Dry spell shows need for change

By Grant Bradley

Contact Energy's costly exposure to a dry winter in the deep south is putting renewed focus on its $3 billion plans to broaden its generation portfolio.

Contact last week announced a 1 per cent fall in net profit for the year ended June to $237.1 million.

The gas and electricity company had needed to supply South Island retail demand by buying electricity from the spot market at a "significant" loss during some periods as its hydro lakes hit near-record low levels.

In addition to the low hydro conditions, transmission constraints in the lower North Island and across the interisland HVDC link resulted in periods where Contact was unable to supply its South Island demand, and was required to buy electricity from the spot market at a loss.

The company now has 1400MW of new generation either under construction or on the drawing board, with an emphasis on renewables.

Last Wednesday, Environment Minister Trevor Mallard said he intended to call in Contact's proposal for a 180-turbine wind farm near Raglan. This means the planning hearing for the Hauauru ma Raki project of up to 540MW will be referred directly to a board of inquiry instead of the relevant regional and district councils.

Wind power is growing rapidly in NZ and around the world, leaping from just 6000MW to 94,000MW in the past 10 years, although accounting for just 1 per cent of global generation.

Contact's chief executive David Baldwin said the decision to use the call-in powers should remove the possibility for unnecessary delays while preserving the right for public participation.

The company also has resource consents for a combined-cycle gas-fired power station at Otahuhu and another at Stratford which could be quickly developed if required.

Baldwin said the second half of the last year had been challenging and somewhat unique.

Hydro generation was lower by 135 GWh (gigawatt hours), or 4 per cent, from the Clyde and Roxburgh dams, reflecting the dry conditions.

Thermal generation was lower by 61 GWh, or 1 per cent, mainly due to the planned Taranaki combined cycle maintenance outage and the decommissioning of New Plymouth, which was partly restored mid-winter as the power shortage intensified.

But geothermal volume rose by 212 GWh (11 per cent), as the benefits of the drilling programme on the Ohaaki steam field were felt and Contact made use of the extra steam production allowed under the Wairakei resource consents renewed in May last year.

State-owned enterprise Mighty River Power also has extensive geothermal work underway.

It hurried into generation its $300 million 90MW Kawerau plant to meet winter shortages and has investment in new geothermal generation capacity at both Rotokawa and Mokai in the Taupo region.

Baldwin said the price of gas would be affected by the emissions trading scheme - no matter what shape it takes - thus putting the onus on renewable development.

Like all generators, Contact is concerned about the constrained national transmission grid which has limited inter-island transfer of electricity and is constrained around the lower North Island.

Transpower has approval to spend up to $672 million replacing half of the interisland link but it will not be at full capacity until 2014.

Baldwin said that with most of Contact's generation in the North Island and a portion of that capacity being unable to flow to the lower North Island and on to the South Island, the company's South Island load - about 50 per cent of Contact's total - is, from time to time, being met through electricity purchases from the spot market at a loss.

This had made its performance for the first two months of the current financial year "well below expectations".

In addition Contact faces higher gas prices. After an $87 million rise in the past year, gas costs are expected to rise by a further $40 million in the current financial year as Contact's Maui gas is exhausted and replaced with more expensive right of first refusal and other gas arrangements

Contact and Australian parent company Origin Energy this year bought Swift Energy's New Zealand oil and gas assets which gives Contact the rights to develop the mostly depleted Ahuroa gas field into an underground gas storage facility, which is expected to be operational by 2010.

This will enable a flexible supply of gas to power the company's Stratford peaking project, and its other gas-fired plants, plus enabling it to optimise the value of its contracted gas supplies.

Contact shares closed at $8.36 on Friday.

- NZ Herald

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