If the federal government is worried about electricity prices it should be looking at this: AGL has this morning confirmed it will buy one of the country’s largest electricity generator, the New South Wales government-owned Macquarie Generation, for the bargain-basement price of $1.5 billion — well below the book value of $2.1 billlion.
“MacGen” owns the Bayswater and Liddell coal-fired power stations in the Hunter Valley, with combined capacity of some 4800MW representing 28% of the state’s generation. The market broadly expected AGL to be the highest bidder — Marubeni and ERM are believed to have been the underbidders — and its shares ticked up on the announcement.
But there are major doubts as to whether the transaction will go ahead after the Australian Competition and Consumer Commission last week flagged its preliminary view was that the proposed acquisition was likely to result in a substantial lessening of competition in the market for the retail supply of electricity in NSW — and nationally, given AGL would become the largest generator in NSW, Victoria and South Australia.
ACCC chairman Rod Sims — who knows the electricity market backwards, being previously the chairman of the NSW Independent Pricing and Regulatory Tribunal, which oversees the sector — said the acquisition would give AGL, Origin Energy and EnergyAustralia (formerly TruEnergy) some 70-80% of electricity generation capacity or output in NSW and over 85% of the retail market in NSW:
“Our concern is that second-tier and new entrant retailers might find it difficult to gain the hedge contracts they need to compete aggressively in the NSW retail market.”
The ACCC has called for submissions and will report by March 4, but the NSW government felt it was unfair to leave underbidders hanging — it announced the winning bidder without waiting for the competition regulator.
In the view of some brokers, like UBS utilities analyst David Leitch, the ACCC’s intervention could short-circuit the MacGen sale to AGL and the regulators concerns about increasing vertical integration of the country’s electricity industry may have to be tested in court — especially given Queensland is likely to privatise its own assets at some point in the next few years, and the same three companies are natural bidders.
NSW Treasurer Mike Baird said AGL’s bid was the only one that exceeded “retention value” — what MacGen was worth to the state in public hands — and the direct implication of this morning’s statement is that if the ACCC blocks the sale to AGL, the whole privatisation will not go ahead. It is worth noting NSW gets to keep $220 million of MacGen’s cash under the transaction.
NSW Greens’ electricity spokesman John Kaye has consistently opposed the sale but says the O’Farrell government is desperate to sell off the assets ahead of a state election just 13 months away. “[It] feels awfully like a fire sale of asset,” he told Crikey. “The value would be far higher than $1.5 billion, not just in terms of the expected value of the income stream but also because of the crucial role it plays in setting prices in the national electricity market.”
Kaye says the sale will create a “triopoly” in the electricity market, which would have longer-term consequences for both electricity prices and for reducing greenhouse gas emissions.
Admittedly, falling electricity demand as a result of the decline of manufacturing and higher prices has depressed the value of the generation assets, but Kaye is not the only one calling it a fire sale price. David Headberry, public officer for the Major Energy Users Inc (which represents heavy industrial users of power like steel mills, aluminium smelters and cement makers), is also opposed to the MacGen sale. He believes it will give AGL — or any private owner — the power to control the spot price of electricity at periods of high demand.
Headberry says the MacGen price of $1.5 billion means the power stations are being sold for $313/MW of capacity. “A new open cycle gas turbine power plant [the cheapest you can buy] sells for about $700-800/MW, so AGL is getting MacGen for a fire sale price, and will allow AGL to exercise market power as well,” he told Crikey.
Headberry says AGL exercised similar power in South Australia between 2008-2010 after it bought the Torrens Island gas-fired power station, the largest generator in the state.
Market concentration in electricity generation is a concern not just for big industrial users but for households, he says, and a lessening in competition will inevitably flow through into higher prices, as occurred in South Australia following AGL’s acquisition of Torrens Island, when retail electricity prices jumped from $40/MWh to $70MWh and higher within the space of two years.
Headberry says the acquisition will result in the electricity generation and retail being dominated by the three large players, just like the supermarket sector. “We are creating the dynamic for another Coles and Woolies,” he says.