Hydro Tasmania CEO Steve Davy talks with Energy Source and Distribution about the company’s record profit, operating in a period of political uncertainty and community buy-in.
The goal of largely de-carbonising Australia’s electricity sector within 40 years may seem a big ask, but, for Tasmania’s key electricity generator, it’s an achievable vision. For Hydro Tasmania’s chief executive officer Steve Davy, the key to moving forward is to take a new perspective on renewable energy; one that isn’t focused on short-term solutions but rather rooted in real, workable formulas to keep Australia’s lights on for years to come.
“It’s important renewables keep growing as a percentage of Australia’s energy landscape until there are other forms of low-carbon generation that can come into the system,” Steve says, just four months into his leadership tenure.
He’s certainly in the right place. Since its first hydropower development almost a century ago, Hydro Tasmania has been a leader in renewable energy development. The company is currently Australia’s largest producer of renewable energy and uses a combination of water and wind power to harness natural energy to be sold on the national grid. Generating between eight and 10 terawatt hours of electricity each year, the company has also been involved in the construction of five wind farms in Australia, including the three it part-owns in Tasmania, being Studland Bay, Bluff Point and Musselroe.
“In June, 2013, the gas-fired generation business that was a part of Aurora Energy was transferred to Hydro Tasmania, bringing us back into gas-fired generation – so we’re now in hydro, wind and gas,” Steve says.
It’s a good position for the company to be in, which Steve knows all too well. He’s been with Hydro Tasmania since 2005, originally managing the company’s energy trading aspects and most recently, acting as chief commercial officer. He’s also acted in the role of chief executive officer since Roy Adair’s departure in June 2013, amid a period of extremely good and unusual profit; one that is likely to continue for this financial year at least.
On the back of a strategy to make the most of the carbon price’s high, fixed period, the company recently announced a record underlying profit for the 2013/14 year. Reaching $238 million – including around $70 million from the carbon price and a similar amount from increased generation – the profits were more than double the previous year’s result.
The outcome is largely due to Hydro Tasmania building up its reserves in recent years and selling the extra power generated at higher prices in Victoria. Nonetheless, it’s a considerable success considering the challenging operating environment the company is working in.
“We decided to let our reserves build up in 2011 and early 2012 so we would have hydro storages as high as possible by July 2012. Then, through the next two financial years, we’ll be generating far more than we would normally plan to generate with our hydro plant,” Steve says.
“With the higher volume and also the higher price that has come in during the fixed carbon price period, we’re making a lot of extra money.”
Of course, the reason Hydro Tasmania is able to generate far more energy than normal is because of Basslink – the world’s second longest undersea power cable. It connects Tasmania to the national electricity grid via the Bass Strait. Through Basslink, Hydro Tasmania has the opportunity to sell its renewable energy in further reaches than in its home state.
“We can generate far more than Tasmania’s demand, so we can export that extra power and receive the national market price over Basslink. Basslink has been very important in creating the additional revenue across what’s probably going to be a two-year period with a high fixed carbon price,” Steve says.
With a changed political context for the Australian energy sector, however, Steve is quick to admit there is uncertainty in the years ahead, particularly in regards to the federal government’s plans to repeal the carbon tax.
With this, come challenges surrounding how Hydro Tasmania, along with other renewable energy businesses, can remain relevant and profitable once the emphasis on carbon price is removed. What’s more, the company will also need to look at how it will benefit from the investments it has made in improved systems.
“In addition, the whole national market is in a state of decline in terms of load, so without a carbon price, the prices in the national market are pretty modest. And our revenue is affected by that,” Steve says.
“Our revenue is also affected by the reforms that are being put in place in Tasmania. The government has determined the prices consumers in Tasmania pay will fall and that also has a direct effect on our revenue.
“We have a lot of respect for the opinions people have in terms of what wind farms do when you live close to them, but we are also mindful people should focus on what science tells us about the impacts of wind farms on health”
“Despite the great years we’re going through at the moment, the revenue situation will be quite a bit tighter in the coming years. That means we are going to be really focused on running as efficient a business as we can.”
Three distinct entities operate as part of the Hydro Tasmania group — Hydro Tasmania, its retail business Momentum Energy, and professional services business Entura. Each business operates as a critical component in an integrated value chain, and each plays an important role in delivering the group’s core business and strategy to enhance value and mitigate strategic risks.
Hydro Tasmania’s strategy has evolved in the past year to adapt to the changed operating environment and the outcomes of the Tasmanian energy industry reform process. While this evolution has taken place in response to external factors, it is also a natural extension of the evolution of the business since entry into the National Electricity Market (NEM).
The connection of Basslink in 2006 placed Hydro Tasmania squarely in the NEM and fundamentally changed its risk profile.
“Momentum Energy plays a crucial role in achieving our strategic targets. Our strategy requires mainland retail growth to a more diversified customer base and an alternative path to market for electricity generated from Hydro Tasmania’s existing generation assets,” Steve says.
“While Tasmania will always be our main focus, diversifying our revenue sources interstate reduces our risk exposure. Momentum is therefore a key risk mitigant for Hydro Tasmania.”
Entura is also a key part of Hydro Tasmania, providing technical expertise and skills for the ongoing maintenance, upgrade and operation of its hydropower assets and wind farm developments. As a stand-alone business targeting growth in new markets, it also contributes to the company’s overall profitability.
“Entura provides employment for professionally skilled people, exporting their skills around Australia and overseas,” Steve says.
While the company will continue to focus on revenue, Steve’s outlook on the coming financial year incorporates much more than the triple bottom line. With Tasmanians being the shareholders in Hydro Tasmania, strategy will continue to foster real and meaningful community buy-in, largely by improving communication with stakeholders – particularly communities living in close proximity to assets.
“Hydro Tasmania was built by people working together. In fact, there are tens of thousands of people in Tasmania who have a direct connection with the business, who were either involved in the construction of the company’s assets or who have close family and friends who were involved in building the assets. We have a lot of respect for the opinions locals have in regards to both their energy usage and their needs as a community.”
“We particularly care about the opinions of people who live close to assets, which is why we’ve invested so much time in engaging with people who live close to wind farms,” Steve says, referencing the company’s 600MW wind farm concept on King Island, which was announced during 2012.
TasWind, as the project is known, would involve a high-voltage underwater cable across the Bass Strait to connect the wind farm to the NEM. Not surprisingly, it has generated significant community debate on the island and attracted industry and media interest nationally. To ensure the community was, and continues to be, onboard, Hydro Tasmania undertook a six-month consultation project that culminated in a survey of the community. The survey returned particularly reassuring results for Hydro Tasmania, finding 59 per cent of respondents supported the project proceeding to feasibility.
“The project will not proceed to the development stage without the ongoing support of the King Island community, and we have undertaken to test that support again before that stage,” he says.
“The effort undertaken on King Island for the TasWind project was particularly
important to ensure the community was well informed before making any decision about moving to the next stage.”
As part of the project, Hydro Tasmania has engaged international consulting firm ARUP to provide the King Island community with a sound experience, via headphones and speakers, to allow them to accurately experience what an operational wind farm sounds like from a variety of distances and under different conditions.
“We have a lot of respect for the opinions people have in terms of what wind farms do when you live close to them, but we are also mindful people should focus on what science tells us about the impacts of wind farms on health,” Steve says, confident Tasmanians, if given the right information, will throw their support behind Hydro Tasmania’s commitment to sustainable, community-focused renewable energy.
Steve is part of the next generation of leaders who came through the formation of the NEM and privatisation phase of the Australian energy industry and is bringing a customer focus to the sector. He also symbolises a new wave of management who have been attracted to the energy market because of an interest in doing something about global warming and climate change. With this, comes a determination to push debate on how renewables can integrate into the energy landscape, which Steve says is heating up nationally.
“There needs to be sufficient investment in the kind of transmission system and the rules around investing in the transmission system, so renewable energy can connect,” he says, acknowledging attitudes need to change if Australia is to facilitate a strong renewable sector.
“Investors need very clear signals and confidence their investments will be maintained for the economic life of that investment. So, the current uncertainty around the Renewable Energy Target dissuades people from making large-scale investments in renewable power.
“And in order to invest, investors need to know what the planning rules are. Many projects in Victoria, including our projects, are stalled because of the way planning rules have changed, creating even more risk for developers.”
Most importantly though, Steve reiterates the importance of renewables growing as a percentage of Australia’s energy landscape until there are other forms of viable low-carbon generation that can join the system.
“At the moment, renewables are the only really acceptable low carbon emitting, or ‘clean’, electricity generation available in Australia. Nuclear power and carbon capture and storage are unacceptable for community and cost reasons respectively,” he says.
“A lot of our people work at Hydro Tasmania because they are very concerned with the environment and climate change. They don’t just work at Hydro Tasmania because we’re a good employer; they are here because they believe in renewable energy and a low-carbon future.
“Tasmanians have a week-to-week association with the lakes and rivers that we are managing in the community. There is a real history and a present contact with the whole community and we take very seriously our responsibility to ensure these assets continue to produce low emissions electricity, to propel Tasmania and Australia forward into the future. There is a very important message in this, Hydro Tasmania’s centenary year.”
• CEO at Hydro Tasmania, and has been with the business since 2005.
• Began his career in New Zealand
• Has a First Class Honours Degree in Physics.
• Prior to his arrival at Hydro Tasmania, managed contract trading at Eraring Energy in New South Wales.
• Previously worked in the banking industry, trading and marketing currency and derivative products and was a senior vice president at Bankers Trust Australia in the 1990s.
• Currently chairman of Hydro Tasmania’s mainland retail business, Momentum Energy, selling electricity on mainland Australia and on the Bass Strait Islands.
• Previously served as chair of the Australia Financial Markets Association Environmental Products Committee.
• Director of the Electricity Supply Association of Australia and also represents generators on the National Electricity Market Reliability Panel.