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S&P winners not yet clear in changing electricity sector

Monday 2nd May 2011

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The Electricity Authority's looming response to a price spike in the wholesale electricity market could force a reassessment of the electricity sector's risk profile, Standard & Poor's says in a report that struggles to identify winners in the restructured industry.

"From a credit perspective, it isn't yet clear which companies would flourish under the new evolving electricity industry structure," S&P said.

On March 26 spot electricity prices rose to an unprecedented $20,000 per megawatt hour during a planned transmission outage in the North Island, hurting some market participants.

The volatility in wholesale electricity spot prices was a concern, S&P said.

"Indeed, the Electricity Authority's looming response to the abnormal prices recently experienced may lead us to reassess our view of the sector's business risk profile," S&P said.

S&P also said that operators face uncertainty from the possible partial privatisation of three state-owned enterprises, Meridian Energy Ltd, Genesis Energy and Might River Power, and costs associated with the emission trading scheme.

The credit rating company identified Genesis Energy as facing the greatest competitive risk and said that the soon-to-be completed Government-imposed sale of Meridian's Tekapo hydro assets to Genesis Energy were not a panacea to its weakening business profile.

The virtual asset swap between the three state-owned companies would give them a reasonable retail presence in both islands, potentially leading to greater competition in an already volatile electricity market.

Profits could be adversely affected it companies could not implement planned electricity price increases. After years of high increases the trend could be subdued this year and next year. High customer churn rates were also constraining price increases.

"Importantly, for some gentailers the retail price increases have been inadequate to cover the increasing customer acquisition/retention costs and network charges that have arisen at the same time as volatile electricity prices," S&P said.

S&P does not believe that the Government imposed asset swap redressed the problem that thermal generators were needed to ensure security of supply but they made weak returns when hydrology was strong.

"In our view, the competitive risks are greatest for Genesis Energy," S&P said.

Both Contact Energy and Genesis Energy had to improve their operations and financial profile in the next few years to maintain rating stability.

The timing and funding of new projects also remained a key credit rating factor.



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