Hydro Tasmania faces losses at it turns to diesel generation

Hydro Tasmania – the state-owned utility often dubbed the “Treasury”, because of the big dividends it delivers to government – says it is now facing an operating loss as it turns to expensive diesel generation to deal with its growing energy crisis.

The state-owned generator confirmed on Tuesday that it is looking to install up to 200MW of diesel gen-sets (100MW by the end of March and another 100MW by the end of April) in locations across the country to deal with any potential outages or supply shortfalls.

The island is facing its biggest energy crisis ever following the record low rainfall that has seen its average water reserves fall to just 16.8 per cent, and the loss of the Basslink grid cable connection to the mainland in late December. It is not known when that link can be repaired.

Hydro Tasmania CEO Steve Davy said the company is taking a “range of actions” to deal with the “unprecedented situation” it is facing.

“We plan by taking into account all known information and credible events,” he said, adding that Hydro Tasmania was now planning to be able to meet all Tasmania’s energy demand without Basslink.

The company and its government owners have been criticised for their lack of commitment to more locally sourced renewable energy generation.

On average, hydro resources can meet only around 8,500GWh of the state’s annual demand of around 10,500GWh, but there is not enough wind or solar capacity built to make up the remainder, so up to 15 per cent has to be imported from Victoria. That is not only expensive, but is also emissions intensive.

Davy said it was now clear that Basslink would be closed for a longer period than forecast (initially the end of February), and Hydro Tasmania was bringing in diesel to meet future energy needs.

“We are now planning to be able to meet all Tasmanian energy demand without Basslink in operation, even in the event of a cool, dry May, and with allowance for an additional adverse event that would have an impact on energy generation, such as loss of a major power station,” Davy said in a statement.

Sites across Tasmania are being considered for the diesel generation, including the Catagunya Power Station, Meadowbank Power Station, and several potential sites within the Bell Bay industrial precinct including the George Town Substation and the Bell Bay Power Station.

Davy said Hydro Tasmania was now facing a loss. The extent of that loss is not known, as Hydro Tasmania does not release its hedging strategy.

Analysts said, however, that it would have hedging strategies with its main customer, the Aurora Energy electricity retailer, while large industrial users would likely have heavily contracted pricing. But because diesel was so expensive,  the cost would likely be beyond any hedging strategy.

The wholesale price of electricity, which is set by Hydro Tasmania because of its virtual monopoly power, has jumped from an average of $40/MWh to nearly $200/MWh in recent weeks and months.

“There is no question that managing the current challenge comes at a cost,” Davy said. “In particular diesel generation is expensive. Actual cost will depend on how much of the diesel generation is operated, and for how long.

“We will run the diesel generation if we receive low inflows into our storages or Basslink has not returned to service.”

Last year, Hydro Tasmania posted a $62.3 million profit before tax and revaluations for 2014-15 — a sharp drop from two years of record profits in excess of $200 million during the carbon price regime, when it operated its hydro resources at much higher output and capacity. It has recorded operating profits for the last decade.