NSW lifts coal royalties to stoke budget coffers

NSW will lift coal royalties for the first time in 14 years as it seeks to aid its budget and arm it with more resources to offer cost-of-living relief to households.

NSW will increase coal royalties for the first time in more than a decade as it seeks to repair the state budget, though the move drew an angry response from the fossil fuel industry, which claimed it will have a chilling toll on companies already reeling from lower prices and increased costs.

The higher royalties will be unpopular with coal companies such as Whitehaven Coal, but Australia’s most populous state has offered some concessions. The increases are well short of recent hikes in Queensland and NSW said it will also remove a cap on the price of coal in 2024.

NSW said coal royalties will rise 2.6 per cent, an increase that the state Labor government said will raise $2.7bn over four years from 2024-25.

NSW Treasurer Daniel Mookhey said the state royalties are antiquated, and the improved fiscal position will allow further cost of living relief for households struggling.

“It’s important to recall that the last time royalty rates in New South Wales changed was just after the iPhone 3 was introduced. That’s an eon ago, market conditions have clearly changed,” Mr Mookhey told reporters.

NSW had flagged revising the way the state taxes coal in July, a move that had stoked anxiety within Australia’s fossil fuel industry that the country’s most populous state would follow the lead of Queensland.

Queensland introduced a new royalty scheme in 2021, which sees levies pegged at 7 per cent when prices are up to $100 per tonne, before rising to 40 per cent when prices exceed $300 per tonne.

The change has provided a significant boost to the Queensland state budget, but has led to major employers such as BHP warning it dented the attractiveness of the state for future investment.

NSW will from July 2024 charge 10.8 per cent on the value of open-cut coal, with slightly lower rates for underground mining and deductions allowed.

Whitehaven Coal chief executive Paul Flynn criticised the decision of the NSW government but was relieved it did not follow Queensland’s lead.

“The existing regime has successfully delivered significant economic and social benefits to NSW for decades, particularly in our regions, and particularly over the last few years where historic high royalty revenues have been returned,” said Mr Flynn.

“While the cost impact of this royalty change is not insignificant, the increase represents a more measured adjustment in contrast to other jurisdiction.”

Natural Resources Minister Courtney Houssos said the government had “struck the right balance” in its decision.

“The Minns government is committed to ensuring the ongoing stability of the mining sector, while rebuilding essential services’ for the people of NSW,” she said.

But NSW Minerals Council chief executive Stephen Galilee said the move was ill-timed, with producers also under sustained pressure.

“This would be a significant additional cost for any business or industry to manage and will present challenges for NSW coal producers facing higher operating costs, including from the introduction of the Commonwealth Government’s Safeguard Mechanism,” said Mr Galilee.

The royalty increase comes as Labor looks to repair its budget, which was hit hard by Covid-19.

Mr Mookhey earlier this year said it would be “very, very difficult” for the government to achieve a surplus by 2024-25.

While it has warned of a difficult fiscal position, the state remains under pressure to provide further help to households and businesses struggling under a cost of living squeeze triggered by surging interest rates and high inflation.

Energy bills have been a major driver of inflation, with electricity and gas prices rising more than 20 per cent again this year for a second straight time.

A global energy crunch triggered by Russia’s invasion of Ukraine was the major driver, and the federal Labor government and states moved a spate of emergency measures to temper further bill shocks.

The federal government in conjunction with state counterparts introduced a $120 a tonne cap on the price of coal, and the NSW government confirmed on Wednesday it will end in July 2024.

NSW Energy Minister Penny Sharpe said the scheme was only intended to be temporary.

“The coal price caps were an emergency measure to keep electricity prices under control during a global energy crisis,” said Ms Sharpe.

“Going forward, it’s important our energy sector has certainty about NSW’s policy settings.”

The removal of the coal cap, however, could add further pressure to electricity generation costs.

Coal is the dominant source of electricity in Australia. Generators purchase coal from producers, a major contributor in determining the cost of producing electricity.

If coal jumps back up to about $120 a tonne in 2024 then the cost of electricity will rise and this will likely flow through to households and businesses in 2025 – further stoking bills and underpinning inflation.

Coal prices above $120 a tonne will also impact NSW and its negotiations with Origin Energy over the future of its largest coal power station.

NSW on Tuesday said it would seek a deal to extend the lifespan of the Eraring coal power station beyond 2025, which will likely see the state have to underwrite losses incurred by Origin until enough renewable energy sources have been built to allow the fossil fuel generator to shutter without jeopardising reliability or stoke price increases.

If coal jumps above $120 a tonne in 2024 then Eraring is expected to become unprofitable and taxpayers will be on the hook to cover the losses almost immediately.

Originally published as NSW lifts coal royalties to stoke budget coffers