There are clear differences though. Hopefully I will annunciate...

There are clear differences though. Hopefully I will annunciate them clearly.

The thermal coal we export is materially better quality than what we burn for power in Victoria. In NSW, coal companies such as CEY should be able to export the majority of their product once their domestic utility contracts expire. Some of their deposits are obviously simply too poor quality to export. But the vast majority is of sufficient quality to get benchmark, or close to benchmark.

The NSW government tried to privatise the coal fired generators for several reasons. (a) Firstly,to enable the implementation of green taxes, which will massively hike up power costs for the consumer. Possibly in the form of tariffs, or a carbon trading scheme. But more importantly, governments could see the effect of (b), the coming pricing parity of domestical coal with international thermal coal prices. The reason why I use CEY above is that they are locked into long contracts wit the NSW government, from memory, it costs them approximately $A39/t to mine it, and then they sell it to the NSW utility for approximately $A45/t. By comparison, the weekly thermal coal price out of Newcastle (FOB) is currently US$94.83/t. Imagine you are a coal producer, and you had the ability to swap your production from domestic to export. Your costs of production would remain the same in the medium term, so the vast majority of that price difference would drop to the bottom line. It would also mean that your profitability would increase approximately 900%. But more importantly, what would be the political ramifications for a Government if suddenly you had to hike up power costs by 150%.

At present CEY is allowed annual inflation rate increases, with a 10 to 15% price increase or decrease at the beginning of the new (10 year?) contract. However, be absolutely very clear on this next point, the company is under no obligation to continue to renew those contracts !!! In 2014, the majority of these contracts for CEY will roll-over or be renegotiated. Why do you think the NSW government was trying to sell the coal fired power-stations ??? Imagine the effect on the price of electricity when one has to pay benchmark thermal coal prices. Electricity prices in Australia are frightening cheap compared with the US or Europe.

Victoria is a very different case. The Latrobe burns ugly brown coal. Much of it is extremely inefficient and it has to be dried out for some considerable period of time before it is even remotely efficiently combustible. Much of this coal, its calorific content is too poor to export, plus it has a bunch of other negative attributes that make it unsellable internationally. It can only be used for domestic production.

This next bit is interesting. Once the Victorian Government sold these power stations off, they immediately changed the rules forcing these operations to virtually be cashflow negative overnight (it was proposed that the NSW Government would have had to given substantial guarantees and enshrined punitive measures for this not to happen, if they sold their power plants). The operators (including a large Chinese group) used substantial debt to purchase these assets and to leverage on the returns. These operators have told the Victorian Government that there will be no maintenance or expansionary capex on these plants until the Victorian Government changes its way. This is a form of corporate blackmail. Because Governments no longer get involved with large capital projects, the operators know that given the current regulatory regime, no private investor will build new power generation capacity. They also know that the Victorian government is not to about to construct a new power plant either. In the mean time, the brown coal-fired plants will slowly wind down, exacerbating an already acute shortage especially during summer.

Next summer it will get even worse. And the Victorian State will also go down with it. Brown-outs will be common. Power usage in Australia is growing dramatically, but ironically, power infrastructure at the same time is diminishing.

I dont think gas is the answer under current pricing tariffs.

I could go through all the permutations, but that would probably be an insult to your intelligence.

Needless to say, power costs across Australia are going to climb substantially over the next couple of years. Capex and opex costs are substantially greater than when the majority of Australias power infrastructure was built (decades ago).

In this future environment in the not too distant future, there will be an increasing role for geothermal energy. In fact, I predict it will be increasingly seen as natural nuclear power stations.

Geothermal will have its day in the sun.

In the mean time get a wiggle on management