The decision by the Commonwealth Bank to slash the value of its stake in the Hazelwood Power station poses an interesting problem for the majority owners as well as the Victorian state Government as they negotiate over a package to close at least part of the state’s biggest emitter of greenhouse gases.
The CBA revealed at its AGM on Tuesday that it had written down the value of its 2% stake in Hazelwood — the state’s heaviest-emitting utility — to just $1 million from nearly $25 million.
The inference of CBA’s assessment is that the total value of the asset bought for $2.35 billion in 1996 is now worth $50 million. As green activists like to point out, the CBA valuation proves their own contention that the asset has become a lemon. Even the state government could afford $50 million.
But it won’t be quite so simple. Other shareholders are yet to follow suit, and it would be surprising if majority owner International Power — which has 92% — would do so right in the middle of negotiations. International Power, which is now owned by the French energy giant GDF Suez, has dismissed the CBA move as an “accounting treatment” that has no impact on the value of the asset.
The Brumby Government wants to close down at least one quarter of Hazelwood to cut emissions in the state by 4 million tonnes a year. It has proposed direct compensation to the owners for the closure, although it is attempting to set up a tender process as a means of finding the best possible price.
The Brumby Government would not be able to afford the estimated $500 million-plus cost inferred by International Power’s valuation of the asset, and will rely on Commonwealth funding. That, however, is doubtful in any case, because a buyout is more akin to the coalition’s policy of “direct action” than to its own plans to introduce a carbon price.
The move by CBA also has implications for the owners of other coal fired generators, and suggests that anyone considering similar investments in the future may struggle to get banking finance.
“The Hazelwood power station probably wasn’t the best investment the bank made,” CBA chairman David Turner said on Tuesday. “It’s been written down to a million dollars. And it’s certainly not part of our core strategy and we wouldn’t plan to repeat an investment like the one we made in Hazelwood.”
International Power has been one of the most vocal opponents of the Labor Government’s proposed carbon pricing regime — the CPRS — and has even argued against proposed energy efficiency measures — saying that any regulation would destroy the value of the power station.
It has previously argued that it should receive the entire value of the power station — equity plus debt — as compensation. That amounts to more than $4 billion for Hazelwood and Loy Yang B, and it has been happy to pursue the compensation course, as long as it gets all its money back.
Of course, any compensation deal would likely would be greater than $50 million, but the CBA valuation makes it difficult to justify anything like original purchase price. Hazelwood, however, is a tricky case for the Victorian government, because only five years ago the utility was granted an extension to its operating life, access to new coal fields, and was led to believe it could continue on its way to 2030.
That is likely to the basis of any compensation agreement, which could otherwise be influenced by asset values, loss of future income, or the question of energy security. But should it also get full compensation for what the CBA chairman suggests was a bad bit of business.
The question of compensation will be a focal point of the multiparty deliberations on a carbon price. The need for compensation for trade exposed industries is well accepted, even if the quantum is not, but the need for compensation for coal-fired generators is hotly contested.
The Greens argued against it, and so did Professor Ross Garnaut, who now sits on that panel. The emotive argument in favour of compensation is the fear of energy blackouts, eagerly propagated by the likes of International Power and TruEnergy, the owners of Yallourn, but these have been contradicted as nonsense by other energy companies, most notably Origin Energy.
International Power’s profits from its operations in Australia rose 11% in the June half to £133 million, despite downtime from Hazelwood because of planned maintenance outages. Those results would include contributions from its other Australian assets, the Loy Yang B brown coal generator and the Simply Energy retail business, which the company said also delivered improved performances and higher margins.