Power play a winner for AGL

AGL has done well in snagging Loy Yang. Photo: Pat Scala

Should the Coalition roll into office and repeal the carbon tax, as it has pledged, Australia’s biggest polluters will have just made off with the coolest $1 billion in corporate history.

As part of the government’s compensation package for large brown-coal-fired power stations, this $1 billion is shared by the likes of Britain’s International Power, Hong Kong’s TRUenergy and the Japanese from Tepco.

This handout is as big and blithe a transfer of taxpayer wealth to foreign multinationals as ever there was. There are no strings attached; the lucky recipients are free to spend it anyway they wish.

And the handouts are scheduled to be made in the next couple of weeks – in cash and unconditional. Opposition leader Tony Abbott has pledged to can the carbon tax if he wins government, which now appears odds-on.

For the Opposition, this sort of careless deal-making is first-class material with which to taunt the government and its carbon tax. As far as the looming escalation in energy costs goes, however, the carbon tax will play only a minor role.

Rising wholesale costs and power industry consolidation are of far greater concern. And today’s announcement from the competition watchdog only entrenches the oligopoly in Australia’s power industry.

By waving through the sale of Victoria’s Loy Yang A power station, the Australian Competition and Consumer Commission has catapulted AGL – the other big beneficiary of the cash hand-outs – into the big league of electricity generators alongside Origin Energy and TRUenergy.

Terrific deal

It’s a terrific deal for AGL, delivering it peak power and base-load; the large presence in the Victorian market it has hankered after.

The regulators had resisted AGL’s attempts to expand into generation ten years ago but now appear to have retreated from their stance that the mop-up of Loy Yang might damage competition and put pressure on electricity prices.

What has changed? The industry has only become more consolidated in the meantime and power prices are rising so fast that they are destined to crimp household spending and drive up costs to business.

Rising power prices are among the greatest threats to the economy.

Power price pinch

The latest figures from the Australian Energy Market Commission (AEMC) predict retail prices in the eastern states to rise by an average of 37 per cent over the four years to fiscal 2014.

Price increases of these dimensions in such a basic commodity represent a menacing impost on business and a brake on economic growth.

The most significant driver of the residential price rises, according to the AEMC is the rising cost of distribution services which are expected to contribute 42 per cent of the total increase.

“The distribution component is expected to increase in most jurisdictions, as a result of both increasing levels of capital works and increases in the cost of undertaking these capital works,” said an AEMC report from November, as you might recall.

Coal price

Besides the capital works and big network upgrade costs, another major contributor to rising power prices is the higher coal price. As supply deals struck at $40 a tonne ten years ago now roll off contract they have to be renewed at $75 a tonne or thereabouts.

This further vertical integration of the power sector, waved through by the ACCC today, simply brings down the number of industry players and lends more pricing power into the hands of a few – namely AGL, International Power, Tepco and TRUenergy.

Unlike other sectors, say retail for instance, the barriers to entry are formidable.

And while it is true that Australia is a nation of duopolies – Woollies and Coles, Qantas and Virgin, Kirin and SABMiller (Foster’s), Amcor and Visy, and so on – the narrowing of the numbers in the power oligopoly cannot but have some effect on rising power prices.

But while there are losers, there are inevitably winners and AGL shareholders, indeed all power industry shareholders, are among the winners here.

The deal also reflects the “browning of AGL” whose former big expansion into the Victorian market was via the acquisition of Southern Hydro. It locks in supply, 30 per cent of Victorian generation, for 37 years.

The $900 million rights issue announced this morning, and priced at a reasonable discount, should get away comfortably.

Hope Downs Marketing Company Pty Ltd. has dropped off the Top 40 list today. For more information click here.

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