Basslink: the greatest bungle

Bacchus H Barren

Basslink is shaping up to be the greatest bungle in Tasmanian history since the collapse of the State Bank, however its consequences will be even greater. It is concerning that the commercial media has not properly investigated and reported this matter, but it is criminal that the matter has not been sufficiently scrutinised by Parliament. Whilst a great deal has been said about other bungles such as TCC, Spirit III and the gas roll-out, these pale into insignificance when compared with Basslink regarding their ultimate impact. Now is the time for some serious questions and now is the time for a Royal Commission of Inquiry.

AS the debacle about the Tasmanian electricity industry, Basslink and Bell Bay power station become public knowledge (thanks to Tas Times), the Hydro’s PR unit has been jolted into action with a few thousand volts of spin.

The recent and not-so-surprising announcement that English owners National Grid International intend to flog Basslink and run (only 9 months after Mr. Lennon threw open the commissioning switch) has been preceded by a spin campaign to attempt to lessen the general hysteria. However regardless of the spin, the fact remains that the chickens are now coming home to roost.

The media bandwagon

It started the week before last when Hydro Tasmania’s Chair Mr. David Crean appeared in an expensive one-page advertisement in Tasmanian newspapers to placate public fears and to suggest that everything was fine and dandy — nothing to see here folks — move along please. It’s always a telling sign that Tas Times has (once again) hit the nail on the head!

The Hydro media spin-wagon was back in action again on the Wednesday with the publication of a puff-piece in the Mercury on the appointment of new Hydro CEO, Vince Hawksworth. Clearly stung by Tas Times’ exposure of the state’s disastrous energy system, the Hydro thought is was time to sell the new CEO as the greatest thing to hit the electricity scene since Dr. Tesla discovered Alternating Current. The only problem is that Vince was appointed 6 months ago. Hydro issued the original press release on 15 May and its contents were largely regurgitated in this article.

Then last Monday Monday the trusty Examiner editorial had an equally nauseous advertorial to push the official line on the Basslink sale. This was accompanied by an equally shallow and pathetic analysis of the situation. It is obvious that the Government is using its links with commercial media in a desperate bid to quell any real commentary on this matter. I hope Monica Attard was looking the other way!

Despite the media candy, at least this time, Hydro is to be congratulated. Instead of casting their net amongst the usual talent-less herd of failed Labor Party candidates, Hobart High old-boys and other assorted intellectual bankrupts, they have this time recruited a CEO who appears to have some worldly experience and knowledge of the energy sector.

Hawksworth’s previous appointment was as General Manager Retail of Genesis Energy — the largest electricity generator and retailer in New Zealand. Hawksworth worked as an Engineer in UK coal mines and migrated to New Zealand in 1993 where he arrived jobless. He started working in the Thermal Division of the New Zealand Electricity Commission (NZEC) which was split up in 1999 to form a number of state-owned enterprises including Genesis Energy. However his appointment as Hydro CEO probably says more about the future direction of Hydro and the Tasmanian electricity sector.

New Zealand electricity chaos — a warning for Tasmania

The New Zealand electricity sector has many similarities with that of Tasmania. It has had a highly chaotic history and is plagued by crippling malfunctions, shortages and high prices. As NZ commenced down the road of electricity deregulation some 13 years before Tasmania, it represents a good predictive analogue — and paints a disturbing picture.

In 1984 the new Labor Treasurer, Roger Douglas, commenced the radical monetarist overhaul of the New Zealand economy — a process to become known as “Rogernomics”. New Zealand experimented with the German model of pure electricity deregulation (self-regulation) resulting in a chaotic mixture of state-owned, private and trustee corporations. In 1987 the Government formed the New Zealand Electricity Commission (NZEC) to try to manage the mess. By 1992-1993 a Commission of Inquiry was established to investigate the high prices being demanded by players as retail electricity prices shot through the roof. In addition to this the entire country (particularly Auckland) suffered routine power outages — this remains a problem today with major outages in Auckland in June 2006. Whilst power companies were making a packet in profits, the absence of regulation meant that there was insufficient (no) investment in generation or transmission infrastructure.

The problem came to an hiatus in 1998 with the Great Auckland Power Outage. Poorly maintained transmission lines from the Mighty River hydro supply failed due to thermal decay. The new retailer (Mercury Energy) was unable to supply any customers in Auckland and the city remained in darkness for two months at an estimated cost to the CBD of $60 million. This event triggered the second round of electricity “reforms” in 1999 where NZEC was split into three (now five) competing entities. However problems with self-regulation remained and following a stakeholder referendum in 2003 the NZ Government was forced by overwhelming public opinion to reinstate the office of the Electricity Commissioner in an effort to re-regulate the industry and control prices.

The land of the long-white electricity bill

The tortuous history of energy bungling in NZ is still resounding today — with routine power outages across the country and NZ consumers now paying the price (literally). Mr Hawksworth’s former company, Genesis Energy, presently charges household customers tariffs ranging from NZ 9.42 cents/kwh for off-peak night to 19.56 cents/kwh for an “Anytime” rate. The standard Genesis day rate is 18.33 cents/kwh plus an annual fixed supply charge of $258.71. This means that New Zealanders are presently paying about twice that of Tasmanians for their domestic electricity.

Could this (or worse) happen in Tasmania?

Read on.

The voltage vampires

It is well documented that every example of electricity deregulation across the world has been followed by both large price hikes and a rapid movement of private energy companies eager to exploit any supply and demand imbalance. This is particularly the case where the state has a weak economy, poor governance structures and a lack of corporate transparency. The same states are typically inexperienced in National Electricity Markets and are sitting ducks for corporate cowboys (often foreign corporations). Sound familiar?

Tasmania has recently seen similar antics with the disastrous bungling of the Bell Bay power station, the announcement of a new private gas-powered generator and the bungling of the gas rollout. Basslink, however, is shaping up to be Tasmania’s biggest disaster since the collapse of the State Bank.

The announcement that the UK owners of the Basslink cable intend to sell the facility marks the escalation of the Tasmanian energy crisis and the start of an ongoing cycle asset hot-potato passing. However it should not be a shock to anyone. The notion that any private company will want to invest in infrastructure (sunk costs) over 25 years is nonsense — most companies will not even exist in their present form after about 10 years!. In addition to this companies do not want capital items sitting as depreciating assets on their general ledger for an extended period of time. As with household pyramid selling, large capital items such as Basslink will only ever be short-term items to be passed onto the next gullible buyer. There is clearly a question as to what provisions, if any, exist in the current Basslink contract to prevent a new owner from setting new price structures.

The shocking cost of stupidity

Basslink is different from most capital investments in that ownership of the cable will revert to the Tasmanian Government after 25 years. Hence the only saleable assets associated with Basslink are a) the rental value of the cable as stated in the current contract with the Tasmanian Government and b) the ability of the cable operator to sell any excess capacity on the 600MW cable to another generator wanting to sell power on the national grid. The recent announcement to sell therefore creates two massive headaches for the Tasmanian Government.

Firstly the Government will be frantic to hide or understate the sale price of the cable, as this will partly reflect the true rental amount agreed to by the Government. NGI built the Basslink cable for a cost of $780 million so it certainly will be looking to make a good return on this investment, which also encompasses the rental potential of the cable. The Government has been at pains to hide the rental agreement and it has generally been rumoured that the amount is $92 million per year. However this is rubbish — simply because it does not account for the future value of money. A flat rental of $92 million per year will not produce any gain on capital expenditure (investment) simply because the value of $92 million in 25 years’ time will be substantially less than it is in todays terms.

Any private company wanting to invest $780 million in a large capital project over 25 years will want a rental return which reflects the opportunity loss of the invested sum. Based on the known information and some approximations from the current inflation and bond rates, we can estimate that a sale price of $2 billion for the cable will need to generate future revenues of about $4.3 billion over 25 years to break-even. This means that the true value of rental payments (in today’s terms) will be about $175 million and possibly as much as $200 million per year. The sale price will confirm that the Government has been taken to the cleaners with regards to contracted cable rental.

Secondly all parties (including the Government) will be eager to hide the poor performance of the cable in terms of energy export from Tasmania. This will also have a significant dampening effect on the sale price. You may recall that Basslink was marketed by the Government as a sure way for Tasmania to sell green energy to the mainland and make mega-bucks. However, as revealed by Tas Times (Bell Bay: Another bungle), this has not happened and is largely impossible given Tasmania’s energy balance and low dam water levels. This is confirmed below by NEM data showing that Basslink connector flow from Tasmania to Victoria has been running at an average of –410 MW (negative flow showing no electricity coming from Tasmania and ALL electricity coming from Victoria). There has only been a tiny number of occasions where Tasmania has been able to push a few pathetic MW across to Victoria, but in general Basslink has acted a corridor for Tasmania to buy dirty Victorian electricity.

Figure. Electricity flow across Basslink (Tasmania to Victoria). The negative values (about –400MW) indicate that nearly all the flow has been from Victoria into Tasmania (coal-fired). That is Tasmania is unable to produce enough competitive energy for the national market.

In summary Tasmania cannot compete on the national Electricity Grid as it can’t produce enough power in a cost effective manner. It has become a victim of both Basslink and the national grid as reflected in the fact that Tasmania pays the highest spot price for electricity, well above all other states. South Australia was once regarded as the basket case of the National Electricity Market, but even SA is now only paying an average of $30 MW/h whilst Tassie is constantly slugged with $36 MW/h. In contrast Queensland and NSW pay about $19-24 MW/h. There has been a wall of silence from Hydro Tasmania with regards to these damning developments.

Consequently the Government is “leaving open” the option of buying Basslink itself — simply because this is the best way in which it can extricate itself from the disaster but more-so it is the only way it can effectively control and hide the damning facts described above.

Your future electricity bill

Hydro Tasmania presently charges wholesalers about 3 cents/kwh for electricity. By the time the power has reached your home, Transend and Aurora have combined to add an additional 7.7 cents/kwh so that your average charge is about 10.7 cents/kwh. If these prices were extrapolated using an annual CPI of 3%, then by 2014 you will expect to pay about 13.6 cents/kwh and in 2020 about 16.2 cents/kwh.

The economics of Basslink, with regards to the future value of money as discussed above, suggest that for prices to remain in-line with standard CPI, then Basslink will need to export from Tasmania a constant flow of about 550MW every day of the year for the 25 year life of the project, just to cover the real value of line rental. As we have seen, this is impossible. Indeed the present status is that almost no energy is being exported to the mainland. Of course this does not include the costs of asset depreciation or transmission loss (usually about 14%) due to heat and AC-DC conversion.

If Tasmania can only manage to scrape-together a meagre 115 MW (technically possible with decent water levels — but well above present values) as a constant daily flow across Basslink, then the real value of cable rental will be overbearing. If we assume that this deficit is passed onto consumers then we can expect to see an average household price for electricity in Tasmania of about 29.7 cents/kwh by 2014 and 37.6 cents/kwh by 2020. These crippling prices are 3 times greater than present prices and 2.2 times greater than the price you should expect to pay under normal inflation. It would appear that Tasmania is well and truly on the same horrendous electricity price path pioneered by New Zealand.

The future is in the past

Tasmanians need to look no further than the recent history of New Zealand to see their energy future. The inability of Tasmania to compete effectively on the national grid, declining dam water levels, declining rainfall and the collapse of the MRET all mean that Basslink has become a heavy weight around the neck of Tasmanian economy. The crippling (real) cost of cable rental will ultimately drive household electricity prices through the roof and crush economic growth. As with New Zealand, the advent of deregulation and high profits will be associated with the neglect of infrastructure development and maintenance resulting in power outages. Possibly as soon as this summer (January/February) it will become obvious that Tasmania’s over-reliance in Basslink to provide “drought-proofing” is both nonsense and a dangerous folly.

Basslink is shaping up to be the greatest bungle in Tasmanian history since the collapse of the State Bank, however its consequences will be even greater. It is concerning that the commercial media has not properly investigated and reported this matter, but it is criminal that the matter has not been sufficiently scrutinised by Parliament. Whilst a great deal has been said about other bungles such as TCC, Spirit III and the gas roll-out, these pale into insignificance when compared with Basslink regarding their ultimate impact. Now is the time for some serious questions and now is the time for a Royal Commission of Inquiry.