The Victorian Government has announced in its state budget a threefold increase in royalties on the extraction of brown coal.
Victoria’s Latrobe Valley contains the largest brown coal resource in Australia which is the foundation for the state’s generation sector. The four large brown coal power stations – Loy Yang A and B, Hazelwood and Yallourn W, which provide 85% of all electricity generated within the state – will see their combined royalty payments increase to $72M per year from when the increase takes effect on 1st January 2017.
This is clearly unwelcome news for the power station owners AGL, GDF Suez and Energy Australia, which have been struggling with low Victorian prices in an over supplied market for many years. However, the impact on customers is likely to be negligible. According to Australian Energy Market Operator (AEMO), output from the four large Victorian brown coal generators was around 47,000,000 MWh in 2014/15. Simple arithmetic makes the increase in the royalty equal to only $1/MWh (or 0.1c/kWh) if fully passed on to the customer. Whether the generators can pass all of this cost on is another matter.
Under the National Electricity Market (NEM) design, the spot price of electricity is set by the most expensive generating unit running at the time, and its expectations of spot prices that influence contract prices. As Latrobe Valley brown coal generation is amongst the cheapest in Australia, it won’t be setting the spot price very often other than overnight when demand is at its lowest and the more expensive plant doesn’t run, so any increase in the brown coal generators’ prices won’t necessarily flow through to the spot price. It seems that the Victorian brown coal generators are going to have to absorb most of the increase in royalties.