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Australia's Grid Privatisation Plans: Aimed at reducing network costs [free access]

March 10, 2015

In June 2014, the state government of New South Wales (NSW) announced that it intends to privatise the NSW electricity networks. Later in September 2014, the Queensland LNP government proposed to privatise not only the Queensland transmission and distribution networks, but also its generation and remaining retail assets, by way of long-term lease. In this article, Global Transmission Report takes a look at the likely structure of the privatisation in the NSW and Queensland electricity markets and identifies some key issues.

 

NSW electricity networks and privatisation proposals

Several states in Australia privatised their electricity assets at an early stage, commencing with Victoria’s privatisation of the Loy Yang B power station in 1992. However, the privatisation of electricity assets in NSW was politically controversial for the NSW Labor Party in its role in government over the 16-year period from 1995 to 2011. The first phase of privatisation, which involved the sale of NSW electricity retail businesses, development sites and electricity generation output contracts, was initiated in 2008. The government realised AUD5.3 billion in sale proceeds. A change in the NSW government to a Liberal/National Coalition in March 2011 initiated a second phase of privatisation, which involved the sale of the electricity generation businesses. In June 2014, Premiere Mike Baird announced the third phase of privatisation, as part of a ‘Rebuild NSW’ policy that the Liberal/National Coalition will take to the 2015 state election. The proposal involves the privatisation of the NSW electricity networks and the long-term lease and AUD20 billion infrastructure programme.

 

The NSW electricity networks are currently 100 per cent state-owned and comprise electricity transmission operator TransGrid, which has a regulated asset base of AUD6.1 billion and owns roughly 14,000 km of transmission lines in NSW and transmits 71 GWh of electricity per annum, and Networks NSW, which comprises three electricity distribution businesses (AusGrid, Endeavour Energy and Essential Energy) with a common senior management.

 

The structure and sequence of transactions would include a 100 per cent lease of TransGrid offered first. The lease of majority interests in Ausgrid and Endeavour Energy would follow, but a decision as to the sequencing of these transactions will be confirmed at a later date.

 

The intention is to undertake trade sales for all three businesses. However, the state will retain the flexibility to consider an initial public offer (IPO) for Ausgrid or Endeavour Energy should market conditions indicate that this would result in a better outcome for the state. The NSW government will retain 51 per cent ownership of the entire network including 100 per cent of the regional network, Essential Energy.

 

The government has announced its commitment to several strict conditions for the partial lease of the network businesses including that all net proceeds will be invested in new productive infrastructure, through the Restart NSW Fund; the transaction will have no adverse impact on electricity reliability; the regional presence of the network businesses will be maintained; and Essential Energy would remain in full public ownership.

 

However, given political concerns, an outright sale of the electricity networks is not contemplated. Instead, the privatisation will occur via the sale of 99-year ‘partial leases’. Moreover, the NSW government has not yet identified how it will apply the 51 per cent ownership threshold in practice. Given that Ausgrid is the most valuable business, the government may prefer to privatise 100 per cent of that business under a 99-year lease in order to maximise the privatisation proceeds. Similar reasoning may result in a structure in which different proportions of TransGrid and Endeavour Energy are privatised.

 

Several local and foreign investors have expressed interest in bidding for the electricity assets. The potential participants include local Duet Group, Spark Infrastructure and QIC, while potential foreign investors could include State Grid Corporation of China and Singapore Power.

 

Queensland electricity privatisation proposal

The privatisation proposal, put forward by the Queensland LNP government in September 2014, also proposed a merger of the state-owned power companies.  The sale of assets valued at close to AUD82 billion owned by state and federal governments have been announced as part of Queensland’s plan to sell a long-term lease on its power grid. The government proposes to sell assets of the electricity generation companies, including CS Energy and Stanwell Corporation, and the transmission company Powerlink. The proposal aims at pension funds, sovereign wealth funds and other investors betting big on infrastructure offering steady returns. The revenue generated from the sale proceeds are planned to be used for building hospitals and roads. 

 

Key regulatory clearances required by bidders may include foreign investment approvals and competition clearances. Competition clearances may be important if a bidder, or any participants in a bidding consortium, have existing electricity operations in Australia, whether in generation, transmission, distribution or retail.

 

Likely impact of grid privatisation

Given that the state-owned generators produce around 60 per cent of the state’s output of electricity, the Australian Competition and Consumer Commission (ACCC) is likely to raise objections in terms of competition and concerns that a single generating entity could push up electricity prices. However, a report launched in February 2015—prepared by global consulting firm EY and jointly commissioned by Infrastructure Partnerships Australia, Chamber of Commerce & Industry Queensland (CCIQ), Australian Industry Group (Ai Group) and the Property Council of Australia (PCA)—shows that under public operation, Queensland’s network charges have increased by 140 per cent over the past fifteen years, whereas they have fallen in Victoria and South Australia, where the networks are privately run. The EY report finds that Queensland energy bills are 37 per cent higher than they would be—the equivalent of AUD570 per year for an average household—had the state reformed its electricity sector at the same time as Victoria.  The report finds that today, an average Queensland household pays 2.5 times more in network costs than in states where the networks are privately run, such as Victoria.

 

However, the above-listed seemingly lucrative proposals will proceed only if the NSW Liberals & Nationals (in NSW) and Liberal Party (in Queensland) receive a mandate for the reform in the March 2015 state election.

 

(AUD1=USD0.8)