Australia : August 09, 2010

This past June, Julia Gillard became Australia’s first female prime minister.  With no delay she called for an election that is going to be held on the 21st of August. The political uncertainties of general elections cause markets to react differently, in particular the energy and resources sector, as the Gillard government policies are different from the opposition Liberal policies. The Liberals have a very different view on carbon policy and have previously voted against a carbon tax and emissions trading scheme.

In late July, according to the Energy Supply Association of Australia, utilities expected their capital expenditure on new power stations in the next five years to be $8.2 billion, down from the estimate of $18 billion last year, which is a $10 billion cut. This is despite the need to address environmental concerns. The chief executive of the Energy Supply Association, Brad Page, said “Regulatory uncertainty around carbon policy and the effects of the legislated renewable energy target are having substantial effects on the credit quality of carbon-intensive generators”. Recent news also speculated that Australia’s largest private generator, International Power, had resumed the merger of its overseas assets with GDF Suez of France and was trying to offload its Australian assets.

As a result of the current state of financial markets and the uncertainty associated with carbon policy, lenders have imposed significant increases in their margins when lending to this sector. Hence, it is harder to access both debt and equity. Power companies will struggle to raise enough money from capital markets until a price on carbon has been established.

Coal still remains the dominant fuel source for generation. This is because coal is a relatively low cost energy source and close to power generators. The government has set a target for 20 percent of generation to come from renewable energy sources by 2020. The high cost of this is likely to be passed on to customers. The two main parties have a different view about passing on high levels of costs to consumers.

The general trend in the NEM has been a continuation of low prices when compared to historical pricing over the last 10 years. According to the Electricity regional reference price (“RRP”), the monthly average spot price is in the $20-$30 per Mwh range in NSW, QLD, SA, TAS and VIC in 2010, which is near half the recorded historical RRP high price in the year 2006-2007. It is unlikely that there will be substantial increases in energy charges in the short term with most of the upward pressure being on network charges.

Policy on a carbon emissions scheme is a battleground in Australia at present and until a clear way forward is found, the uncertainty will continue.