Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Multiple factors at work in Mighty River share prices

Weather, demand, governance and risk management among drivers.

Photo / Supplied
Photo / Supplied

A number of key influences will come to bear on the share prices of Mighty River Power, and the other state-owned power generators, once they hit the NZX boards.

The key drivers are likely to be the weather, demand, energy efficiency, growth, structural changes in the economy, governance and perhaps the most important of all, risk management, analysts say.

Improved efficiency of the national power grid could also play a part in their performance.

Nationally, electricity demand has declined slightly over the last two years. Lacklustre growth and shutdowns of major power-intensive industries has meant demand on the industrial front has been flat to declining. Doubts about the future of Rio Tinto-controlled Tiwai Point aluminium smelter is also clouding the demand outlook, because Tiwai consumes about 14 per cent of New Zealand's total power supply.

"That potentially could lead to an oversupply situation if that plant shuts down," says Morningstar analyst Nachi Moghe.

Conservation measures are also playing a big part in lower consumption. Heat pumps, more energy efficient refrigerators, better insulation, the use of smart meters and double glazing mean households are becoming more frugal in energy use.

Improved efficiency at Transpower, which owns and operates the state's power grid, could have an impact on the wholesale electricity market by reducing volatility.

Transpower has two big projects due for commissioning this year - the HVDC Pole 3 upgrade of the link between the North and South Islands and North Auckland and Northland grid upgrade, say analysts.

Pole 3 has in the past proved a headache for the already-listed Contact Energy because of its inability to transfer North Island power to the South. Once the upgrade is completed, more efficient two-way transmission of power between the islands is expected to help reduce price volatility in the wholesale market.

While New Zealand can boast a high level of renewable energy - most of it from hydro - it does come at a cost in the form of volatility. The reliance on renewables means the vagaries of the weather can play havoc with spot prices. A case in point is a spot power price of $147 a megawatt hour, which is up from $30 a week ago - all thanks to the drought.

Erich Livengood, NZX's head of energy and integration, agrees that price volatility is very high by international standards. But he says a scan of the latest spot wholesale power price could prove misleading, as it will show only part of the equation.

"The other part is the hedges and the risk management futures market instruments that exist," Livengood says. "They are not perfect, but it forms a different picture if you take those two pieces together."

There are three main power using groups - residential, industrial and commercial.

Lack of growth in the economy affects the last two categories, but not residential which tends to be less sensitive to the slings and arrows of the economy. However, residential consumption is far more sensitive to the weather than the other two classes.

The electricity sector's relationship to the broader economy was not nearly as strong as it is in other countries. It is muted by the fact that NZ does not have a huge industrial base like South Korea, or the other very industrialised countries, Wellington-based Woodward Partners analyst Nick Lewis says.

For the most part, Lewis says, New Zealand has "ample" power generating capacity - more than the country needs in the short-term, and partly reflecting the recent addition of new geothermal generation.

Whether it comes from hydro storage, regional or local generation constraints or maintenance shutdowns, there will always be times when the wholesale power price goes ballistic. "Anomalies in the system can contribute to near-term volatility, despite the ample supply situation that we are now in," Lewis says.

Derivatives play a big part in any energy company's day-to-day running. Peer-to-peer contracts can be struck to deliver power at a certain price at some point, regardless of the going spot price on the day. There are also futures contracts, available through the Sydney futures exchange, that can be entered into to defray risk.

How the generators manage their derivatives is expected to be a key driver of their performance.

"So investors will have to develop a view as to how prudent the management team is and how protective they will be of cash flows, and therefore how assured they will be of that dividend coming through every six months," Lewis says.

He says much depends on the conservatism, or otherwise, of the team and the board - will they be risk takers or risk averse?

By and large, the country has more supply than it needs at the moment, and demand will need to grow before more generation is built, Lewis says. "So don't expect the share price to move around too much."

- APNZ

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