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[sharechat] Focus on CEN(Part 2) - Electricity Mkt

From: "" <>
Date: Thu, 29 Apr 2004 12:23:03 +1200

I am sure that none of those who took part in the float of Contact 
Energy in April 1999 would have had any inkling as to what would 
happen next.     The remainder of Electricorp was split into three: 
Mighty River Power, Meridian and Genesis Energy.    Transalta from 
Canada came to this country and went.   The largest retailer in the 
country, by then renamed 'On Energy', and Australian owned, 
effectively collapsed.    The Maui gas field, which powers the largest 
thermal stations in the country, gave notice that it was coming off line 
early.  Then just last month the largest scale hydro electricity project in 
a decade Meridian's 'Project Aqua' was abandoned in the planning 

One might argue that the power market landscape has changed so 
much, that reaching back into five years of history of Contact Energy 
ownership will give very limited insight as to what will happen from 
here on.   Contact Energy, together with the other retailers, have 
learned the lesson that generating capacity should be matched to an 
end line customer base.   Not to do so, as 'On Energy' found to their 
cost, leaves an energy company at the mercy of weather and 
wholesale spot power prices.   If the power a company generates is 
coupled with end line customers' demand it makes an energy business 
easier to analyze.   The old generator/retailer distinction still nominally 
exists but it is clear that the major players have looked to vertically 
integrate the electricity market.  One-off earnings wobbles, such as we 
saw in FY2001, due to supply/demand mismatch exasperated by poor 
weather will simply not happen again.  Where they started out as the 
poor cousin of a much larger Electricorp, Contact Energy is now a 
clear "number one" in the electricity market.  That number one status 
gives Contact Energy management a market power that they did not 
have before.

The key driver of the electricity market is that forward prices are 
determined by incremental new demand.      That makes any existing 
power stations suddenly very valuable in a way that was not fully 
foreseen at the time Contact Energy was floated.   To fully understand 
this value aspect of Contact, this point needs further explaining.


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