Project cost and funding mix
Abbott (2018) states that Loy Yang B is a 1,000-megawatt plant with two 500-megawatt units. The state government of Victoria offered for sale a 51 percent share of Loy Yang B, a A$2.4 billion asset. Loy Yang B sale was made to Mission Energy. The authorities entered into a thirty-three-year take-or-pay contract; financing was arranged by a consortium of institutions led by two Australian banks. The take-or-pay contract involved a capability charge to cover fixed costs and an energy charge to cover variable costs, such as coal and water. The financing security rested on the perceived safety of the take-or-pay contract, and the banks examined that contract carefully.
Later, Engie (70%) and Mitsui (30%) became the company’s owners. According to UPDATE 3-Engie, Mitsui sold an Australian coal-fired power plant to Alinta (2017). In 2017, the company was sold to the Chinese company Alinta Energy, owned by the Hong Kong conglomerate Chow Tai Fook Enterprises. The deal was valued at A$ 1.1 billion ($ 835 million).
Demand, supply, and risks
According to Abbott (2018), while the Victoria government is taking ambitious steps to increase its renewable energy supply from more than 10 percent to 40 percent by 2025, the sale of the power plant gives confidence that coal plays an essential role in the state’s energy mix. In Victoria, coal is the main primary source of electricity generation in the state, accounting for about 85% of electricity generation.
At the same time, coal is a source of controversy for the country. Moreover, Australia is one of the most heavily polluted greenhouse gas countries per capita. Therefore, the sector is becoming increasingly reliant on a narrower group of lenders. Ishikawa (2021) notes that banks compete for sustainability and strive to show how green and clean they are, making it challenging to book new assets, especially in the thermal coal field. Lending to the coal sector has been criticized, which is why banks, historically among the largest lenders to the coal sector, often backtrack.
Initial problems with the project and final restructuring
According to Loy Yang B coal plant ‘shifted $ 1 billion offshore’ (2017), owner Loy Yang B received $ 116.9 million in carbon tax compensation from the state energy security fund in June 2012. Within days, owner Loy Yang B took $ 1 billion offshore as part of Project Salmon. This project involved a debt restructuring so that Australian companies could use $ 1 billion in dividend payments to cancel the loans.
Before the sale of the company in 2017, Engie embarked on a restructuring that included the sale of assets worth 15 billion euros. According to UPDATE 3-Engie, Mitsui sold an Australian coal-fired power plant to Alinta (2017). Following the sale to Loy Yang B, Engie said the deal would reduce its net debt by € 666 million ($ 790 million). Moreover, Alinta will get its money back in less than ten years on an asset deemed critical to Australia’s energy supply, which could eventually become Victoria’s last coal-fired power plant.
Ishikawa (2021) asserts that three of Loy Yang B’s existing lenders, including Intesa Sanpaolo, Sumitomo Mitsui Banking Corp, and United Overseas Bank, have refused to refinance AU $ 440.5 million for the 1,000-megawatt power plant, even at a higher price than the original loan from December 2017. In turn, Alinta completed the refinancing of Loy Yang B in April 2021 with a syndicate of seven banks, including three Chinese banks that were the first lenders of the project. The company completed a $ 440.5 million refinancing in April, partly covering a $ 715 million loan taken in 2017 to purchase the power plant.
References
Abbott, M. (2018). Markets and the state: Microeconomic policy in Australia. Taylor & Francis.
Ishikawa, M. (2021). ESG focus reshapes Aussie coal loans. IFR.
Loy Yang B coal plant ‘shifted $1 billion offshore’. (2017). Modern Power Systems.
UPDATE 3-Engie, Mitsui sell Australian coal-fired power plant to Alinta. (2017). Reuters.