For years, Tasmanians have been told a simple story about our energy future: build more interconnection, export more power, and share in the benefits of stronger mainland demand and higher mainland prices. It was the backbone of the Battery of the Nation vision and the political case for Marinus. Hydro Tasmania would sell into Victoria when prices spiked, the story went, and the profits would flow back home.
But it’s not that simple. Hydro is settled at the Tasmanian price, not the Victorian one. That means any benefit from high mainland prices is indirect. Hydro can still benefit when Victorian conditions lift Tasmanian prices, and by timing generation strategically, but it does not directly receive the Victorian spot price or automatically capture the Victoria to Tasmania spread.
After meeting with Hydro, receiving a follow-up letter and working through the fine print, that indirect picture has sharpened into focus. What emerges is not the arbitrage model Tasmanians were encouraged to believe in, but a very different set of rules – rules that leave Tasmania with a much more indirect and qualified share of the benefit than the public narrative implied.
The key structural reality is that inter-regional value is split into two directional pools – northward and southward – each treated separately under the settlement framework. When electricity flows south, one pool is created; when it flows north, another is created. Each is then divided between the two regions under a fixed rule that gives most of the value to the importing side.
This is not a Tasmania-versus-Victoria rule. It is an export-versus-import rule that applies across the entire national market. But its consequences for Tasmania are significant. When Tasmania exports into Victoria, much of the inter-regional residue created is allocated to the importing side – Victoria – not retained in Tasmania. To the extent that value is received within the regulated framework, it reduces what the Victorian network would otherwise recover from customers. In plain terms, Tasmanian exports may help lower Victorian network revenue recovery, and Tasmanians have never been clearly told that.
TasNetworks receives only the smaller share of the pool, and whatever it does receive, whether from the pool itself or from the auction process, sits within the regulated framework and operates to reduce what would otherwise be recovered from Tasmanian customers. Whether the interconnector revenue requirement is funded from the pool or funded from customers after crediting the pool makes no practical difference. TasNetworks is the recipient of the pool amounts on the Tasmanian side. Hydro is not the automatic beneficiary simply because it exports.
This also avoids the most important matter: what happens when Tasmania becomes a net exporter after Marinus? The answer is uncomfortable. As Tasmania exports more, the dominant pool will shift from the Tasmanian to the Victorian direction. And under the national rules, that value will flow to a significant extent to Victoria. The only analysis the public ever saw – the heavily redacted Whole of System Business Case released after the decision was made – does not appear to have clearly disclosed this issue at all. Can we seriously believe a caretaker cabinet understood what it was signing Tasmania up to when the key financial mechanics were hidden from view?
Hydro’s claim that it will still benefit from high Victorian prices under regulation does not withstand such scrutiny. It may benefit indirectly when Victorian conditions lift Tasmanian prices which means Tasmanians will be paying more, but any direct claim on inter-regional value must be bought at auction. If those units are valuable, Hydro will pay accordingly, and for northward flows the auction proceeds go to the Victorian network operator, not Tasmania. This is akin not to arbitrage from trading, rather asset speculation via an auction.
This is not the story Tasmanians have been told.
Tasmania is paying for the North West Transmission Developments, a major network expansion intended to support new renewable generation and expand export capability. But expanding exports does not mean Tasmania keeps all of the financial value created when power flows north. Under the national rules, when Tasmania exports into Victoria, a substantial share of the inter-regional residue may be allocated to the Victorian side. At the same time, the new renewables NWTD is meant to unlock is likely to require Hydro to provide support via Power Purchase Agreements. This support has proved costly at Woolnorth and Granville. Tasmanians are likely to bear the costs, while much of value ends up in Victoria. That is a long way from the simple export-windfall story sold to the public.
More troubling is Hydro’s apparent retreat from the export narrative underpinning the government’s agenda. Hydro informed me it has “no export driven strategy” and describes future exports as merely “plausible”. Exports may still occur, but as opportunistic outcomes rather than essential drivers of future profits. In other words, the benefit of exporting under the regulated model appears far more contingent, indirect and constrained by market rules than the Battery of the Nation rhetoric ever acknowledged.
The government, Minister and Hydro need to be upfront with Tasmanians and explain how we are not sleepwalking into an energy future designed for someone else’s benefit, by being honest about who captures the value, and on what terms.
Hydro Tasmania is too important to this State, for both renewable electricity and the State’s finances to not ensure the full story of what the future may look like is clear to all Tasmanians.