Electricity investment not worthwhile at current prices, Contact boss says

Tuesday 6th March 2012 2 Comments

Electricity consumers are paying less than the cost of secure supplies, making the industry unattractive to investors, says the chief executive of Contact Energy, Dennis Barnes.

Speaking to the New Zealand Downstream energy conference, Barnes said current rates of return on electricity industry assets was “at a level that commercial investors shouldn’t continue to invest in.”

“I borrow money at 8 percent and I pay 6 percent to shareholders,” he said during a question and answer session with industry CEOs. “That tells me the industry isn’t covering its cost of security. I’m not complaining, just stating the facts. Good businesses should respond to that.”

He feared the New Zealand industry would lurch between complacency followed by policy changes driven by supply crises.

In the meantime, “it’s clear to me fronting up to an eight-man board and asking for $300 million (to build a new power station) isn’t something I will be doing in the next few years.”

However, the CEOs generally agreed the current weak electricity demand growth and a surplus of generation capacity would make higher margins difficult to achieve in the short to medium term.

“It’s going to be a long hard slog,” said Barnes.

Meridian Energy Mark Binns expressed concerns about whether the stress testing regime being proposed by the Electricity Authority would create the degree of security it was intended to achieve.

Energy Minister Phil Heatley opened the conference by acknowledging the extent of New Zealanders’ concern that more oil and gas exploration threatens the country’s environmental integrity.

“New Zealanders are very engaged in how we get economic advantage with the environmental rules and regulations that are put in place.”

He declined to be drawn on whether the government would adopt a recommendation of the Green Growth Advisory Group for a Norwegian-style sovereign wealth fund, which would collect royalties from oil and gas development for investment in public infrastructure.

“Whether we create such a fund to make that (economic benefit from oil and gas) more ‘line of sight’ is something we are obviously considering,” Heatley said.

He was critical of gas industry players’ slowness in providing information required to fully understand last year’s Maui gas pipeline outage.

“I’m disappointed the companies haven’t surfaced with all the information and I have asked why that is.”

BusinessDesk.co.nz

Comments from our readers

On 7 March 2012 at 8:49 am Ron Palmer said:

Something is seriously wrong in New Zealand with the cost of electricity. The public pay through the nose when compared with other counties such as Australia,USA, including Hawai, and even Tahiti where most of the power comes from diesel powerd generation.

On 10 March 2012 at 3:26 pm mark mead said:

I Have to Agree with Above Comments! 30 Years ago tipping water Over A dam seemed like a Ingeneous idea! Green And Highly Effecient!! And Power Bills Were a 3rd of the Uk! then Nuclear came a long!! and i Guess Must outstrip our efficiency"s! Or is this a Top Heavy Industry !! CAsh Cow! Controlled By double dipping Govt!!