Heading backwards with power generation
Thirteen years ago the Kennett government's sale of Victoria's generators raised $10 billion (about $14 billion in today's money). Now, the NSW Government is desperate to raise funds by selling assets.
NSW generators, like Victoria's, are overwhelmingly coal-fired.
The Federal Government's climate-change policy has vastly devalued coal-fired generators anywhere in Australia.
Capital-intensive businesses such as electricity generators can be valued on two different bases.
The first uses multiples of their annual profits. The other takes initial investment outlays and adjusts these for improvements and writedowns.
In principle, the two methods should give the same answer if appropriate adjustments are made.
This is clearly not the case with coal-based electricity generators. The value of these generators has been written down in anticipation of extra charges if the carbon tax is brought in.
Thus, Loy Yang A in the Latrobe Valley has an equity value of only $500 million placed on it by part-owner AGL. Added to its debt, this values the firm at about $3.5 billion.
On privatisation Loy Yang A raised $4.8 billion (about $6.7 billion in today's dollars).
It is an asset with a life of many decades, has been well-maintained and has had its capacity increased.
The prospective carbon tax has devalued Loy Yang A's worth and this also would apply to the NSW generators.
A prospective carbon tax makes selling coal-based power stations extremely difficult because today's profit is no guide to future prospects.
The intended tax also makes it too risky to build new generators.
As demand increases, this lack of new supply means higher prices.
These are already showing up in company profits.
There is no real substitute for coal-based electricity -- wind and solar can only be bit-players, while gas is expensive and also will eventually incur carbon charges.
Hence, the regulatory risk from the prospective carbon tax is suffocating the normal market processes whereby high profits attract new plant building. Unless new coal-fired generator capacity is built, electricity prices will rise.
The regulatory risk that prevents private firms from building new power stations has another dimension. It means that in future the government itself will have to underwrite the investment risk entailed in building new capacity.
This means new electricity generation will be dictated less by market needs and more by government agendas. Unfortunately, that returns us to the bad old days before the Kennett-Stockdale privatisation reforms forged the existing low-cost and efficient Victorian electricity industry.