Hydro Tasmania's performance leaks

TASMANIA has been highly dependent on hydro electricity generation for much of its industrialised history.

The consequence is that the island has been subject to periods of energy security stress - historically when an extended period of drought left the hydro storages depleted.

This has occurred a number of times in living memory, most dramatically in 1967 and 1968 and most recently in 2007 and 2008.

Basslink, brought into service in 2006, was claimed to drought-proof Tasmania.

The experience of 2007-08 showed that this claim rested on an assumption about the way Hydro Tasmania manages the storages.

Basslink running flat out in import can only supply about 40 per cent of our average load.

If Basslink was to have drought-proofed the island, Hydro Tasmania would have had to manage the storages to a much higher minimum than has been the case.

The gas-fired Tamar Valley Power Station was under construction during the 2007-08 drought.

Basslink was up and running but there were serious concerns about its reliability. Faults had been discovered in the cable during commissioning and the cable had to be lifted and repaired in two places.

In this environment, and in consequence of the Global Financial Crisis, the owner of the company developing TVPS, Babcock and Brown, failed.

In the weeks before that failure occurred, representatives of B&B intensely lobbied the Tasmanian government to take over ownership of the part-completed power station.

The government was initially sceptical, feeling it likely that if B&B failed, another player would pick up the TVPS asset and complete and operate it.

Subsequently, it came to light that the contracts for the major pieces of plant (the Mitsubishi Combined Cycle machine and the Rolls Royce Trent Open Cycle machine) would be nullified if B&B went into receivership.

Given that there were long queues for the supply of this plant, B&B's failure meant that it was extremely unlikely that TVPS would be completed.

The then Labor government, under extreme pressure because of very well-placed concerns about the security of Tasmania's on-going supply of electricity, took the decision to purchase the part-completed TVPS.

The deal was an outstanding one. The government paid less than $100 million for an asset that was worth more than $250 million at that stage. With skilful project management, the project was completed on time and under-budget.

The completed asset was put into Aurora Energy - Hydro Tasmania wanted it but concerns about Hydro Tasmania's already dominant position in the wholesale electricity market and the low likelihood of the ACCC approving Hydro Tasmania's ownership lead to TVPS being placed with Aurora.

Aurora borrowed $205 million to complete the asset and received the $100 million purchase price paid by the government as an equity injection. TVPS came into service in 2009.

In Aurora's hands, the station operated as base load; that is its big machine - the 205 MW Mitsubishi Combined Cycle machine - ran pretty much all the time.

During the period from 2009 to 2012, rainfall returned to normal and better than, and with TVPS running, the storages recovered strongly, peaking in October 2012 at 62 per cent.

The carbon tax became effective in Australia on 1 July 2012 and operated until repealed in July 2014. During this period, Hydro Tasmania ruthlessly ran down the storages.

It exported as much electricity over Basslink as it could, running the link flat out in export 24 hours a day for months at a time. Of course, this generated very strong profits for Hydro Tasmania and it was able to pay very large dividends to the government from the cash it generated.

In effect, and apparently without much regard for Tasmanian's future energy security, Hydro Tasmania made hay while the sun shone, converting water in its dams and lakes into cash. Hydro Tasmania generated cash from operations of $262 million in 2012-13 and $243 million in 2013-14.

"The deal was an outstanding one. The government paid less than $100 million for an asset that was worth more than $250 million at that stage. With skilful project management, the project was completed on time and under-budget."

COMPARE this with cash generation in the prior year 2011-12 of $107 million and in the subsequent year 2014-15, of only $26 million. Dividends are paid to government with a one year lag so the strong cash generation of 2012-13 and 2013-14 allowed Hydro Tasmania to pay the government returns of $235 million in 2013-14 and $212 million in 2014-15 - about double the "usual" amount.

In June 2013, as part of the necessary tidying up to get ready for the sale of Aurora's retail business, TVPS was transferred to Hydro Tasmania. The asset was moved from Aurora to Hydro Tasmania without any payment though the associated debt of about $205 million went with it.

On receiving the TVPS asset, Hydro Tasmania promptly wrote it down to zero in their accounts - apparently on the grounds that TVPS would not run and consequently had no value. In doing so, Hydro Tasmania completely ignored the very high insurance value which TVPS provided to their business and electricity consumers in Tasmania.

Following months of bleating to the government, Hydro Tasmania convinced the (Liberal) Treasurer to provide them with an equity injection, and the government shifted the TVPS debt from Hydro Tasmania to TasNetworks.

By this device Hydro Tasmania was provided with a $205 million equity injection at TasNetworks' expense. The result of these transactions was that Hydro Tasmania had acquired the very valuable asset TVPS for nothing, had the debt taken off it hands and had the asset on its balance sheet at zero.

By the time the carbon tax was repealed in July 2014, the storages had been run down to 28%. Subsequently, Hydro Tasmania appears to have managed the storages to 30%. When it rained and inflows were strong, Basslink was used to export electricity.

This continued during the second half of 2014 and through the first half of 2015 and is very evident from the weekly storage data published on the Hydro Tasmania website. Things changed dramatically in the second half of 2015.

The latter half of the year is typically the period when the storages build - historically from June to November the storages rise to their peak; they then usually run down during the drier months to their low around the middle of June before the cycle repeats.

But this didn't happen in the latter half of 2015. Rainfall and inflows from about August 2015 onwards have been among the lowest on record. Apparently targeting storages at 30 per cent, Hydro Tasmania progressively cranked up the level of imports over Basslink.

In the later months of 2015, Basslink was running flat out 24 hours a day in import - operating like a 470 MW power station. With average electricity demand running at about 1065 MW during summer, this meant that Basslink was supplying about 44 per cent of all of Tasmania's electricity needs.

To put this in perspective, in recent weeks, wind has supplied about 145 MW on average and hydro the rest. Bizarrely, in the week before Basslink failed (which occurred on 20 December), Hydro Tasmania used Basslink to export some electricity - about 9.3 GWHrs, equivalent to average capacity of about 55 MW.

What were they thinking? Even more bizarrely, Hydro Tasmania took an incredible decision announced in August 2015. They decided to dismantle and sell the big machine at TVPS - the 205 MW Mitsubishi Combined Cycle machine.

One can only shake one's head in disbelief that the Hydro Tasmania Board could have made this decision. Having apparently decided on a strategy of managing the storages to 30 per cent, this meant that their only protection against a period of drought was Basslink.

But Basslink could never be fully relied upon - cables fail from time to time, a risk that was well understood within Hydro Tasmania. Indeed, the contractual arrangements between Hydro Tasmania and Basslink provide that in the event of a cable fault Basslink is obligated to fix it within 60 days (or presumably pay financial penalties if it takes longer as is now apparent)

So, Hydro Tasmania has known all along that a cable failure was always a possibility. It beggars belief that Hydro Tasmania was apparently prepared to wing it and dispose of TVPS - the only generation capacity that was available to cover the loss of the Basslink cable during a period of drought and low storages.

This decision is all the more outrageous considering that TVPS had been given to Hydro Tasmania for nothing and the associated debt taken off its hands. Hydro Tasmania says that the government approved the disposal of the TVPS Combined Cycle unit.

If this is true, one wonders what is wrong with the government's advisers. In industry parlance, a Basslink failure is a "credible contingency". Standard risk management practice is to have a back-up in the event of a credible contingency.

In a time of low storages, with Basslink out of service, the only back-up available was TVPS. How could any well informed person think it was a sensible idea to dismantle and sell it?

Had the sale of the TVPS Combined Cycle machine proceeded, Hydro Tasmania would have been left with some gas thermal plant - the 58 MW Rolls Royce Trent machine (an open cycle machine and therefore much less efficient and more costly to run than the combined cycle machine) and three 40 MW Pratt and Whitney FT8s (jet aircraft engines which are still more expensive to run and have been notoriously unreliable) ie total gas thermal capacity of 178 MW in place of 383 MW.

There is a catch though - the Rolls Royce Trent machine is not at TVPS at present. Hydro Tasmania has revealed recently that it has a warranty problem and is back with the manufacturer to have it rectified. The timing of its return to service has not been made public.

AS is now known, Hydro Tasmania had begun dismantling the Combined Cycle unit. At some stage late in 2015, it seems it suddenly struck them that they (and we) were in a spot of bother. They decided they would need to run the Combined Cycle unit in early 2016 even with Basslink fully operating.

We then saw the amazing performance of Hydro Tasmania re-engaging staff who had been terminated and paid redundancies and commencing the process of putting the Combined Cycle unit back together. It would be nice to think that Hydro Tasmania has seen the light.

However, their public position is that a future sale has not been abandoned. Hopefully, this is feeble face-saving, that sanity will prevail and the Combined Cycle machine will be kept permanently and maintained in good order to be available as a back-up in just the kind of situation the State is now in.

The government may need to direct Hydro Tasmania to make that happen. It may need the market operator AEMO to make arrangements with Hydro Tasmania to compensate it for the costs involved in keeping the whole set of TVPS plant in running order and maintaining contracts to ensure gas is available if needed.

This notion is not new. Following the 1967 drought, Hydro Tasmania maintained an oil-fired thermal power station at Bell Bay for many years until it was ultimately converted to gas and later decommissioned when TVPS was constructed.

For all those years people thought it was a good idea to keep some back-up plant available. What has happened to change the thinking at Hydro Tasmania?

Tasmania is now in a precarious electricity supply position. Basslink failed on 20 December. We are told it will be back in service on 20 March. We will be lucky if they achieve that. The TVPS Combined Cycle unit is being reassembled and should be back in service on 20 January.

The TVPS Open Cycle unit is with the manufacturer for warranty repairs. We don't know when it will be back in service. Storages are 21% full and falling rapidly. Hydro Tasmania tells us that their projections are for storages to bottom in April at about 14 per cent on the assumption of average inflows (ie. rainfall).

What happens if the very dry conditions continue? This sorry mess leaves Hydro Tasmania with some serious questions to answer.

How does the Hydro Tasmania Board justify the decision to sell the TVPS Combined Cycle unit?

What is their strategy for managing the storages? How will they restore community confidence that Tasmania's electricity needs will be met in future extreme conditions?

What is their back-up plan in the event of a credible contingency such as a Basslink failure in a time of low storages?

Hydro Tasmania's decision-making has left Tasmania in a very precarious position. It remains to be seen whether the State will get through the next few months without electricity rationing. That will cause extraordinary inconvenience.

There will be considerable economic damage including job losses. The impact on the tourism industry doesn't bear thinking about. As the major supplier of electricity in Tasmania and the only supplier with reliable base load capacity, Hydro Tasmania's behaviour has been completely irresponsible.

■ The author of this article is a retired energy industry insider who spent more than a decade working with Hydro Tasmania.