Corporate welfare may keep the lights on. But backing Eraring power station will have other costs for the NSW government

‘Eraring is not the clunker that AGL’s Liddell plant was near its demise. But the 40-odd year old plant’s reliability without a major fault can’t be assured.’ Photograph: Peter Lorimer/The Guardian

The New South Wales government has bought itself an insurance policy worth as much as $450m to keep open a power station it couldn’t afford to have exit the grid.

But operating the 2880-megawatt Eraring plant up to four years beyond its scheduled August 2025 closure date will cost more than just the price of corporate welfare – there’s also the environmental and economic impacts to quantify.

The government promised to compensate Eraring for 80% of its losses, up to $225m a year for the first two years. Should the plant earn a profit (and assuming owner Origin Energy opts into the compensation part of the deal as everyone expects), the government would collect a 20% share, up to $40m a year.

Hidden in the fine print, though, is a provision to cover major repair costs if they top $50m – minus a $10m contribution from Origin. The cap, then, might not be a cap.

It’s fair to say Eraring is not the clunker that AGL’s Liddell plant was near its demise. But the 40-odd year old plant’s reliability without a major fault can’t be assured. Is it feasible that a Minns government going into the March 2027 election wouldn’t dig deeper if blackouts loom?

Other costs are harder to determine. The plant will emit in the order of 20m extra tonnes of carbon-dioxide equivalent – possibly double that if it runs to a final (for now) closure date of April 2029.

The energy minister, Penny Sharpe, stressed that additional pollution wouldn’t undermine NSW’s target of halving 2005-level emissions by 2030. That’s because the dates are merely points of time and there’s no carbon budget implying a steady reduction.

But the atmosphere keeps track.

For the owners of remaining coal-fired power stations in NSW, what’s to stop them arguing for compensation?

The value of CO2’s real damage – through stoking global warming – is $70/tonne, rising to $420/t by mid-century the Australian Energy Market Commission suggested last month. At the low end, that’s 70 x 20,000,000, or $1.4bn. Not nothing.

And what about the market distortions from the intervention? Does propping up Eraring deter investments in renewable energy or batteries? We’ll have to see.

For the owners of remaining coal-fired power stations in NSW, what’s to stop them arguing for compensation? Moral hazard is a risk.

As one rival told the Guardian, Origin brought forward Eraring’s closure by seven years and succeeded in blackmailing the government. Will they be the last?

Vales Point, owned by Delta Energy and located near Eraring, may well be the next in line to demand a handout should they threaten to bring forward their closure date.

For Origin’s biggest rivals – EnergyAustralia, owner of the Mount Piper plant near Lithgow, and AGL, with its Bayswater generators in the Hunter Valley – Thursday’s decision was no big surprise, but nor was it welcomed.

As former Liberal energy minister Matt Kean has said, Origin really had no choice to keep Eraring running because they would have had to go out into the market to buy electricity to meet the retailing contracts it holds in NSW and beyond.

By one estimate, Origin was more than 1500MW short – a gap it would have struggled to close. Their coal contracts were also exposed to short-term movements that pointed to a management gamble that went amiss.

Who was over a barrel then, the government or Origin?

In the government’s defence, they inherited much of the problem.

Had the Coalition government not privatised the coal plants a decade ago, NSW might have been able to make easier decisions to prioritise renewables. Queensland – which has retained most of the electricity sector as state-owned – is doing just that.

The previous Coalition government played a similar card in managing to get AGL’s ailing Liddell plant to limp past the 2023 election by a month. Eraring won’t close before August 2027 now, or about four months after the next state poll.

The premier, Chris Minns, Mookhey and Sharpe also make the irrefutable point that nothing will destroy the public’s support for decarbonisation more than a major blackout and an extended time of higher power prices.

While not a perfect parallel, the closure in 2017 of the country’s dirtiest power station – Victoria’s Hazelwood plant – sent wholesale electricity prices skyward.

“In Victoria, average spot prices for 2017 were up 85% on 2016 and up 32% in South Australia for the same period. NSW and Queensland were up 63% and 53%, respectively,” the Australian Energy Regular said two years after the shutdown.

Still, it is hard to avoid the view that the NSW government opted for a cautious rather than bold tack. And that the biggest winner is Origin.