Gutwein directed Hydro Tasmania to enter into a loss-making deal, utility says

Documents show publicly-owned companies expect to lose millions on 'onerous' wind farm contracts
Published
 December 17, 2020
Published:  December 17, 2020
December 17, 2020
December 17, 2020
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Granville Harbour Wind Farm. Image: Granville Harbour Operations Pty Ltd

Two of Tasmania’s publicly-owned power utilities have revealed they could lose tens of millions of dollars on power purchase agreements with wind farm owners.

It has prompted questions about why more information about the contracts is not publicly available, and how government agencies that are supposed to operate as commercial businesses came to sign deals that could leave electricity consumers out of pocket.

Leading Tasmanian economist John Lawrence warned the potentially significant losses could lead to Hydro Tasmania and Aurora Energy having to increase power prices, carry unnecessarily high levels of debt or cut dividend payments to the government.

He said the losses were “basically just a subsidy” that if warranted should be funded through the Department of State Growth, and called for greater disclosure of what the contracts would mean for the utilities’ finances.

“If they want to prop up an industry they should put it on the record rather than hide it away in the books of a government business enterprise,” he said.

Hydro Tasmania’s new annual report disclosed [p. 101] that in the five months after the first turbines at the Granville Harbour Wind Farm were commissioned in early February it had racked up a potential loss of $500,000 due to an “onerous contract” it was ordered to enter into by Treasurer Peter Gutwein and then minister for energy Matthew Groom.

The total loss due to the contract is likely to have become much larger as the wind farm’s 31 turbines were progressively commissioned during 2020. The last units are due online shortly.

The loss is recorded in Hydro Tasmania’s accounts as a “community service obligation” incurred to “facilitate the construction of the Granville Harbour Wind Farm”.

A spokesperson for Hydro Tasmania confirmed to Tasmanian Inquirer the potential loss on the Granville Harbour Wind Farm contract was included in a $195.8 million provision for losses on “onerous contracts” disclosed in the utility’s 2018-19 annual report (p. 37).

The utility defines an “onerous contract” as one where the “unavoidable cost of meeting contractual obligations exceeds the economic benefits to be received”.

It declined to disclose the current estimated loss on the Granville Harbour wind farm agreement, saying the magnitude was “commercial in confidence”.

Why two government-owned utilities entered into contracts which stand to lose tens of millions of dollars is shrouded in secrecy.

The spokesperson said 52 other contracts were included in the $197.8 million provision but did not identify which companies they were with, what the estimated losses on each one was or whether they included other wind farm agreements.

Hydro Tasmania now has a provision for over $260 million for “onerous contracts” for renewable energy certificates from wind farms, gas contracts and lease liabilities. No breakdown on the projected losses is publicly available.

Aurora Energy, the government-owned energy retailer, revealed in its latest annual report it could lose up to $28.9 million on a 10-year agreement it entered into in September 2017 with Goldwind Australia for the 144 megawatt Cattle Hill Wind Farm near Waddamana.

Hydro Tasmania puts on a happy face with pre-election subsidy deal 

Details of why the utilities entered into the loss-making contracts is shrouded in secrecy. At the heart of the likely losses are agreements to purchase Large Generation Certificates (LGCs) from the new wind farms.

Under the Federal Government’s Renewable Energy Act, each megawatt hour of new generation accredited by the Clean Energy Regulator results in the creation of a tradable renewable energy certificate. Electricity retailers such as Aurora Energy are obliged to buy an annually determined number of certificates.

Initially, the Renewable Energy Target was set at 41,000 gigawatt hours by 2020. However, in June 2015 the Abbott Government – with the support of the Labor party – agreed to cut the target by 20 per cent to just 33,000 GWh.

By 2016, a flood of proposed wind and solar projects led analysts to estimate the target would soon be exceeded. Once the target was met new projects would still be eligible for the incentive up until 2030, when the scheme expires, but analysts forecast the value of certificates would collapse as the result of an oversupplied market. (The target was met in September 2019.)

According to Hydro Tasmania, in early September Gutwein and Groom directed the utility to enter into a contract for the wind farm.

The low value put on renewable energy certificate prices in the 2020s created a big problem for the consortia proposing the Granville Harbour and Cattle Hill wind farms.

In early 2016, Alex Simpson, one of the business partners proposing the Granville Harbour farm, lamented to The Advocate that the only “real obstruction” to the project proceeding was the lack of a power purchase agreement. He said the project would create 200 jobs during construction and eight long-term positions. (The company now estimates the wind farm will provide six full-time jobs after commissioning.)

In May 2016, the Tasmanian Labor Senator Anne Urquhart took up the cause of the wind farm proponents, telling the Senate that Groom had “done absolutely nothing to progress” the Granville Harbour Wind Farm “even though it is well within his power to do so”.

The board of Hydro Tasmania was baulking at buying overpriced renewable energy certificates.

With the 2018 election approaching and the Tasmanian Liberal Government struggling in the polls, pundits suggested the outcome in the northwest coast seat of Braddon could prove crucial in determining whether it retained power in its own right.

In mid-June 2017, Hydro Tasmania announced an in-principle deal had been reached with the wind farm proponents “in consultation with the Tasmanian Government”. The deal was “subject to a number of technical and commercial conditions”.

According to Hydro Tasmania, in early September Gutwein and Groom directed the utility to enter into a contract for the wind farm.

Lawrence said the contracts provided the wind farm proponents “some form of security so they can either go along to their bank or their investors with the ability to sign off on a guaranteed return”.

Two weeks before the writs were issued for the March election, Hydro Tasmania issued a media release extolling the benefits of the agreement. It said the state could have 3000 MW of wind energy, almost 10 times the installed wind capacity at the time. The media release made no mention of the potential financial costs or that it had been ordered by government ministers to support the project.

The bills fall due

Central to the contract negotiations was the future value of the Large Generation Certificates.

Hydro Tasmania told Tasmanian Inquirer it agreed to buy the renewable energy certificates at a fixed price for the duration of the contract, which runs until January 2028.

Dylan McConnell, a research fellow at the University of Melbourne’s Climate and Energy College, said the renewable energy certificate price had recently bounced back up as some projects had been delayed and there were not as many certificates available as had been expected.

But he said this was expected to change when near-complete or delayed projects are finally commissioned and new projects emerge in the wake of recent major renewable energy announcements by the NSW and Victorian governments.

 “Why would a generator want to buy these large generation certificates? It doesn’t need them. It is in the business of selling them.” Tasmanian economist, John Lawrence.

The Clean Energy Council, a lobby group representing the renewable energy sector, notes some analysts estimate the certificates may be worth nothing by 2030.

Hydro Tasmania has an estimate for the possible liability on the renewable energy certificates contract, but only discloses losses from the sale of the certificates each year in its annual report.

The total losses on the agreement will not be public until the release of Hydro Tasmania’s 2027-2028 annual report.

Lawrence said he had been told the loss on the contract based on the current price of the certificates could be as much as $17 million a year.

He said it made little sense for a generator such as Hydro Tasmania to buy the certificates.

“Why would a generator want to buy these large generation certificates? It doesn’t need them. It is in the business of selling them,” he said.

“It wouldn’t be interested in speculating on the price of the large generation certificates so clearly the Hydro would have to have been directed to buy them.”

In its June 2017 statement, Hydro Tasmania said it would buy about 360 GWh of certificates from the Granville Harbour Wind Farm. However, its liability could be greater if the wind farm performs better than expected. Hydro Tasmania has confirmed its agreement is to buy all the certificates from the project.

In a recent media release, the wind farm said the project would produce about 400 GWh of clean energy every year  - 11 per cent more than the estimated output cited by Hydro Tasmania.

“If taxpayers of electricity consumers are picking up the bill for projects there is a good public policy argument for them to make it all as transparent as possible.” Dylan McConnell, University of Melbourne Climate and Energy College

A government spokesperson has rejected the suggestion the losses on the Granville Harbour Wind Farm contract were the result of a poor decision by Gutwein and Groom to order the utility to enter into the agreement.

According to Aurora Energy it was not directed to enter into the loss-making contract for the Cattle Hill Wind Farm, which was commissioned in January 2020.

Asked if the losses on the wind farm contracts put pressure on power prices, utility debt levels or dividends, the government spokesperson said “no”.

Asked how the losses on the contracts were consistent with the government’s goal of “putting downward pressure on power prices”, the spokesperson pointed to a 1.38 per cent reduction in the regulated price for 2020-21.

The government also rejected the suggestion that a lack of transparency about the Hydro Tasmania contract prevented ministerial accountability. “Details regarding these contracts are commercial in confidence,” the spokesperson said.

The path not chosen

The ACT Government has also committed to get 100 per cent of its electricity from renewable generation, a target it reached in September 2019. However, it chose a different path to that pursued by the Hodgman and Gutwein governments.

It ran reverse auctions aimed at eliciting lowest cost bids from competing project proponents.

Projects included wind farms and solar projects both in or near the ACT, and in other states that are part of the National Electricity Market.

Prices paid for the winning bidders from the capacity auctions are publicly released. Evoenergy, the government owned utility, reports on payments to renewable power generators each quarter. Various stages of the program have been subject to independent reviews that are also publicly available.

McConnell said that with state governments playing an increasingly active role in stimulating new renewable projects it was critical the correct processes and regulators were in place “to ensure we are getting good bang for buck, and that consumers aren’t getting fleeced”.

He said the ACT Government’s approach of an open tendering process and independent reviews may have been driven less by the need to build public confidence in the policy than ensuring the best value for money.

“If taxpayers of electricity consumers are picking up the bill for projects, then there is a good public policy argument for the government to make it all as transparent as possible,” he said.

Bob Burton is a Hobart-based author, researcher, editor and freelance journalist. He is the Editor of CoalWire, a weekly bulletin on global coal industry developments for the US-based non-profit group Global Energy Monitor. His freelance journalism has been published in a wide range of news outlets from the British Medical Journal to the US-based PR Watch.

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