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Contact in talks on 13MW dairy boiler project

Wednesday 16th October 2019

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Contact Energy says it is in talks with a dairy producer on a 13 megawatt electric boiler as part of its strategy to benefit from the country’s efforts to decarbonise heavy industry.

Electrification of the country’s South Island dairy plants from coal to electricity would increase peak demand by about 600MW, the company says in a presentation for international investors. That is roughly equivalent to the load of the Tiwai Point aluminium smelter, the country’s biggest power consumer.

Contact says it is a world-class geothermal operator and well-positioned to supply the extra demand expected from the electrification of transport and industry during the next 30 years.

Consents at its geothermal fields around Taupo are sufficient to allow it to expand production there by up to 67 percent.

“The continued substitution of fossil fuels with renewable electricity will drive demand for renewable generation development.”

Contact shares fell 0.3 percent to $8.73, trimming its gain this year to 48 percent.

New Zealand’s biggest dairy processors, Fonterra and Synlait Milk, are already trialling a shift to electricity. Fonterra is converting its Stirling cheese plant near Balclutha to electricity, while Synlait earlier this year commissioned a 6MW electrode boiler as part of an expansion at its Dunsandel plant.

In its presentation, Contact estimates conversion of dairy sector boilers could increase power demand by about 4 terawatt-hours by 2050. National demand is currently about 40TWh and may reach 57TWh by 2050 based on government estimates. Electric vehicle uptake could provide 6TWh of that extra load.

Contact is already considering options to expand generation at its Tauhara geothermal field to meet that potential industrial demand growth and retire its older, higher-cost gas-fired plants.

Other generators, including Mercury NZ and Tilt Renewables, are building new wind farms to meet that demand growth and in expectation that Contact will shut its 23-year-old 377MW Taranaki Combined Cycle plant in the near future.

In its presentation, Contact says extending the life of the plant – TCC – is expected to cost about $80 million.

It notes that Tauhara will operate at a long-run marginal cost of less than $60/MWh – less than the next tranche of wind generation - and that its geothermal operations overall are cheaper and more reliable than TCC.

Carbon costs are rising and in the past year, gas for generation cost $76/MWh, up from $62/MWh the year before and $59/MWh in 2017, it noted.

Contact says it will decide the future of TCC early next year, at the same time it decides on the scale of its next investment at Tauhara.

At the full 250MW, the project would probably cost about $1 billion and could lift operating free cashflow by more 25 percent, it says.

Contact notes that the timing and scale of any development will depend on the outcomes of appraisal drilling currently underway, demand growth and the opportunity to economically substitute its ageing thermal plant with geothermal.

Early, smaller-scale development would probably cost less than the $4 million a MW anticipated for the full 250MW project, Contact says.


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