Despite last week’s black-outs, the power company says splitting up the big electricity gentailers is the wrong answer; instead their healthy profits should drive investment in energy security and decarbonisation
Contact Energy has this week reported a pre-tax earnings increase to $553 million and Mercury has reported $463m, amid questions about the big power firms profiting at consumers’ expense in a broken electricity market.
There have been mounting calls for the government to split the generation and retail arms of the big gentailers: Contact, Mercury/Trustpower, Genesis and Meridian. But in an interview with Newsroom, Contact chief executive Mike Fuge says he doesn’t see that as an immediate regulatory risk.
He and chief financial officer Dorian Devers warn splitting the gentailers might have exactly the opposite effect to the one intended. New Zealand needs overseas capital to build renewable generation, and it’s only the big listed companies that can access that.
With the loss of economies of scale, vulnerable electricity consumers might end up paying more for their power, they argue. Rather they point to their own plans as offering lower prices, such as this week’s new plan offering free power between 9pm and midnight.
The Community Energy Network is dubious about the gentailers’ promises. It has added its voice for calls to restructure the electricity market to allow newer, smaller, not-for-profit players to enter.
The grouping of health, housing and community groups supports proposals to split the gentailers, marked by retailer Flick Electric’s 7,200-strong petition – but it worries such a wholesale restructure of the power companies or the hedge contract market would take too long.
It comes after power was cut to thousands of homes on their coldest night of the year, last week, in a critical breakdown between generators and network operator Transpower that sparked tough Ministerial questions about whether the gentailers were chasing top dollar at all cost.
Two small power companies have lodged a formal complaint with the Electricity Authority, and called for the gentailers to be split up.
Bill Heaps, an independent director of the Community Energy Network, agrees with that call, but says consumers can't wait; they need energy security and lower prices now, not later.
The gentailers aren't incentivised to offer low prices to residential consumers, he argues.
So Heaps is calling for guaranteed low-priced hedge contracts to allow not-for-profit community energy retailers to enter the retail market.
"The quantity of community support hedges should be sufficient to enable all consumers in hardship to access the lowest available prices on the most favourable terms, as well as provide sufficient additional capacity to enable community retailers to maintain viable electricity retail operations."
He argues there are about 2.21 million connected customers in New Zealand, and according to the Government’s Electricity Price Review, more than 100,000 of those families are experiencing energy hardship.
"Ultimately, any community support hedge arrangement that emerges must deliver electricity prices to people in hardship at the lowest price which is offered to any other customer."
– Bill Heaps, Community Energy Network
"Implementing the community support hedge arrangement may need Government enforcement through legislation," Heaps says.
"However, it is possible that a government statement indicating its intent to implement future legislation would be sufficient to encourage the large generator retailers to negotiate more favourable hedges.
"Ultimately, any community support hedge arrangement that emerges must deliver electricity prices to people in hardship at the lowest price which is offered to any other customer."
Contact Energy delivered its full year result to shareholders yesterday. Its net profit for the 2021 financial year is up 50 percent to $187m.
Speaking afterwards, Mike Fuge strongly rejected criticisms that Contact had taken advantage of the high electricity demand last week by failing to fire up additional generation capacity like its Taranaki Combined Cycle gas plant at Stratford.
"We could not bring the TCC on in the timeframe that was made available; it requires 72 hours to fire up," he told Newsroom.
"We deployed every available element of generation that we had, as quickly as we could, including our new product Demand Flex which was deployed into the reserves market. Our traders acted with the highest standard of integrity, though-out, and we're very confident of that.
"We're happy for the investigation to take place. But we think there are more important things the market should get on with, right now."
– Mike Fuge, Contact Energy
At both Contact and Genesis, there has been some unhappiness at retailer Electric Kiwi and wholesaler Haast Energy going running to the Electricity Authority.
Their complaints are seen by some as sour grapes, after they failed to adequately hedge their power contracts or to invest in their own generation capacity. But Fuge was more circumspect: "We're happy for the investigation to take place," he said. "But we think there are more important things the market should get on with, right now.
"I'm treading a fine line here. We encourage and we value the development of the tier two retail market. I, as an individual, passionately believe in the value of competition in driving costs down and ensuring the right outcome for the consumers.
"I think there is frustration at the nature of the claim because, certainly from our perspective, it does appear to be spurious. And when people end up on the wrong side of hedges, that's hard. I think all of us who participate in this industry have had that experience. But the best thing you can do it learn, and make sure you are hedging appropriate the next time."
Did the gas and coal firms fire up?
Just this morning, the Electricity Authority has ruled on a similar undesirable trading situation complaint, from 2019, by resetting prices from December of that year.
That will serve as encouragement to small players who feel badly treated by the gentailers.
Ahead of that ruling, Dorian Devers said responding to such complaints – which had been laid ever more frequently – was massively intensive on staff resourcing, especially if the complaints weren't well thought-out. "It's a waste of effort," he said.
"The current market conditions illustrate the challenge of ensuring the right balance is struck between investment in decarbonisation, security of supply, and ensuring energy is affordable ... One wind farm a year is required to be built to achieve net zero carbon emissions by 2050. Delivering that outcome, while maintaining security and affordability should be foremost in the Government’s mind.”
– Prue Flacks, Mercury chair
Though Contact says there wasn't sufficient warning to fire up its TCC plant at Stratford, both Contact and Genesis already had 50MW gas peakers running as demand peaked. Genesis also had two of its three big 250MW coal-fired Rankine units operating.
To one extent, both companies will feel quietly vindicated; they have been unwavering in their insistence on the need to keep coal and gas generation as a back-up to renewable for at least 10 more years.
And after four years of Government pressure to decarbonise New Zealand's electricity generation, last week's black-outs sparked an unexpected about-turn: Energy Minister Megan Woods, with the Prime Minister at her side, demanding to know why Huntly's third coal unit wasn't fired up.
Contact's pre-tax earnings were up 25 percent; Mercury's were down 6 percent. That reflects the low lake levels this year; to some extent, the hydro generators' woes were the thermal energy generators' gains. Mercury says its result was adversely impacted by a sustained period of low inflows into Lake Taupo; Contact says its Clyde Dam was less impacted by low water levels.
“Mercury has delivered a resilient financial performance in the face of some challenging market headwinds,” said Vince Hawksworth, the company's chief executive.
He highlighted the company's "ambitious" acquisitions as providing it with additional scale and capability in a rapidly evolving landscape.
"I think for the country, it's important that we start the journey towards decarbonisation of the electricity sector. Whether it's achieving the 100 percent by 2030? At some point in the next two decades we're going to have to make the move. And so ensuring an orderly transition is the number one priority."
– Mike Fuge
The acquisition of Tilt Renewables’ New Zealand assets would increase Mercury’s total annual generation by over 1,100GWh, he said. Construction of the Turitea wind farm also continued, with the transmission line, grid connection and northern wind farm substation fully commissioned. And Mercury had also reached agreement to acquire Trustpower’s retail business.
Meridian is to report its full-year results on Wednesday, August 25. Genesis, the country's biggest retailer, has traded on lower lake levels by running its Huntly coal and gas units all winter. It will report its full-year results the following day.
But in response to questions from Newsroom, Genesis lodged an early blow to Contact's hopes to offload all the country's gas and coal generation assets into one big company dubbed ThermalCo. “Genesis is not in discussion with Contact regarding their ThermalCo idea," a spokesperson said.
An end to gas and goal
ThermalCo is a bold proposal from Contact to pull together all those non-renewable assets, which will ultimately be phased out as the country decarbonises its electricity sector. They would be merged into a single entity that might be owned by the existing market participants, a JV, another player, private equity, institutional investors or even government.
Both Contact and Genesis have said their goal and gas assets will be needed for at least 10 more years, but Contact says it might not be an owner.
Mike Fuge said: "We've opened up initial conversations with both government and regulators, and possible market participants. At the moment everyone is very curious about how it could develop."
He declined to comment on whether Genesis was one of those curious market participants.
"We're totally agnostic as to the ownership structure. What's important if the commercial structure, and the transparency and robustness of the commercial arrangements that market participants enter into.
"If it's a commercial opportunity for our shareholders, then we'll obviously do the right thing by our shareholders," he added.
"But if you look, we sold our Ahuroa storage facility a couple of years ago, and entered into commercial arrangements with FirstGas, and we haven't missed a beat. Equally we sold our Rockgas LPG business, but we still offer LPG as a product to our customers – it's just the provider is not us. So we are very relaxed about a range of possibilities."
"We could just go, right, we're going to get out of thermal and make it everyone else's problem. And then we look great as our carbon emissions go down and we can say we're 100 percent renewable. But that doesn't help New Zealand."
– Dorian Devers, Contact Energy
So does Contact want to get out of non-renewable thermal electricity? "I think for the country, it's important that we start the journey towards decarbonisation of the electricity sector. Whether it's achieving the 100 percent by 2030? At some point in the next two decades we're going to have to make the move. And so ensuring an orderly transition is the number one priority."
The 25-year-old TCC gas plant has been shut down since July, prompting questions from Transpower about why it could not be fired up in anticipation of last week's foreshadowed cold nights and high demand. Contact intends to decommission it entirely by June 2023 – and run it as little possible until then.
Tauhara geothermal power station, near Taupō, is intended to replace its baseload generation, as the company gradually exits non-renewable energy. Dorian Devers added: "We try to be very genuine about this. We could just go, right, we're going to get out of thermal and make it everyone else's problem. And then we look great as our carbon emissions go down and we can say we're 100 percent renewable. But that doesn't help New Zealand.
"New Zealand needs thermal to firm the renewable generation, until 2030. And we want that to happen in the best, and most cost-effective, and least carbon intensive way. I think the market will reward us for doing the right thing, as opposed to just saying, we're out, it's someone else's problem."
