One of Australia’s oldest coal generators refused bank guarantees, operating status under threat

One of Australia’s oldest operating coal fired power generators, Vales Point B, says it has been refused bank guarantees and is seeking a crucial rule change or exemption from energy market regulators to allow it to continue operating.

The stunning revelation was made by Vales Point B owner Delta Electricity – now controlled by Czech-based energy group Sev.en – in an application for a rule change that would allow it to hold cash, rather than bank debt facilities, to meet its prudential requirements with the market operator

The 1320 MW facility, on the shores of Lake Macquarie in NSW, had been scheduled to close in 2029, but in July last year announced an extension of its technical life that pushed out the closure date to 2033, when it will be more than 50 years old, depending on market conditions.

It now says that it can’t get banking finance when its current loan facilities expire at the end of this year. Of its 15-member banking syndicate, 13 ruled out any finance at all because of ESG constraints.

This included Australia’s big four banks – ANZ, CBA, NAB and Westpac. The other two institutions offered some finance, but only in relation to mine rehabilitation and renewable energy power purchase agreements.

“There was still no appetite from most lenders simply because of the association with thermal coal,” Delta said.

“This means that there exists a real potential that a market participant, while being a profitable and solvent business, may be unable to meet prudential requirements with AEMO from the end of 2024,” it notes.

It is seeking a rule change through the Australian Energy Market Commission, the market rule maker, to allow cash to be used as credit support to manage any liabilities it has under the operations of the market.

The issue has divided opinion in the energy market about whether the change should be allowed, and the risk of not being able to post a bond for a coal generator that will close within the decade and will need to be cleaned up afterwards.

Vales Point has been a source of controversy since the NSW government sold it to Trevor St Baker and Brian Flannery for just $1 million in 2015. They reaped huge dividends from the generator, and reportedly sold it to Sev.En for around $200 million in 2022, plus another at least $130 million in dividends.

Delta argues that the rule change is not controversial – as it does not favour any particular technology – and that it is urgent, because without the change it could force the exit of the generator.

“A significant number of financial institutions, that would be acceptable to AEMO, are no longer providing financing facilities to fossil fuel generators,” it writes. “While the energy transition is progressing, there will be an ongoing reliance on fossil fuel generators, at least in the immediate future.” 

“Without the option of providing cash as credit support, is likely to result in …. severe reliability and security issues at worst, where critical generation assets are forced to withdraw from the market or are removed from participating in the market by AEMO because of an inability to meet prudential requirements through a bank guarantee.

‘While it is likely that, should such circumstances materialise, government or regulatory bodies would seek an interim solution, this creates an unacceptable level of uncertainty for market participants, and the simplest and most efficient solution is to resolve the issue through the proposed rule change.”

AEMC says it has not yet initiated the rule change request, and will issue a consultation paper when it does to seek comment from other market participants and stakeholders.