NSW's long-awaited fireworks

Amid the controversies generated by late-night walkouts by directors of its state-owned electricity generators, the landmark nature of NSW's electricity privatisations – both for the state and the private sector operators – has tended to be under-played.

After decades of tortured debates and inertia, NSW has finally been able to sell some of its energy assets and in the process has helped to permanently re-make the structure of the east coast energy market.

Given the intensely political nature of the process – and the politics had produced a quite awkwardly engineered process – it was probably inevitable there would be some last-minute theatrics. Three years after Morris Iemma announced the start of the privatisations, however, a large slice of the NSW electricity sector will now be privately owned and managed.

The politics of electricity in NSW always meant that it was always going to be difficult to assess the outcome of the sale process because Iemma had devised a privatisation process that didn't involve selling any of NSW's generators or distribution networks. Instead the government put its retailers up for sale, along with the so-called GenTrader contracts that are akin to long-term leases of the coal-fired generators.

By selling the retailers – Country Energy and Internal Energy to Origin Energy and EnergyAustralia to TruEnergy – along with the GenTrader contracts NSW has raised $5.3 billion, $3.3 billion from Origin and $2 billion from TruEnergy.

There is no doubt that the value received for the retailers is full, with Origin paying just under $1300 per customer. That's as big a price as has ever been paid for an energy retailer, particularly as the last big sales in Queensland were pre-crisis. The fact that AGL was a distant third bidder also tends to validate the value.

The bonus for NSW from the process is that AGL is now vowing to spend up to $1 billion to try to wrest those soon-to-be acquired customers from the winning bidders, which is a massive positive for competition and a validation of the Australian Competition and Consumer Commission's decision to allow Origin to bid for two retailers.

AGL, which appears to have believed that there were three bidders for three assets and therefore the retailers could be acquired relatively cheaply, was out-manoeuvered by the approach to the ACCC, quite late in the process, by the government's advisers at Lazard and Credit Suisse, seeking its attitude towards an acquisition of both the smaller retailers by Origin. Its approval ensured strong bidding and a good return for NSW taxpayers.

The GenTrader deals are far more difficult to come to grips with, given their novelty and the different economics of the generators. The NSW generators are quite inefficient, with high operating costs and fuel costs that are rising rapidly as coal production in NSW shifts from electricity generation to export markets.

Those inefficiencies have effectively been locked in for the long term by the government's unwillingness to sell the plants because of the political context and are reflected in the terms of the contracts.

With Origin and TruEnergy responsible for arranging fuel supply and exposed to any future carbon price inevitably the arrangements would be relatively low-margin and the contracts relatively low-value. Origin has agreed to pay $950 million for its contract with Eraring Energy.

While the value of the GenTrader contracts has been criticised by some of the generators' exiting directors, and the state Opposition, those embedded cost structures and the transfers of fuel and carbon risk to the buyers would need to be factored into any analysis. Given the length of the sales process and the number of bidders it attracted it is difficult to argue that the contracts are worth more than the value the auction produced.

The government still has the GenTrader contracts for the biggest and lowest-cost generator, Macquarie Generation and Delta Coastal, to go. Delta, which owns a gas-fired peaking plant, is likely to be keenly sought after and would appear an obvious target for AGL. In any event, there is potential for the sale proceeds to be swollen significantly by the time the process ends early next year.

The sales of the retail business transform the east coast energy retailing market. Origin has increased its retail customer base more than 50 per cent and TruEnergy, which risked being marginalised as a distant third player had it lost out to AGL, has established itself as one of the three big east coast players by acquiring NSW's biggest retailer and doubling its customer base in the process.

There is no fallback acquisition of any significance for any of the big retailers – the NSW process represented the last opportunity to acquire large portfolios of energy customers, given that all the other states have exited the sector. The lengthy process of consolidation has ultimately produced three big integrated east coast energy groups.

While NSW has been a low-margin market for retailers, which helps explain why even AGL, with its dominant position in gas, hasn't built much of a market position in electricity (it has about a 10 per cent share) the scale efficiencies for Origin and TruEnergy and the bulked up retail components of their vertically integrated businesses ought to create both margin and enhanced flexibility and security, although AGL might have some influence over the margins if it aggressively tries to buy customers.

Its success may also encourage TruEnergy to consider floating its bulked-up and more diversified Australian operations, which would have the side-benefit of reducing/sharing its Hong Kong-listed parent's exposure to the latent carbon price risk in its Yallourn brown coal plant in Victoria's LaTrobe Valley.