‘Bullish’ contract talks

SPECULATION the Federal Government might walk away from plans to close power stations, potentially including several in the Latrobe Valley, has gathered momentum.

An Australian Financial Review report last week claimed Federal Resources and Energy Minister Martin Ferguson warned the government could walk away from negotiations if it was “unable to secure a favourable price” with power stations through its contract for closure process.

The Federal Government’s commitment to remove up to 2000 megawatts of coal-fired power generation from the system by 2020 – necessitating the closure of several power stations – has been a key plank of its Clean Energy Future Package.

Industry sources told The Express the owners of Energy Brix, Hazelwood and Yallourn power stations were currently in “bullish” negotiations with the Federal Government over contract for closure details. The government intends to secure contracts with existing generators by 30 June to decommission 2000 megawatts.

The Financial Review claimed the Federal Government faced a multi-billion dollar blowout in the cost of closing power generators “due to the prospect of a future low carbon price and a Coalition win at the next election”.

It said as power companies demanded higher compensation amounts to close down, the government might walk away from negotiations.

Mr Ferguson has previously told The Express the government did not have a “bottomless pit of taxpayers money” to pay generators to phase out their plants.

Later he said if the contract for closure process did not happen in the Valley, as widely anticipated, then this region might not be the hardest hit by the carbon tax as it has long claimed.

Last week’s growing speculation about the viability of closing power stations was partly attributed to potential inaccurate Treasury projections of the future carbon price.

While the tax has been fixed by the Federal Government initially at $23 per tonne, it will transition to a “flexible market price” in 2015-16 with Treasury modelling projecting a $29 price after that date.

That figure was widely questioned by economics experts last week, the Financial Review said if, instead, it fell to it’s ‘floor price’ of $15, the value of generators could increase four-fold. If the Coalition then won government, the value would rise much further, it added.

A local industry observer concurred with other analysts last week, that if the carbon price was much lower than forecast, the value of generators would increase significantly, pushing up demands for government compensation to close.

Since the contract for closure program was for the most carbon intensive generators, the industry observer agreed the value of those generators was materially affected by the level of the future carbon price.

According to the Financial Review, Grattan Institute energy director Tony Wood said the contract for closure plan never made sense and was “the biggest con” he had ever seen”.

He claimed brown coal was “so much in the money”, evidenced by AGL’s planned 100 per cent buyout of Loy Yang A.

The local observer said multiple variables affected the future likelihood of contracts for closure progressing.

He said while it was possible power generators could continue to profit healthily if the carbon price post-2015 was low, if the price remained high and the Federal Government walked away from the closure program generators could still be forced to close early but without compensation.

“Contracts for closure at least provides some certainty in the market place, and around closure dates,” he said. “If it doesn’t happen then (the future of plants) reverts back commercial decisions by the owners”.