Tasmania has been urged to invest more in renewable energy despite the state-owned electricity generator, Hydro Tasmania, facing serious financial challenges.

A defunct carbon tax, uncertainty around the renewable energy target (RET) and a changing climate are all posing threats to the renewable energy producer.

Hydro Tasmania has all but abandoned plans to build the world's largest wind farm on King Island, but insists its future prospects are favourable.

Energy experts now say drier conditions are emerging as yet another threat to hydro-electric generation.

A serious drought in 1968 saw the company take drastic measures to keep its turbines spinning.

Former Liberal senator and Hydro Tasmania chairman, Peter Rae, said it highlighted the state's lack of options.

"That [drought] finished up with having to bring in ships using their generators to generate electricity. We had to then build the Bell Bay oil-fired power station," he said.

It would not be the first time Hydro Tasmania has been forced to diversify.

In 1988 the company stopped building dams in the face of growing opposition to the practice.

"By the early 1990s we had a situation: 'well what are we going to do?' The answer was obvious. Wind," Mr Rae said.

Now 100 years old, Hydro has grown to be Australia's largest renewable energy company.

Mr Rae wants to see the business expand further.

"We've got, for instance, more sunshine hours in Tasmania than they do in Melbourne, about equivalent to what they have in Sydney and far more sunshine hours than Germany, which is a very high-producing solar area," he said.

Renewable Energy Target 'crucial'

Last month federal Parliament scrapped the carbon tax. It is also reviewing the RET.

Australia currently has a goal to source one fifth of its energy from renewables by 2020.

That target proved a boon for Hydro Tasmania, doubling its pre-tax profit last financial year, but comments from federal ministers are making the sector nervous.

Earlier this year, Treasurer Joe Hockey described a wind farm around Canberra's Lake George as "utterly offensive".

Hydro's current CEO, Stephen Davy, said the King Island wind farm project has gone on the back burner.

"The King Island project is hard to see progressing under the current settings," he said.

"We're looking at the King Island project along side other ideas and that broad concept does have a future, we think."

In Hydro Tasmania's submission to the RET review it outlined the challenges scrapping the target would pose:

If the RET was repealed or effectively ended, it would almost certainly terminate any further investment in large-scale renewable energy projects, and put at risk the long-term viability of existing renewable energy assets. This includes more than $2 billion of proposed Tasmanian wind farm opportunities.

Green energy commentator Chris Harries urged the State Government to fight to keep the RET in place.

"The Tasmanian Government should do everything in its power to prevent the RET being diminished or being revoked all together because that would be a huge loss to Tasmania," he said.

"The Premier has a huge burden on his shoulder to make sure he creates huge waves to make sure that doesn't happen, because otherwise he would be letting the Tasmanian population down."

Mr Rae said the uncertainty also jeopardises prospects for a second cable across Bass Strait into the national energy grid.

"There is a good case for looking seriously at the second interconnector being developed very soon, provided the Federal Government will agree to meet its 2020 target," he said.

Tasmania could face an 'energy surplus'

Chris Harries is worried Australia's volatile manufacturing sector coupled with political uncertainty could seriously affect Tasmania's bottom line.

"If in the event of a closure [of Tasmania's aluminium smelter in Bell Bay], and we didn't have another outlet for exporting electricity from Tasmania, we would have an astonishing surplus of electricity we wouldn't know what to do with," he said.

Having too much energy would also hit Hydro's balance sheet.

Last financial year about 70 per cent of its profit came from exporting energy to the national market. It brought $116 million to the state's coffers.

"If we do lose a major user of power in Tasmania, we need to set ourselves up so that we're in a position to be able to respond and take advantage that we have a surplus of cheap electricity that can be sold on the market," said Mr Harries.

Mr Davy said any solution needed to be longer sighted than the political cycle.

"Our experience with Basslink is that it took decades of people thinking about that idea and once Tasmania had committed to investigating the idea seriously in 1995, the commitment to build Basslink didn't happen until 2002 and the power didn't start flowing until 2006," he said.

More calls to sell state assets

Finding capital to invest in such projects is a challenge.

Mr Davy said Hydro's solution had been partial privatisation with wind farms built in the state partly sold to a Chinese company.

"75 per cent of those wind farms have been sold to Shenhua Clean Energy, but we buy from those wind farms, the renewable energy certificates for our retail operations on the mainland," he said.

Hydro Tasmania's $400 million wind farm at Musselroe in Tasmania's north-east. ( ABC: Damian McIntyre )

Mr Rae, who was Hydro chairman at the time, said partly selling the assets was a difficult process.

"The only way we were able to do it was by having the wind farms not regarded as Hydro assets because they aren't water-related, and having those capable of being sold or partially sold, joint ventured," he said.

"So what we were able to do was gain some capital for further development by building and then selling an interest in the wind farms."

Mr Rae said he saw benefits in the state selling assets like Hydro Tasmania.

"I've had the view for a long time that what could happen with Tasmanian renewable energy sector, is have the sort of thing that was done with Telstra; that is have it partially owned by government, partially owned by the private sector," he said.

"I don't know of any reason why you couldn't look at the development of a public-listed company which can then gain capital without borrowing against the state."

The Commonwealth has offered Tasmania $600 million to privatise its energy assets. But Mr Harries is not convinced it would be a good idea.

"It's yet to be proven that privatisation delivers what it promises to lower energy prices to consumers," he said.

Privatisation 'up to the Government'

Tasmanian Senator and Greens Leader, Christine Milne, said the offer was an insult.

"The absolute hide of Tony Abbott and Joe Hockey to turn up in Tasmania and try and offer incentives to sell off the Hydro, when it is Tony Abbott that is smashing the profitability of the hydro... it was totally wrong to abandon carbon pricing," she said.

Mr Davy said that, as the company's CEO, it was not for him to comment on how Hydro would go as a privately owned enterprise.

"Our job at Hydro is to run the firm as best we can. It's really up to the people of Tasmania and the Government of Tasmania to decide if they want the business privatised," he said.

Privatisation is an unlikely outcome for Hydro Tasmania, with the State Government rejecting the Commonwealth offer.

Mr Davy said the Government had, instead, given Hydro instructions to look at existing assets.

"The Government of Tasmania has encouraged us to think about how we can get more out of the Hydro system as well," he said.

Pipes used for the generation of electricity by Hydro Tasmania ( Tony Briscoe )

"That wouldn't involve building new dams. It would involve making our power stations more effective."

He said the company has spent the past decade upgrading infrastructure.

"What we're doing with that $70 million a year is mostly we're lengthening the life of the asset so we're reinvesting in parts that need replacing mid-life or end-of-life," he added.

"We're also upgrading the performance as well, but the hydro plants are already quite efficient, so when we're going in and upgrading, we're increasing by 2 to 5 per cent the efficiency of each power station."

Power consumption in Australia has reduced in recent years; another sign the company has tough times ahead.

"It would be a disaster for the future of this state, if we don't take advantage of the things we're good at," Mr Rae said.

"Of the things which we lead the world in and of the things which we've got the resources to do."