Reece diversion tunnel

Hydro Tasmania measures changes in the long-term value of the business by monitoring two key performance indicators: net asset value and cost per megawatt hour of generation.

Our net asset value at 30 June was $1665 million, which is $269 million higher than last year and represents an increase in the long-term value to our shareholders. The improvements in net assets are largely the result of an increase in the value of our hydro generation assets. This is mainly due to an increase in our storage position since last year, which has increased our expectations of future profitability, see figure 8.

The cost per megawatt hour of generation was $77.51, which is $12.16 higher than last year. This cost reflects our actual performance over the past financial year, and is influenced by the level of water inflows, the efficiency of our existing system and changes to our cost structure. The main contributors to the higher cost in 2008/09 were lower generation and higher operational costs (although operational revenue was also higher), reflecting the expenses of Momentum Energy in the calculation⁴.

⁴The calculation method of cost per megawatt hour of generation has been altered from last year to better capture Hydro Tasmania’s total cost base. Cost per megawatt hour of generation is calculated by taking total operating expenses plus finance costs, divided by generation. Generation includes the total of hydro and gas-fired generation.

After several years of prudent financial management and cost control in response to the drought, Hydro Tasmania implemented several strategies in 2008/09 to build its financial strength and increase its long-term value: the acquisition of Momentum Energy Pty Ltd, the sale of Roaring 40s’ Asian assets, and the storage rebuild strategy.

Acquiring a stake in Victorian electricity retailer Momentum Energy provides us with opportunities to add value to the business in the long term. It allows us to diversify our customer base and to explore opportunities to provide innovative solutions for retail, consulting and energy customers’ needs. It also provides us with a means to manage the risks associated with our exposure in the National Electricity Market (NEM), including the risk of vertically integrated companies reducing the liquidity of the contract market and the prices in the wholesale market.

Roaring 40s

Roaring 40s provides long-term value to the business by growing its development portfolio. The sale of Roaring 40s’ Asian wind farm assets enables Roaring 40s to focus on renewable energy growth opportunities in Australia. The proceeds of the sale have been retained in Roaring 40s.

Roaring 40s has a wind farm developments pipeline for areas around Australia, including major developments at Waterloo in South Australia and Musselroe in Tasmania.

	Lake Echo

We have experienced 12 years of water inflows lower than the long-term average of 10 000 GWh which represent a high risk to our long-term capability to generate electricity. In July 2007, with storages at 19.1 per cent of full energy, we implemented a five-year strategy to rebuild storage levels to 30 per cent of full energy5 by 30 June 2013. This strategy involved supplementing hydropower with electricity generated by our gas-fired power station and imported energy via the Basslink cable. Increased storages will reduce our risk profile for future years.

Challenges and opportunities

Hydro Tasmania faces challenges and opportunities arising from uncertainties about the global financial environment, the national climate change mitigation strategy, the introduction of competitive generation in the Tasmanian electricity market and water inflows.

Global financial environment

Hydro Tasmania faces risks associated with uncertainties and lack of liquidity in debt and equity markets.

Our prudent financial management and effective cost management means we are well placed to weather the global economic downturn. However, the current conditions are putting at risk capital funding for some of our research projects and development opportunities. In addition, the impacts on our customers may lead to reduced demand for energy, as well as reduced demand for Hydro Tasmania Consulting services if customer projects are delayed.

National climate change mitigation strategy

The uncertainty surrounding the federal government’s climate change strategy - particularly the legislation establishing the Carbon Pollution Reduction Scheme (CPRS) – has made it difficult for Hydro Tasmania to realise greater value from our position as Australia’s leading renewable energy business.

But despite this uncertainty, we have continued to invest in renewable generation technologies and are well positioned to capture value that will arise from the establishment of a carbon market.

Competitive generation in Tasmania

The Tasmanian Government acquired the Tamar Valley Power Station from Babcock and Brown Power in September 2008, while it was still under development.

The ownership of this gas-fired power station was transferred to Aurora Energy Pty Ltd, Tasmania’s largest energy retailer. The power station began generating in April 2009 and is expected to be fully operational in September 2009.

Once this occurs, it will have the capacity to generate approximately 390 MW of electricity, which is equivalent to around 30 per cent of the average Tasmanian electricity demand.

The Aurora Energy Tamar Valley Power Station will compete with Hydro Tasmania’s generation portfolio, reshaping the competitive environment in Tasmania. The new power station’s large capacity provides strong competition for wholesale customers and may lead to us losing some wholesale electricity sales.

The commissioning of this power station will mean that Hydro Tasmania is no longer expected by the State to be responsible for security of supply for Tasmania’s electricity consumers.

This will provide us with opportunities to diversify our revenue base and increase activities outside Tasmania.

Water inflows

Hydro Tasmania continues to face the risk of reduced water inflows. The storage rebuild strategy is in place to deal with this and is explained above.

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