Delta Electricity needs urgent rule change from AEMO after 15 banks refuse to offer credit

Fifteen banks have refused to offer the owner of the Vales Point coal-fired power station credit on emissions grounds, creating a red-tape crisis for the company.

Delta Electricity’s Vales Point coal fired power station.

Delta Electricity, which operates the Vales Point coal-fired power station in New South Wales, has requested an urgent rule change from the Australian Energy Market Commission after 15 banks refused to offer it credit on emissions grounds.

The refusal has created a bureaucratic headache for the company, which under current market rules, must provide a bank guarantee or letter of credit to the Australian Energy Market Operator (AEMO) given it is during some periods a net debtor to it.

While Delta is profitable, and can afford to put up the guarantee in cash, under current rules it is unable to legally do so.

Chief executive Richard Wrightson said he had even offered to deposit money with an institution as security, simply to procure the financial instrument necessary under the rules, but even that offer was refused.

“We’re actually not asking them to lend, we’re just asking them to issue a bank guarantee,’’ Mr Wrightson said.

“That’s the bit I find frustrating, quite irritating.

“This de-banking is dangerous ... I won’t describe it as a crisis now, but unless we prepare for this, it’s chaotic.’’

Delta has written to the AEMC asking for a minor rule change to be able to put up the guarantee as cash, saying it was not confident it could get a bank to stand behind its debt in time, after expending significant effort to that end.

The company said in its letter that the request was “relatively urgent, as the financing options available to Delta (and other market participants exposed to fossil fuels) beyond 2024 are extremely limited or non-existent’’.

“A significant number of financial institutions, that would be acceptable to AEMO, are no longer providing financing facilities to fossil fuel generators,’’ Delta said.

“While the energy transition is progressing, there will be an ongoing reliance on fossil fuel generators, at least in the immediate future.

Coal-fired power generators are facing a financing drought.

“There is an urgent and emerging need to ensure that market participants who, due to the ESG (environmental, social and governance) policies of credit support providers, are unable to meet the requirements ... have alternative options.’’

Delta said its current bank guarantee expires at the end of 2024, and its current financier told it last year that due to its updated ESG policies, it would not be extending the financing facility.

Delta said it had engaged an experienced financial adviser, but “it has been identified during the refinancing process that 13 of the 15 lenders declined due to ESG constraints, which included the Big-4 Australian banks’’.

“Both of the remaining financial institutions were prepared to offer a bank guarantee facility to provide credit support related only to requirements for mining rehabilitation obligations and renewable power purchase agreements,’’ Delta said.

“While it was considered, by these lenders, that these guarantees are ‘ESG positive’ (i.e. support mine rehabilitation obligations and an agreement to purchase solar power), there was still no appetite from most lenders simply because of the association with thermal coal.

“This means that there exists a real potential that a market participant, while being a profitable and solvent business, may be unable to meet prudential requirements with AEMO from the end of 2024.’’

Delta’s most recent financial report, for the year ended Decmber 30, 2023, shows it made a profit of $23.2m, and an underlying profit of $117.6m, on revenue of $877.9m.

Delta said the effect of the requested rule change would be non-controversial, as it would not change how the market operates, or favour any one participant over another.

But the change was “relatively urgent’’, as it could result in AEMO having to “restrict market activity from market participants where a bank guarantee cannot be provided for those activities’’.

Tis could cause, “severe reliability and security issues at worst, where critical generation assets are forced to withdraw from the market or are removed from participating in the market by AEMO because of an inability to meet prudential requirements through a bank guarantee’’.

“While it is likely that, should such circumstances materialise, government or regulatory bodies would seek an interim solution, this creates an unacceptable level of uncertainty for market participants, and the simplest and most efficient solution is to resolve the issue through the proposed rule change,’’ Delta says in its letter.

Vales Point, on the NSW Central Coast, has a capacity of about 1320MW, or about 4 per cent of the eletrcity demand in the National Electricity Market.

The coal-fired power generator was previously earmarked for closure in 2029, but the Czech-owned group which owns it last year refused to commit to that timeline, telling AEMO that an assessment had determined it could remain open for a further four years.

AEMC chair Anna Collyer said: “The AEMC is Australia’s independent rule maker and advisor for the energy market and will consider any rule change request in accordance with its standard policies and procedures.”