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State's power companies at a loss due to COVID and switch to renewables

Opinion

Stanwell and CS Energy have long been reliable cash cows for the Queensland Government. But for how much longer, writes Robert MacDonald

Print article

COVID-19 has thrown up yet another problem for Treasurer Cameron Dick as he plots Queensland’s path back to good health.

The pandemic has already delivered the double whammy of a sharp drop in state revenues and a big jump in spending, fuelled by the Government’s economic rescue packages.

And now, it’s clear COVID-19 is also speeding up the inevitable decline of Queensland’s coal-fired power generators, which is bad news for a treasurer counting on predictable sources of income.

State-owned Stanwell and CS Energy not only produce two-thirds of Queensland’s energy but also have been reliable cash cows for decades – delivering hundreds of millions of dollars a year in dividends to the state.

On current planning, Queensland will continue producing coal-fired power – and presumably, dividends for the state – for at least another quarter of a century, until the switch to renewables is complete.

But the 2019-20 annual reports from Stanwell and CS Energy suggest the end could be sooner rather than later.

Both companies announced big write-downs in the value of their coal-fired power stations – nearly $720 million for Stanwell and $354 million for CS Energy .

That in turn, translated into big losses — $240 million of red ink for Stanwell and a $77.6 million deficit for CS Energy.

Growing competition from other energy sources and falling prices are a big part of the problem, but so too is COVID-19.

In the words of Stanwell’s CEO, Richard Van Breda:

“The effects of the COVID-19 pandemic have created an early ‘tipping point’, causing many generators to become loss making.

“With gas, oil and thermal coal prices all decreasing along with energy prices, the wholesale price of electricity is now less than the long-run average cost of running power generation units.”

In other words, thanks to COVID-19 and the switch to renewables, the Queensland government now owns loss-making energy assets.

For now, at least, these figures sound worse than they are; they are really just book-keeping adjustments recognising the fact that the state’s coal-fired power stations have an increasingly limited lifespan.

Both companies are still generating plenty of cash, enough to deliver the state a combined dividend of more than $300 million for 2020-21.

But still, even on a cash basis, things aren’t exactly rosy. Last year Stawell and CS Energy paid a combined dividend of more than $600 million.

It’s not yet end of days for Stanwell and CS Energy, but COVID-19 is clearly speeding up the eventual demise of the state’s coal-fired generators.

And that, in turn, is presenting further challenges for both companies, already dealing with enormous disruptions in the way things used to be.

“The pace of the National Electricity Market’s (NEM) transition from an energy landscape characterised by large thermal generators, towards low carbon technologies, continues to accelerate,” Stanwell’s chair, Paul Binstead, says in the company’s annual report.

“Electricity prices have declined materially over the past two years with the primary driver of this decline being the change in the supply and demand balance across all regions in the NEM.”

Add in the arrival of COVID-19 and its depressing effect on the economy and the situation just gets worse for the coal-fired power generators.

Binstead reports that the weighted average price of electricity in Queensland dropped from $80.29 a megawatt hour in 2018/19 to $53.41 in 2019-20.

That’s good news for consumers but bad news for coal-fired power stations trying to produce the best possible financial results for their owners – the Queensland Government.

Adding to Stanwell’s and CS Energy’s uncertainty about the future is the problem facing all of us – when will life return to normal?

“The pace of the Australian economy’s recovery to pre-COVID-19 levels remains unclear and our modelling is currently indicating that the current market conditions may continue for an extended period of time,” Binstead says.

Cameron Dick has more than enough urgent issues to address in his soon-to-be delivered state budget and Stanwell’s and CS Energy will no doubt be doing all they can to run as efficiently and as profitably as possible for as long as possible.

Their traditional rivers of gold won’t dry up overnight. Dick can presumably count on them for at least the next four-year term of government.

But as the latest annual reports from both companies highlight, change can come far more abruptly than anyone planned, particularly when something as devastating as COVID-19 is added to the mix.

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