Draft recommendation 11
3.4 Election commitment — merger of the state-owned generators
The ToR has asked us to consider the likely impact of the Queensland Government's election commitment to merge CS Energy and Stanwell on electricity prices. Our analysis is set out below,
93 QCOSS, sub. 25, p. 8.
94 Pacific Aluminium, sub. 14, p. 1.
95 Pacific Aluminium, sub. 14, p. 2.
96 Sun Metals, sub. 51, p. 7.
97 Sun Metals, sub. 51, p. 7.
98 Vogler S (2015), p. 1.
noting that the Queensland Government has already made the decision not to merge the two generators.
During the 2015 election, the Queensland Government indicated it would undertake a further restructure of its generation portfolio, through a merger of CS Energy and Stanwell, to lower costs and deliver additional efficiencies.99 The Queensland Government observed100 that the financial performance of the GOCs had been poor for several years, with falling electricity demand compounded by oversupply and declining prices.
3.4.1 Mid Year Fiscal and Economic Review 2015-16
Structural reform was considered as a mechanism for improving business practices and realising cost savings. This could be achieved, for example, through the removal of duplication across a range of areas including administration, human resources, industrial relations, boards, management and legal costs.101
The Queensland Government indicated that the nature of any merger arrangements to be implemented should, however, be relevant to the transforming energy market, and enable the entities to reorientate towards renewable energy opportunities.102
In its Mid Year Fiscal and Economic Review 2015–16 (MYFER), the Queensland Government announced it would retain CS Energy and Stanwell as separate generation businesses, with a:
renewed focus on pursuing efficiency savings and optimising capital investments to provide portfolio flexibility as the wholesale electricity market continues to evolve … 103
As part of the MYFER, the Queensland Government said that in the five years from 2015–16 to 2019–20, it expects to realise $110 million in efficiency savings from the two generators, while recognising the challenges of its ageing coal-based assets and the increasing uptake of alternative technologies.104
In making its MYFER announcements about structural reform of the gencos, the Queensland Government noted that its decision was:
consistent with [its] commitment to protect competition and consult with the ACCC.105
3.4.2 Potential impact of merger on competition and electricity prices
We have already set out concerns about the level of market concentration in the Queensland generation markets. We note that the ACCC expressed concerns with the potential for a further reduction in competition, such that a merged entity with a share of the electricity market in Queensland greater than 60 per cent would have the potential to use its market power to push up electricity prices.106
Stakeholder concerns
Private sector generators, electricity retailers and large customer submissions raised concerns at the prospect of a further consolidation of CS Energy and Stanwell resulting in further concentration
99 Australian Labor Party 2015a, p. 9.
100 Queensland Treasury 2015a, p. 89.
101 Australian Labor Party 2015a, p. 9.
102 Queensland Parliament 2015, p. 26.
103 Queensland Treasury 2015d, p. 28.
104 Queensland Treasury 2015d, p. 28.
105 Queensland Treasury 2015d, p. 28.
106 Vogler S 2015, p. 1.
of market power in Queensland’s wholesale electricity market, with detrimental impacts for electricity users.
Stakeholder submissions107 expressed concern about any action that may put upward pressure on prices. QEnergy commented:
[t]he Government’s policy commitment to further consolidation of the two government owned generators into a single entity will further entrench the conditions that could result in higher prices for Queensland consumers.108
Similarly, ERM Power considered the existing level of competition in the Queensland market to be compromised and that any further consolidation would worsen outcomes. It noted:
[t]he two state-owned generators between them provide the bulk of power for the State: in any given five-minute trading period there is not sufficient electricity from other sources to meet the needs of Queensland consumers … If CS Energy and Stanwell were merged this would mean the combined entity would alone be able to set the marginal bid in any five-minute period. This would have deleterious effects on retailers who would likely find it difficult to hedge efficiently, with higher retail prices to consumers as the outcome.109
Energy retailers110 considered a merger to be inconsistent with the Queensland Government’s support for retail price deregulation, with ERM Power noting:
Stanwell and CS Energy operating as a merged entity in both generation and retail pose a significant threat to the development of a competitive and innovative energy market in Queensland. It is unlikely that other retailers would be able to compete effectively against an organisation that controls such a significant proportion of the available pricing and supply.111
ACIL Allen modelling
ACIL Allen modelled the potential impact on wholesale electricity prices associated with a merger of the two generators, compared with those prices under the base case conditions.112 This comparison is summarised in Figure 29.
ACIL Allen found that a merger of the two portfolios would allow the single generator to dominate the Queensland region of the NEM and drive up prices through the use of its market power. It estimated that this would result in increases of wholesale electricity prices of about $11/MWh on average (or 20 per cent) between 2015–16 and 2019–20, compared with the base case.113 ACIL Allen’s modelling assumed that from 2020–21 the increase in price volatility would provide incentives for the earlier entry of new capacity in the form of additional peaking plant. By 2034–35, an additional 500 MW of peaking plant would be introduced into the Queensland region of the NEM in response to the increased price volatility. This would result in prices converging back to those of the base case. If this additional capacity was not introduced however, wholesale prices would remain above those of the base case for the entire projection period.114
112 ACIL Allen Consulting 2015a, pp. 109–13.
113 ACIL Allen Consulting 2015a, p. 110.
114 ACIL Allen Consulting 2015a, p. 111.
Figure 29 Projected annual average wholesale prices— merger and base cases
Source: ACIL Allen Consulting.
3.4.3 Operating efficiencies can be achieved without a merger
Given our analysis, we support the Queensland Government's decision not to proceed with a merger of CS Energy and Stanwell.
We also consider reducing the operating costs of the two gencos, without structural reform that increases market concentration, to be a more effective approach for managing operating costs.
Submissions to this Inquiry115 identified options for non-structural reforms, including the rearrangement of the government owned generation assets to limit the ability of the gencos to influence the market and to help reduce the effect of constraints in the system on prices.116 In Chapter 7, we have made recommendations about strengthening the oversight of the electricity GOCs to ensure that there are clear expectations about the efficient operation of the businesses.