Saturday, August 27, 2022

Point of Order: Power without the pain of unbearable prices – how our electricity companies have been performing

The big power companies on which New Zealanders depend for energy supplies in their homes, factories and farms have had a remarkable season. But unlike their counterparts in Australia and the United Kingdom they have navigated it without inflicting the same sort of pain on their consumers in soaring prices.

An earlier post from our authoritative London writer this week on Point of Order charted the UK issues. The lessons are instructive.

Here in NZ, consumers may have complained, too, but by comparison they enjoyed plentiful supplies without the problems when they become too dependent on wind and solar power as a result of the drive to decarbonise.

Companies such as Meridian are already fully renewable in their capacity while Contact and others are adding to their renewable generation. Besides its Tauhara project, Contact plans to build a new $300m 5.1MW geothermal power station besides its Te Huka power station, near Taupo.

Genesis, which operates the coal- and gas-fired 953MW Huntly power station, NZ’s biggest by capacity, is on target to meet its goal of sustainably reducing 1.2m tonnes of carbon by 2025.

Retiring CEO of Genesis Marc England says that as New Zealand transitions to an even higher level of renewable electricity, thermal back-up would remain essential to maintain security of supply through the transition, even though it would be used less often.

“Our forecasts show New Zealand’s electricity generation will be 96-98% renewable by 2030, but there will still be times when it doesn’t rain, the wind doesn’t blow, and the sun doesn’t shine.”

Huntly can continue to provide security to the renewable electricity system day-to-day for the country’s energy consumers to decarbonise over the long term, he said.

“However, the security Huntly provides needs to be supported by appropriate commercial agreements and market settings.”

Marc England, who is moving to work in the Australian electricity industry, has done a superb job in his term at Genesis., a company that was described as the “runt in the litter” at the time the Key government sold off 49% of each of Meridian, Mercury, and Genesis.

Genesis reported operating earnings up 24% to $440m in the June year – the top end of its guidance range – aided by favourable derivative contracts and good hydro-generating conditions.

The result compared with ebitdaf of $355m in 2021 – which was depressed by a $33m arbitration cost relating to prior years – and was up 6% on an adjusted basis.

The company forecast its ebitdaf to be around $455m in the current year, subject to hydrological conditions and gas availability.

England sees more growth for the company in the current year– and still more volatility in the electricity market.

Contact, in its result, reported ebitdaf down 3% to $537m.

Chief executive Mike Fuge said it was a “solid” financial performance despite “unpredictable and volatile” trading conditions.

“This unpredictability has been compounded by a combination of global energy supply and security concerns, exacerbated by the impact of Russia’s invasion of Ukraine, with subsequent unprecedented increases in international energy prices, including coal, which has also coincided with a reduction in gas output from the domestic gas market.”

Contact, along with Meridian Energy, are the main suppliers of power to the Rio Tinto majority-owned Tiwai Point aluminium smelter.

Rio had previously advised that it planned to close the plant late in 2024.

Contact said Rio was looking to continue operating its unique low-carbon smelter at Tiwai Point beyond 2024 and had announced it has begun exploring potential pathways with electricity generators.

“Contact has been approached by Rio, and we will constructively engage,” Fuge said.

“It’s still early days, but we are encouraged that the smelter’s owner recognises the renewable advantages of our electricity system and Contact supports their engagement approach with key local stakeholders.”

Meridian and Contact have entered into a “swaption” and a contract for difference (CFD).

The two financial contracts provide Meridian with additional portfolio flexibility and are for a two-year period starting from January 2023.

Fuge said Contact had been saying for some time that the role of thermal assets would change from running baseload – or continuous power – to providing risk-management support; backed by fixed insurance-style payments.

Contact has championed the idea of rolling all the country’s coal and gas-fired thermal generation assets into one under “Thermal Co”.

“Contracts like this one show the merits of Thermal Co – an industry-wide entity that could provide the risk management support the market needs, at the lowest cost with the lowest carbon emissions while new renewable generation is built.”

The arrangement with Meridian demonstrated the efficiency of the market and would reduce the use of coal.

Contact runs the Clyde Dam on Lake Dunstan and has extensive geothermal capacity in the central North Island.

Meanwhile Mercury was said by the NZ Herald headline to have ended the financial year as a “totally different beast.”

After a transaction involving Tilt Renewables, it has become the country’s biggest wind power generator.

Mercury said the addition of wind generation and performance improvements helped take its ebitdaf to $581m, up $118m on the previous year. The results reflected a more diversified generation portfolio, with wind generation now complementing its hydro and geothermal generation. It is targeting $800m this year.

CEO Vince Hawksworth spread good cheer to the company’s investors and consumers saying:

“We are embarking on a major period of growth and are well positioned to thrive in a rapidly changing world that is increasingly recognising the urgency with which we must decarbonise”.

Meanwhile Meridian chief executive Neal Barclay reported the year had been challenging, but successful, for his company .

“We’ve navigated another significant drought, grown our customer base, built out our development pipeline and maintained momentum on the construction of our Hawke’s Bay wind farm Harapaki.”.

The company’s bottom line was lifted by a $214m gain on the sale of its Australian business and a $281m rise in the value of hedging contracts, used to insure against market volatility.

Barclay said Meridian consumer and corporate power sales continued to increase and the company was continuing to focus on customers, particularly the vulnerable.

It was also looking at developments to decarbonise the energy and lift renewable energy, with projects totalling 2.4 gigawatts, including a battery storage system and solar farm in Northland, and a wind farm in Hawke’s Bay.

“The team working at Harapaki have navigated a number of challenges successfully. The impact of these challenges has meant that we’ve had to spend more money on this project than anticipated to maintain the construction timeline,” Barclay said.

It is working to help industrial users such as dairy factories switch to renewable sources.

Meridian is working with Contact Energy on possibly using South Island power to produce green hydrogen, with Australian firms Woodside Energy and Fortescue Future Industries, shortlisted to develop detaIled proposals.

There was no discussion of what, if any, progress was being made in talks with NZ Aluminium Smelter on possible new supply contract after the current one expires at the end of 2024.

So as Point of Order surveys the big gentailers there may be satisfaction with what has been achieved, but as Transpower chairman Keith Turner told the Herald last month New Zealand’s power generation system could do with more capacity.

Marc England disputes that saying there is enough to go around – for the moment at least.

“That being said, it is an issue that will grow,” he said.

“As time goes on, New Zealand is going to have to make sure that it has the right market incentives to enable what we call fast-start peaking – so that it can turn on generation quickly in order to meet demand every time there is a cold evening.

“We think it is the wrong paradigm to say that the market is either not working or that it is perfect.”

The New Zealand electricity market has done its job effectively over the last 20 or 30 years in delivering electricity reliably to consumers. It has not had the blackouts that plagued the country in an earlier era.

Consumers have got new protections, as the Electricity Authority showed earlier this month. The Authority has changed market rules to ensure consumers are not affected by very large power contracts after last year’s Tiwai Point deal underlined the potential for price discrimination.

The independent statutory body said consumers would be protected from potentially paying more than they should due to the impact of very large electricity contracts on wholesale prices under urgent changes announced today.

The authority has made an amendment to the Electricity Industry Participation Code 2010 to prohibit generators from giving effect to a contract of net 150MW or more unless certain conditions are met.

The amendment will be in place for nine months while a proposed permanent amendment is consulted on, the EA said.

Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton

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