Financial impact on Hydro Tasmania of response to energy supply challenge

19 June 2016

Hydro Tasmania today outlined the financial impact on the business of record low inflows from September 2015 to April 2016, combined with the six-month Basslink outage, in evidence to the Public Accounts Committee of the Tasmanian Parliament.

Chairman Grant Every-Burns told today’s hearing most of the impact of responding to the energy supply challenge would occur in the current financial year, with some cost carried over to 2016/17.

“The period in question was very dry by any reckoning, containing a number of sequences each representing the driest in 100 years,” Mr Every-Burns said.

“Within that same period the Basslink cable failed. The consequences of this failure were magnified by a repair time amounting to 176 days against our prior expectation of 60 days.

“As a result, this year's profit will be eliminated and a loss of $90 million is expected (loss before tax and fair-value adjustments. Non-audited accounts). In the year ahead Hydro Tasmania intends to build storages and target a break-even or small positive financial result for 2016/17.

“In my 45 years’ experience in the power industry as a power engineer, senior executive and board Director I have rarely seen a situation more difficult than that recently faced by Tasmania and I have never seen a response so effectively executed,” he said.

“In the space of just six weeks we have moved from a period of record low rainfall, with the potential to limit electricity supply in Tasmania, to a situation of record-breaking rainfall and damaging flooding in many of the catchments, regrettably with some loss of life. 

“The effects of such dramatic reversals in nature are very real in communities and at a personal level. Our sympathy is extended to all those affected at this time by the Tasmanian events.

“The cost of the Energy Supply Plan is substantial, but we recognise the absolute importance of maintaining confidence in energy supply given its economy-wide significance.”

CEO Steve Davy said the financial impact was the result of foregone generation and related inability to produce Large-scale Generation Certificates (LGC), lost electricity sales, the increased cost of generation for electricity sold and a range of other costs associated with the low inflow / Basslink situation. The adverse effect of these impacts is partially offset by reduced Basslink costs.

Mr Davy said Hydro Tasmania has low variable costs and therefore a low marginal cost of production from hydro generation. The business is also highly contracted for Tasmanian electricity consumption. When Hydro Tasmania receives low inflows, the business foregoes hydro generation, and this must be replaced by generation from other sources.

“Over 2015/16, the alternative sources have been Basslink imports (from September to December 2015), gas and diesel generation,” he said.

“Some of Hydro Tasmania’s foregone generation has taken the form of agreed load reduction with some major industrial customers, whose assistance was greatly appreciated.

“All of these alternative sources result in a loss of revenue or increased cost of production for Hydro Tasmania.”

Prior to the heavy rainfalls in May and early June, Hydro Tasmania calculated that the extended dry would result in a shortfall of approximately 2025 gigawatt hours (GWh) compared to normal yield.

Replacement generation comprised 900 GWh of Basslink imports, 745 GWh of gas generation, 325 GWh of load reduction and 55 GWh of diesel generation.

Hydro Tasmania estimates that the net cost of responding to the energy supply challenge is between $140 million and $180 million, including an offsetting reduction in Basslink costs. This takes into account that Basslink has been back in service since 13 June, and assumes a return to normal inflows going forward. The net cost includes:

• Gas-fired generation - approximately $47 million.
• Diesel generation - approximately $64 million.
• Net reduction in the value of LGCs produced - approximately $15 million.

The remainder is related to the cost of imported energy over Basslink, a variety of contractual arrangements, and the cost of managing the situation.

The full impact of the Basslink outage is not yet known, as the cause of the outage, and its contractual impact, has not yet been determined.

Mr Davy said Hydro Tasmania’s focus is on rebuilding major storages back to secure levels over winter.

“Lake Gordon and yingina / Great Lake are steadily recovering, and we expect them to be at satisfactory operating levels by the end of winter.”

Hydro Tasmania has funded its response to low inflows and the Basslink outage through additional debt.

As at 31 May 2016, Hydro Tasmania’s net debt stood at $849.6 million. Despite the challenges it has faced, Hydro Tasmania’s debt is forecast to peak at approximately $940 million in late 2016. This is well within Hydro Tasmania’s current borrowing limit – supported by the letter of comfort from the Treasurer to TASCORP – of $1085 million.

Ends.

Released by Samantha Meyer 0438 210 468; Samantha.meyer@hydro.com.au  

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