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Genesis not worried by lifting of ETS cap

Wednesday 29th August 2018

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Genesis Energy, the country’s largest thermal generator, says it is not worried by proposals to lift the cap on carbon prices in the country’s emissions trading scheme.

The company said it is important that consumers see the true carbon cost in the energy they use and noted that its recent increase in retail natural gas prices – its first since 2013 – is in part a reflection of a 20 percent increase in gas costs due to changes in the ETS regime.

Chief financial officer Chris Jewell told analysts and journalists today that the firm has plenty of options for hedging its long-term carbon exposure but to date has chosen not to use them.

That has been a function of its Rankine strategy, but also the fact that there are cheaper primary ways of accessing carbon. The firm is conscious that the cap may be lifted but “we have lots of different ways of hedging carbon.”

“We clearly don’t want to be paying $50 for carbon and we have no intention to,” Jewell said. “And we’ve got plenty of time to make those decisions.”

Genesis has more than 950 MW of coal- or gas-fired capacity at its Huntly site. Low lake levels increased demand for production from the firm’s dual-fuel Rankine units during the past year and that saw emissions from the firm’s generation activities jump 45 percent to 2.14 million tonnes.

But the company today showed that its carbon exposure is fully hedged out to 2022, and partially hedged out to 2024. During the past year its average carbon cost was $6 a tonne, and that figure rises to $15-$20 in the 2020 financial year and $17-$22 in the 2022 year.

New Zealand carbon units were recently trading at $24.80 a tonne on the spot market, according to OMF. April 2022 contracts were at $27.90.

The Labour-led coalition has picked up a review of the ETS started by the former government aimed at making it more effective, easier for foresters to participate in and open to the addition of agriculture over time. A halving of firms’ carbon bills – introduced in 2009 after the global financial crisis – is being wound out and firms will face their full exposure from Jan. 1. The current cap is set at $25 a tonne.

Jewell said the company expects to be able to fully pass on emission costs from its gas businesses and the Rankine generators. The 400 MW fifth unit at Huntly will take a little longer given the more fixed nature of its take-or-pay gas supply agreements, he said.

Genesis, which also operates the Tongariro, Waikaremoana and Tekapo hydro schemes, is committed to reducing its emissions. It has slashed coal use at Huntly and pledged to stop using the Rankine units routinely by 2025 and entirely by 2030.

Chief executive Marc England told analysts today they can assume the firm will operate two of the three operational 250 MW Rankine units until 2022 – the end date of the firm’s swaption agreement with Meridian Energy. After that the options range from zero to three, and they could be hedged or unhedged, he said.

Two dry periods in the past year saw the Rankines generate 1,042 GWh of electricity, more than twice that a year earlier, with 63 percent of it fuelled by coal.

But only 12 percent of their output was for the company’s customers and that reflects the far greater value the market gets from them than Genesis, England said.

That said, they remain a key strategic asset for the firm and getting the maximum value from them is important.

England said the company has great flexibility to run them on gas, local coal or imported coal, and the firm is also looking at other ways to contract their capacity longer term.

“We don’t see recontracting swaptions as the only path forward for Genesis,” he said.

Genesis has been expanding multi-fuel offerings to businesses and homes and has developed new digital tools to give consumers greater control of their consumption. It has also been trialing solar panels, batteries and electric vehicles to see how families and firms may use those technologies in future.

England said take-up of those services will be important for the sector in the future but that may not really get underway until early in the new decade.

In the meantime, the firm will press on developing tools and services that will help establish it as an energy management firm – rather than an energy supplier.

“We’re not rushing to create new products for customers around solar, storage and EVs.”

“It’s more about prioritisation of our effort to maximise the value of that when it happens,” he said.

“We don’t need to wait for a solar panel on a roof, or an EV being plugged into a home, to help consumers manage their energy choices through technology.

“By creating that platform with what’s available today, we’ll be well positioned to be the energy manager of choice when someone wants a solar panel on their roof or a car plugged into their garage.”


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