Higher prices dominate energy sector in 2004

By Adam Bennett of NZPA

Thursday 30th December 2004

Higher prices were the dominant theme of the New Zealand energy sector this year.

Kiwis paid a lot more for their electricity while the five major companies they buy it from enjoyed a red letter year.

Among the state-owned generator-retailers Genesis Energy posted an $80.1 million for the June 2004 year. Mighty River Power also had a strong profit of nearly $100m. Meridian's profit rose over 20% to $132.9m in the year to June.

In the private sector, Contact Energy posted a 22 surge in profit of $144.04m for the September year, while TrustPower had a 32% rise to $61.9m for the March year.

Contact's shares were at $6.30 today, from a year low of $4.99 in March, while TrustPower was at $5.42 from a low of $3.10 in December last year.

All five companies hiked retail charges way beyond the inflation rate this year.

Genesis and Mighty River both increased prices about 9% in the June 2004 year to all customers.

Meridian raised charges by about 15% over the period and announced further increases effective from September. Those increases were in line with those of TrustPower and Contact.

The companies defended price hikes with a variety of reasons: lack of rainfall impacting on hydro lakes; higher wholesale electricity and gas prices and, most frequently, the need to fund investment in new generation.

New Zealand reliance on hydro-electric generation leaves it at the mercy of the occasional dry spell down south, the key Maui gas field is running out faster than expected and our surging economy has seen growth in electricity demand outstrip expectations.

But while, according to the power companies, New Zealanders are now paying more to fund new generation, there was little tangible progress on that front.

Genesis began construction of a new 385 megawatt (MW) gas-fired plant at Huntly, scheduled to produce electricity from early 2007.

Meridian, which pulled the plug on its controversial $1.2 billion 524MW Project Aqua hydro scheme in December opened a 55-turbine wind farm on the Ruahine Ranges.

Meridian chief executive Keith Turner offered a ray of hope to consumers that his company was finished with big price hikes.

Meridian says wind will be cheaper than coal or gas and New Zealand could potentially generate electricity at prices of 6c/kWh or lower.

But the rapid depletion of our local gas reserves mean Genesis and Contact, which also has substantial gas fired generation, are now pushing imported liquified natural gas (LNG) as the best way forward.

Genesis, which has not ruled out more price hikes, said LNG was not much more expensive than local gas. Some commentators said LNG would translate into generation at a cost of about 10c/kWh.

However, a number of commentators were wary of LNG as it would leave New Zealand at the mercy of yet another volatile internationally traded commodity.

The danger of this was underlined in September and October when a number of factors, including insurgency in US occupied Iraq and rebel activity in Nigeria, disrupted international oil supplies.

That sent prices over $US50 ($NZ70) - close to levels seen during the Arab oil embargo of 1973-4.

Local fuel prices spiked to all time highs of $1.26 a litre for 91 octane petrol, $1.31 a litre for 96 octane and 85c a litre for diesel.

Although this time around the local economy was largely shielded by the strong local currency and high commodity prices, on-going geo-political uncertainty and spiralling demand from emerging economies means higher longer-term oil prices look likely.

Meanwhile, at the greener end of the spectrum, local scientists predicted wave energy devices could potentially deliver 40 times the country's current generation capacity at between 10c and 20c/kWh within the next decade.

But at that price, the technology depends on the imposition of carbon taxes on thermal generators for economic viability.

The success of an international carbon tax and carbon credit system hinges on the participation the world's major greenhouse gas producers. While Russia signed up to the Kyoto Protocol this year, the US, which currently emits about 36% of the world's greenhouse gases remains opposed to it.

Back in New Zealand, our biggest power consumer Comalco, which operates the Tiwai Point aluminium smelter, was understandably critical of government support for Kyoto.

The smelter uses about 15% of our electricity but also emits greenhouse gases as a by-product of the smelting process.

There were suggestions the country's energy worries would melt away if the smelter, which employs nearly 1000 and earned about $1 billion in export receipts last year, closed. Comalco next year begins new power supply negotiations with Meridian.

Rumours of a government cost-benefit study on its economic impact were quickly quashed by Energy Minister Pete Hodgson.

Hodgson attracted plenty of flak this year for the government's role in the energy sector.

In November a report by Auckland University economists concluded the taxpayer would likely have to foot most of the bill for new power stations because government policy was discouraging private investment.

In August it emerged the government was underwriting part of Genesis' new gas-fired Huntly station.

Electricity Commissioner Roy Hemmingway said the deal favoured a state-owned company over others and risked driving new private investment out of the sector.

A couple of months later the Electricity and Gas Industries Act became law giving Mr Hemmingway and his commission some real more teeth although he has yet to show them.

The commission was established after an earlier attempt by the big electricity companies to set up a system of self-regulation failed last year.

But it earlier drew some criticism for a lack of consumer representation on its advisory groups. It has just three designated consumer representatives among the 45 appointments to the groups. The balance of the groups are largely representatives from energy generators, retailers and lines companies.

Although the government may have been accused of discouraging private investment in the industry this year, Australian energy giant Origin Energy was not put off.

In July it purchased US energy giant Edison Mission's 51.2% controlling stake in Contact Energy.

Origin, Australia's second largest power company with a market cap of over $A4 billion, also bought up large in the New Zealand gas sector.

It bought half of the Kupe natural gas field and then gained control of New Zealand's largest distributor of liquefied petroleum gas (LPG) Rockgas. Origin also has a number of on-going gas exploration projects here.

Australia's buy-up in the New Zealand energy sector continued when Prime Infrastructure succeeded in its very messy bid for profitable community-owned lines company Powerco.

Prime's purchase included the New Plymouth District Council and two community trusts' majority stake.

Prime's $680 million offer for company ran into some community opposition. But it was almost derailed completely after a controversial Takeovers Panel decision which favoured overseas investors over local minority shareholders.

When Finance Minister Michael Cullen "reluctantly" approved the deal under overseas investment rules, he said the deal had "barely met national interest criteria.

But some power sector assets at least returned to New Zealand ownership in December when Auckland lines company Vector secured two-thirds of gas pipelines company NGC Holdings after completing a $851 million deal with former majority shareholder Australian Gas Light.

Vector's purchase was prefaced by bitter political infighting at the company's owner, the Auckland Energy Consumer Trust.

Although most power sector hand-wringing this year was over meeting the country's future electricity requirements, the condition of the electricity network was tipped by some to emerge as a major headache in the future.

Some commentators have warned a lack of maintenance of national and local electricity transmission and distribution infrastructure could result in future systems failures similar to those suffered in recent years on the east coast of the United States and in New Zealand in the 1990s.

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