Over the next three weeks, I will continue posting a new post daily, or thereabouts, related to how Hydro Tasmania actually earns money, how the National Electricity Market (NEM) shapes its fortunes, and why the numbers in its accounts now matter more than at any time in the past two decades. It also seeks to dismantle the myths that have dominated public debate.
This third post provides details about Hydro Tasmania – The institution that holds the State together. There are 18 Chapters in total. I thank John Lawrence for his assistance in preparing this information, his attention to detail and research over many years as we have worked together to better understand one of the most complex areas that impact our state, economically and functionally.
Chapter 3: Hydro Tasmania – The Institution That Holds the State Together.
Hydro Tasmania is the most important public institution in the state. Not the biggest employer. Not the biggest spender. But the most important. It is the backbone of our electricity system, the anchor of our fiscal position, and the single entity whose performance determines whether Tasmania remains financially independent or drifts into permanent reliance on Canberra.
For decades, Hydro has been the quiet stabiliser of the Tasmanian economy. Its dividends and tax equivalents underwrote budgets, funded services, and cushioned downturns. When other revenues faltered, Hydro delivered. When the state needed a buffer, Hydro provided it. The role was never glamorous, but it was essential.
To understand why Hydro matters so profoundly and why its current trajectory is so alarming, we need to understand what Hydro actually is.
Hydro is not a simple generator. It is a generator, a storage system, and a strategic asset all at once. It produces electricity from water, but it also stores energy for days, weeks, or months. It can ramp up or down in seconds, stabilise frequency and voltage, and provide the fast‑response services that keep the system upright. It is drought‑sensitive, because its output depends on rainfall. And it is a financial engine whose profits depend on market conditions, interconnector flows, and strategic bidding.
No other generator in the NEM has this combination of attributes. Hydro is both a power station and a battery. Both a producer and a balancer. Both an energy source and a system service provider. This is why Hydro’s decisions – when to generate, when to conserve water, when to import, when to export – have outsized effects on prices, reliability, and the state budget.
Hydro’s value has always come from flexibility, not volume. It does not make money by producing as much electricity as possible. It makes money by producing electricity at the right time. Because it can respond instantly, it can generate when prices are high, hold back when prices are low, provide Frequency Control Ancillary Services (FCAS), and arbitrage between regions when interconnectors allow it. This flexibility is Hydro’s competitive advantage. It is also why droughts hurt so much: when storages fall, Hydro loses the ability to choose when to generate. It becomes a price taker instead of a price maker.
Hydro’s financial health depends on three forces: water, market conditions, and interconnectors. For decades, Hydro could influence all three. Today, it controls none of them. This is the structural shift that explains everything that follows – the collapse in underlying profit, the shrinking Inter-Regional Revenues (IRRs), the Power Purchase Agreement (PPA) losses, the erosion of pricing power, and the growing fiscal risk to the State.
Start with water. Hydro has never controlled rainfall, but historically it could rely on relatively stable inflows, predictable seasonal patterns, and storages that stayed comfortably above critical levels. That world is gone. Climate variability has changed the game. Inflows swing harder. Droughts last longer. Storages are harder to maintain. The margin for error is smaller. Hydro’s most important input is now both uncontrollable and unreliable. It cannot plan its way out of this. It can only react.
Market conditions have shifted just as dramatically. Hydro once shaped prices because hydro flexibility was scarce. It often set marginal prices in Tasmania. It could shift water into the evening peak, create or relieve scarcity, and time exports to maximise value. That world has disappeared. Batteries now dominate the dynamics that once made hydro powerful. They flatten prices, shorten and soften the evening peak, soak up cheap solar, discharge into the peak, dominate FCAS, compress arbitrage spreads, and respond faster than hydro ever could. Hydro has gone from price maker to price taker. It no longer shapes the market. The market shapes it.
And then there are the interconnectors – the most important structural shift of all. Hydro’s fortunes depend on Basslink (and soon Marinus) because interconnectors determine when Tasmania can export, when it must import, how much arbitrage exists, whether residues exist, and how closely Tasmanian prices track Victoria. But Hydro’s influence over this dimension has collapsed in stages.
Up to 1 July 2025, Basslink Pty Ltd controlled Basslink as an unregulated commercial interconnector. Hydro didn’t own it, but it could still influence outcomes indirectly through bidding strategy, timing of generation, exploiting Basslink’s commercial incentives, and capturing IRRs created by the unregulated model. Hydro had partial influence, even if not control.
From 1 July 2025 to 30 June 2026, APA resumes control,the link remains unregulated – and Hydro’s influence narrows further. APA decides how Basslink operates. Hydro is now reacting to someone else’s strategy.
From 1 July 2026, Basslink is to become regulated. This will be the final break. Basslink will stop behaving like a trader and become a regulated transmission asset. Australian Energy Market Operator (AEMO) controls flows. AEMO controls FCAS. Basslink earns a regulated return. IRRs shrink and move toward auctioned residues. Constraints override economics. Marinus will tighten mainland coupling even further. Hydro has lost control of the interconnector dimension entirely. It no longer influences Basslink. Basslink and AEMO now influence Hydro.
This is the structural truth: Hydro’s financial health is now determined by three forces it cannot control: water it cannot predict; market conditions it can no longer influence; and interconnectors it no longer controls. This is the foundation for everything that follows: the collapse in underlying profit, the shrinking IRRs, the erosion of FCAS margins, the PPA losses, the flattening of prices, the rising costs, and the weakening fiscal contribution to the State.
Hydro’s financial health is now determined by three forces it cannot control: water it cannot predict; market conditions it can no longer influence; and interconnectors it no longer controls.
Hydro is not mismanaged. It is structurally exposed. And Tasmania has never been told this clearly.
Meanwhile, Hydro is being asked to do too many things at once. It is expected to keep prices low, maintain storages, support new wind and solar generation, provide system services, deliver dividends, fund capex, manage drought risk, compete in Victoria, underwrite the state budget, prepare for Marinus, absorb PPA losses, and deliver “Battery of the Nation” benefits. No private company would be asked to juggle this many conflicting objectives. Yet Hydro is expected to do it all – with rising debt, falling cash flow, and shrinking margins.
At the same time the responsible shareholder minister also has to guide the affairs of the State’s transmission and distribution company TasNetworks and the dominant retailer Aurora Energy and manage conflicts of interest between all three.
Hydro’s role in the state budget makes its decline critically significant. Hydro is not just another Government Business Enterprise (GBE). It is the fiscal engine of the state. When Hydro’s profits fall, dividends fall, tax equivalents fall, own‑source revenue falls, the budget deteriorates, fiscal independence shrinks, and pressure for federal bailouts grows. This is not theoretical. It is happening now.
Hydro’s underlying profit in the parent company for 2024/25 was negative. Its debt is rising. Its cash flow was weaker. Its windfall IRR revenue is disappearing. Its PPA losses are mounting. And yet Treasury’s forward estimates assume Hydro will deliver $250 million a year by 2028/29. That number is fantasy.
If Tasmanians do not understand Hydro’s true role -as generator, storage system, market participant, and fiscal anchor – then nothing else in this series will make sense. Hydro is the hinge on which the entire system turns: the NEM, Basslink, Marinus, PPAs, Large Generation Certificates (LGCs), FCAS, IRRs, the state budget, and Tasmania’s fiscal independence. Hydro is not just a power company. It is the institution that holds the state together.
And right now, it is under more pressure than at any time in its history.
Next, in Chapter 4, we examine how Hydro actually makes money – the revenue streams, the bidding strategies, the arbitrage opportunities, and the hidden risks that determine whether Hydro thrives or struggles.