The West Australian state government appears to have taken another step back into the Dark Ages after reversing yet another key energy market decision and deciding to extend the life of its ageing Muja coal-fired power station.
In a decision which has stunned energy market participants and observers, the Barnett government said it would invest more money to extend the life of the 47-year old plant near Collie by another 15 years – despite the excess capacity in the state’s grid.
The WA government has already spent $290 million on what has been regularly described as a “bungled” and “half-baked” refit of the 240MW Muja AB generators.
Now, it will invest a further $46 million to extend its life. But neither KPMG, which has catalogued a series of failures in governance, engineering, risk analysis and management, and Verve Energy, the plants owners, think the state will get its money back.
The situation at Muja highlights some of the deep problems facing the WA government and its premier Colin Barnett and energy minister Mike Nahan – and other states for that matter – who are trying to offload old, state-owned assets, be they generators or networks, in a market with falling demand and a growing penetration of renewables.
Last month, the WA government proposed to renege on agreed tariffs for installed rooftop solar – in a bid to save $50 million and offset the cost of the (then unannounced) latest Muja upgrade – but was shouted down by the public, and the federal Coalition which feared losing seats in the election.
Neither Barnett nor Nahan are supporters of renewables. Nahan, a former executive director of the conservative Institute of Public Affairs, recently conceded that governments and utilities were “struggling with the phenomena” of solar.
However, Nahan’s antipathy towards large scale renewables, in particular wind farms, has stunned many people who have met with him since his appointment, or who have heard him speak at industry functions.
The Muja refit was supposed to have cost $150 million, and be funded privately. But the cost has more than doubled because of repairs and delays caused by massive corrosion that was discovered in its boilers.
According to the West Australian, Nahan told reporters that the government hoped it could recoup its investment, helped by the anticipated removal of the carbon price. Nahan and the WA government also want the renewable energy target to be scrapped. Such a move would sandbag earnings for installations like Muja.
However, according to a KPMG document that Nahan released (hard copies only), this would only be possible if the first $290 million upgrade was written off completely.
According to the West Australian, KPMG says the best that could be expected is just $52 million over 10 years, while analysis from Verve Energy – the plant’s owners – shows the net value would be just $2 million over 15 Opposition Leader Mark McGowan said KPMG revealed a financial disaster and a litany of mistakes.
The KPMG report said the corrosion should have been foreseen, found that project partner Kempe was a poor choice with limited experience and financial capacity, that Verve took disproportionate risk and unilaterally guaranteed all financing, supply and off-take contracts, and that no comprehensive business
According to the West Australian, the KPMG report considered two options: proceed with the boiler work repairs on 1 and 2 and complete the project, or “partially abandon” the project by abandoning works on 1 and 2 and continuing to operate 3 and 4.
The KPMG report found option 1, to proceed, would generate $52 million of value over 10 years compared to option 2, to partially abandon. This does not, however, mean the project will be profitable over that time, with the analysis treating all costs and revenues to August 31 – which total $289.8 million – as sunk.
Nahan told the newspaper that “the easiest thing for me to do politically would be to walk away from the refurbishment and leave it there, but that would not be in the best interests of WA taxpayers.
“The best interests lie with completing the project and selling down, as planned, 50 per cent of it (to the private sector) and allowing it to operate for another 10-15 years.” McGowan said such a claim was “ridiculous”.
Kirsten Rose, the head of the Sustainable Energy Association, said she was stunned by the decision, particularly given Nahan’s repeated warnings that the WA grid had up to 1,000MW of excess baseload capacity.
“I’m absolutely floored by this, that they are throwing good money after bad,” Rose said. “It’s crazy. And when you think of what this could buy in terms of renewable energy.”
See also: Greentech Media recently published a story that looked at the perils of capacity markets, using WA as an example.