AGL defends hydro assets

11 May 2009Archived News Energetics in the News

PUBLISHED: The Age & Sydney Morning Herald - by Clancy Yeates, Peter Holt - Principal Consultant - Sustainable Water, Energetics Pty Ltd comments on water shortages and the future of hydro electricity.


$1.4bn takeover queried

AGL Energy is under pressure over its controversial $1.425 billion takeover of Southern Hydro as the worst drought on record has severely cut output from hydroelectric plants at the centre of the 2005 deal.

A key assumption in the takeover was that normal rainfall would resume by this year, but instead, the two main dams dependent on rainfall are parched.

After the worst-ever flows into the Murray system in the March quarter, the 135 megawatt Eildon Dam is just 12 per cent full and its output is believed to be minimal. The 180 MW Dartmouth Dam - Australia's largest - stopped generating electricity in 2007 and is unlikely to restart before 2011.

Industry sources said the $1.425billion price tag was well ahead of rival bids from Origin Energy and Babcock & Brown, which were less than $1.1 billion. Electricity supply from the Snowy region has fallen sharply since 2007, though AGL does not disclose individual plant production levels.

A company spokesman denied the assets had been impaired, and pointed to a 20 per cent pre-tax rise in wholesale electricity earnings at the latest half year results. "We do not run the business on an asset-by-asset basis. Rather, we look at all of the generation across our portfolio and that is how the auditors sign off on the business, as a single cash-generating unit," he said.

Several analysts, who think AGL overpaid for Southern Hydro, have lowered their valuations on the dams. AGL's hydro assets contributed just $3.4 million to earnings before interest and tax in the 2008 financial year.

Despite the drought, the company aims to this year complete a 140MW expansion of the Bogong hydro-power plant, which will use water from snowfields in Victoria. It says the move will mean half its hydro capacity is effectively drought-proof.

AGL managing director Michael Fraser has previously said the company was also considering expansion of the Dartmouth Dam, but a spokesman said this was now a low priority because of expected prices. "There are other more attractive development opportunities for AGL at this time, although that option remains in our wider development portfolio," he said.

Amid the prolonged drought, the company says the carbon pollution reduction scheme and a government mandate to increase renewable energy use will raise the value of hydro assets.

At the time of the Southern Hydro deal, AGL's managing director, Greg Martin, stressed the company's cautious rainfall assumptions. "Higher dam levels at Dartmouth and Eildon are important, and they're currently well on their way to recovery from the lows experienced in the recent drought," he said in 2005 before Paul Anthony took over the top job.

AGL's low dam levels are just one example of the headaches the drought is causing companies that depend on plentiful or cheap water.

New Zealand's Contact Energy, half owned by Origin, also suffered a similar problem when drought contributed to a 23 per cent fall in earnings forecast for this financial year.

The principal consultant for sustainable water management at Energetics, Peter Holt, said climate change science suggested water shortages would lead to increases in hydro dam shortages.

Analysts at Citigroup said operations run by Foster's, OneSteel, Newcrest and Rio Tinto were also at risk from security of water supply and the possibility of higher prices caused by drought.

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