Point of Order: Mercury Energy’s hydro power generation has been boosted by a wet half-year

They called it an “atmospheric river”, the weather bombardment which hit NZ’s northern region at the weekend. It exacted a terrible toll on metropolitan Auckland and the rest of the region.

Few living there may have noted a statement from electricity generator Mercury Energy labelled “WET, WET, WET!” This was to emphasise the impact of what the company said had been “the wettest first half-year ever”. Mercury operates the chain of hydro-electricity stations on the Waikato river.

More prosaically, the company said hydro generation in the second quarter of this financial year was 38% higher than in the corresponding quarter in the previous year.

“Weather patterns across the Waikato catchment were very wet, almost the wettest second quarter since records began, extending the wet trend from the start of the financial year which is now ranked as the wettest July to December period on record. This is a marked change from the previous year when inflows trended around the lower quartile. Accordingly hydro generation was 1,281GWh for the three months ended December 31, 2022, up 352GWh (or 38%) on the comparable period the previous year, reflecting these very wet conditions. Hydro spill was significant at 386GWh for the quarter and 675GWh over the half year to maintain lakes within operating levels.”

Because of the big inflows, electricity spot prices have been weak, averaging $47/MWh and $59/MWh in Auckland respectively. However, forward electricity prices remain high with calendar years 2023 to 2026 around or above $190/MWh in Auckland reflecting high thermal generation costs.

National demand growth remains modest, with lower industrial demand driven mainly by reduced electricity consumption by Channel Infrastructure at Marsden Point.

While hydro generation was strong, geothermal generation for the quarter of 606GWh was 61GWh lower due to significant turnarounds (maintenance outages) at Nga Awa Pūrua and Kawerau. Wind generation for the last quarter was 9% higher period due mostly to commissioning of Turitea North wind farm in 2021.

For the financial year, Mercury is forecasting hydro generation of 4,700GWh with much of this additional generation being sold at lower spot prices over the quarter.

Mercury’s quarterly operational update now includes the impact of the Trustpower retail business resulting in higher mass market connections, volumes, and prices versus the prior comparable period. In December 2022, Mercury acquired the outstanding interest of 52% in the NOW broadband business with 24,000 residential and commercial broadband connections.

Mercury has reported connection growth across all product lines, lifting total connections by 11,000 over the quarter (excluding the NOW acquisition).

Commercial & Industrial yields (physical and end-user CfDs) rose by $13/MWh to almost $107/MWh versus the prior comparable period, reflecting the rising electricity forward curve repricing contract renewals.

Not surprisingly, Mercury has confirmed its FY2023 EBITDAF guidance of $620m. Very wet conditions across the Waikato catchment have lifted FY2023 hydro production forecasts to 4,700GWh (from 4,500GWh).

This additional hydro production has mostly been generated during Q2 when spot electricity prices were low due to nationally wet conditions and the Lake Taupō level was actively managed within the consented operating limits. The integration of the Mercury and Trustpower retail businesses is ahead of schedule, but this is pulling forward integration costs from future years into FY2023.

In December 2022, Mercury acquired the remaining shares of NOW New Zealand Limited. Mercury made an initial investment for 48% of NOW back in March 2021.

NOW provides telecommunications and broadband services to 24,000 residential and small commercial customers throughout New Zealand.

Mercury’s net profit after tax for the 2022 financial year was $469m, up $328m on the previous year, driven by the $367m net gain on sale of Tilt Renewables shareholding which was immediately reinvested into the associated acquisition of Tilt’s New Zealand operations and future development options.

That was the year Mercury celebrated becoming NZ’s biggest electricity retailer by customer market share and a truly multi-product utility provider during the year, after the $467m acquisition of Trustpower’s retail business.

The result also reflected a more diversified generation portfolio, with wind generation complementing Mercury’s hydro and geothermal generation, following the acquisition of Tilt’s NZ wind operations and the commissioning of the northern section of the Turitea wind farm.

Mercury Chair Prue Flacks said at the time that the steps the company had taken to build further diversity and resilience meant the outlook for Mercury remained bright.

“Decarbonisation will underpin significant growth for Mercury over the coming decade. With a scale retail business now contributing substantial forward revenue and a strong portfolio of existing and prospective generation assets, we expect to meaningfully contribute to emissions reduction,” said Ms Flacks.

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