The move by state Treasurer Eric Roozendaal is being seen as a last ditch effort to ensure the cost of coal for the state’s electricity assets is capped and that the state government is ready for a proposed $8 billion privatisation to be bedded down in time for next March’s state election.

The state government last mined coal in NSW through its Powercoal entity in 2002, before selling its assets to Centennial Coal.

NSW Greens MLC John Kaye said since the Powercoal body no longer exists, the state government does not have the economies of scale of a commercially run coal mining enterprise and would be forced to offer the coal from Cobbora to the privatised electricity generators at a discounted cost to make the electricity operations profitable for the private companies that acquire them.

NSW Shadow Treasurer Mike Baird said the NSW premier and treasurer must explain why the government was pursuing a transaction that would increase risks for the state, reduce competition, make the market less efficient and lead to significant upward pressure on power prices

“This week came the extraordinary announcement the Keneally Labor government will go back to mining coal because the treasurer failed to negotiate new coal contracts,” he said.

“So now NSW will retain the risk of producing coal, which is one of the key risks that should have been reduced by the sale.

“By its nature, this sale process should remove risks for the state, but because of the incompetence of the treasurer, we have the opposite.”

Kaye said there was no commercial tension in the negotiation between the state government and its preferred tender for Cobbara, Whitehaven Coal.

The NSW government was forced to step in as operator after it could not agree with Whitehaven on the price of coal from Cobbara.

Whitehaven was believed to be seeking $55 per tonne of coal which would have made it economically unattractive for the state government to privatise its power generation assets, analysts believe.

The Cobbora open cut mine contract is expected to produce 30 million tonnes of coal per year and provide the coal for the state’s medium-term energy needs.

State-owned utilities Macquarie Generation, Delta Electricity and Eraring Energy had formed an unincorporated joint venture to back Cobbora, but originally had aimed to secure a mining company to develop and operate the mine.

The JV is seeking state government approval to mine 30Mtpa of raw coal and produce 20Mtpa of product coal. Open cut mining is slated to start in 2013 for a life of 21 years.

The negotiations failed at a time when NSW private coal companies are increasingly coming under foreign ownership and focused on increasing shipments of thermal coal to more lucrative export markets.

The strong prices being offered for export coal are making the prospect of locking into long term sub-market priced contracts less attractive for coal miners, who are seeking to diversify their revenue base.

NSW Shadow Minister for Primary Industries and Energy Duncan Gay said it was “incredible that Eric Roozendaal has bungled the coal contracts to such an extent that NSW has now been forced to re-enter coal mining”

“The NSW Liberals and Nationals foreshadowed the need to address the coal contracts back in July 2008 and, unfortunately for everyone in NSW, the state Labor government ignored our warnings,” he said.

“It is now clear the Keneally Labor government has failed at every one of its reform objectives – to promote the interests of consumers, to increase efficiency and competition, and reduce the costs of electricity.

“We urge the Keneally Labor government to abandon its fire sale of the state's electricity assets, which will deliver nothing less than a legacy of problems for the people of NSW.”