Vales Point: profits from policy chaos

AdminInsights

Last week, a parable of Australias energy policy chaos came to light. Not in the bawdy policy debate in Canberra, but in the quietly filed financial reports of a power station owner.

This is the story of the shifting fortunes of Vales Point, an old polluting coal-fired power station. In 2015, its then owner, the NSW state government decided it would close early. So it was devalued by $370 million and sold to private hands for $1 million dollars.

Now, less than 2 years on the buyers have decided to keep the station open for far longer, and have already pocketed $40 million. While consumers and the climate loose from delaying the inevitable phase-out of coal-fired power generation, there are winners along the way too.

Vales Point Power Station
Vales Point Power Station
Credits: Webaware (Own work) [Public domain], via Wikimedia Commons

The 1,320MW coal-fired Vales Point power station is located on the Central Coast of New South Wales. It is one of the state’s five coal power stations. In 2015/16 it was responsible for 11.4% of the large-scale electricity generation in the state, producing 6.85 million tonnes of CO2 in the process.[1]

The facility was commissioned in 1978 and for most of its life was state-owned.[2] In December 2015, as part of the Liberal government’s power privatisation, it was sold to Sunset Power International Pty Ltd for $1million.[3] Sunset is owned 50:50 by companies associated with Trevor St Baker and Brian Flannery: veterans of the Australian energy industry.

Interestingly, Trevor St Baker also controls over 25% of ASX listed ERM Power Limited. Sunset Power has a contract to supply electricity from Vales Point to ERM. In turn, ERM has contracts to supply the whole NSW government with electricity.[4]

Earlier in 2015, while still in state hands- but potentially after it had been put up for sale – the Vale Point station’s useful life was assessed. The conclusion of this exercise was a decision to close the power station seven years before the end of its technical life: in 2021/22 rather than 2028/29. As a result, it was devalued by $371,163,000: essentially writing off almost all of its value. It was on this basis that it was sold: as a near worthless legacy asset supplying power into a saturated electricity market, unable to compete with either cheaper brown coal- generated electricity from Victoria or the growing supply from renewables.[5]

Now, less than two years later, the picture could not look more different.

Sunset Power International’s 2017 financial report was released last week. It reveals that:

  • In 2017, it sold over $380 million of electricity from Vales Point. By comparison, in its last full year of state ownership Vales Point generated electricity sold for $270 million.[6]
  • In April 2017, the shareholders pocketed $39,900,000 for the buy-back of 14 $1 shares ($2,850,000 per share), nice work if you can get it.
  •  Sunset Power has decided to operate Vales point until at least 2029. As a result of this decision, plus increased electricity prices and a different accounting method, Sunset Power has increased its valuation of the power station assets by over $650 million to $720 million.

So what the NSW government considered a near-worthless asset a couple of years ago is now anything but, and its owners have already made back 40 times their original investment of $1 million.

This is a stark example of the consequences of Australia’s broken energy policies. Years of chaos has led to a chronic lack of long-term planning and delayed investment in new renewable capacity. As a result, supply tightened so much in the wake of Hazelwood’s closure that windfall profits have been delivered to highly polluting coal power stations. Of course, Australia’s self-sabotaging approach to gas exports hasn’t helped either.

And an under-utilized coal power plant, recently slated for early closure, will now operate until the end of the next decade. Indeed, its owner plans to run it for even longer.[7] This reversal of fortunes appears to be a consequence of the uncertainty resulting from Tony Abbott’s regular application of a wrecking ball to climate/energy policy for the best part of a decade. It also raises serious doubts about whether the NSW Government’s management of the privatization of Vales Point was really as good for tax payers as then-Treasurer Gladys Berejiklian claimed.[8]

Footnotes

[1] Clean Energy Regulator (2017) Electricity sector emissions and generation data 2015-16, 19 April 2017, Energy & Resource Insights analysis

[2] Technically, the current power station is Vales Point B. Vales Point A began operations in the 1960’s and has been decommissioned.

[3] The sale process had begun in March 2015 and, the buyer announced in November and the sale finalised on 17 December that year. See media release 

[4] Contracts 777 and 776 for large and small sites respectively. Use of these whole-of-government contracts is mandated for departments, executive and separate agencies, advisory entities and statutory bodies/authorities.

[5] Potter, B and Winestock, G (2015) NSW lost $565m on dud Vales Point power plant, 20 November 2015, Australian Financial Review

[6] Delta Electricity (2015) Delta Electricity Annual Report 2015

[7]Ludlow, M (2017) Delta Electricity to extend life of Vales Point coal-fired power station, 17 September, Australian Financial Review

[8] https://www.gladys.com.au/content/gentrader-deal-cleaned-vales-point-and-cobbora