 

THE fact that trees may regrow does not make native-forest logging industry sustainable.

Dorset Mayor Greg Howard was reported (Mercury, February 2) as slamming people who do not accept his reality that because forests regenerate, forestry is one of the only truly sustainable industries.

It’s a non sequitur that is easily shown to be such by a close examination of Sustainable Timber Tasmania’s financial statements.

Over the past 20 years net contributions by governments to STT have been about $500 million.

Over that period the value of STT’s forest estate has plummeted by 75 per cent.

The latest financials show the estate is worth $186 million.

Despite all the assistance, it still lost most of its value. Ipso facto STT is financially unsustainable. No other conclusion is possible.

If that sounds bad, the reality is worse.

STT’s forest estate is based on expected future net proceeds. That is, future harvest revenue less future expected costs. But STT only values standing timber. The costs of regenerating the forest are ignored.

“All coupes regenerate,” claimed Mr Howard. Maybe, but if regeneration costs are not counted when valuing forests, how can Mr Howard claim they are sustainably managed? This is the fundamental flaw in arguments peddled by the native-forest harvest lobby.

Were regeneration costs included when calculating future expected proceeds, almost all native forests would have a negative value.

Standing timber may have a value. Most native forests don’t, if one includes the mandatory regeneration costs when calculating future net harvest proceeds.

It gets even worse if one attributes a value to all the other non-timber losses that occur when forests are harvested and which bean counters preparing financial statements overlook.

There are habitat, water catchment and carbon losses and, in the case of Blue Derby Mountain Bike Trails, clear spillover costs that affect tourism.

Harvesting trees generates cash, but that does not make it sustainable.

(published in The Mercury 5^th Feb 2022)

Basslink for Sale Chapter Two

 

The Basslink sale saga continues.

Since the Basslink for Sale post back in September the mooted sale to APA has been abandoned, and Basslink P/L (BL) is now under the control of Receivers and Managers (KPMG) appointed by BL’s banks.

Back in late October BL still hadn’t managed to refinance its existing bank loans as required. The sale to APA had fallen through. The final straw was when Hydro Tasmania (HT) and the State government finally ran out of patience with BL for non-payment of amounts awarded against them following legal action in the wake of 2016 interconnector outage and announced they were going to start legal action to recover amounts owed.

It was a Mexican standoff. The banks wanted their money. Creditors were getting impatient. BL’s owners didn’t want to contribute any more. BL was insolvent.