Bernard Hickey: Energy float may turn into a s(t)inker
5:30 AM Sunday Aug 26, 2012
Ministry of Economic Development figures show total observed electricity consumption has fallen in three of the past four years. Photo / Thinkstock
There's been a lot of noise around the Government's plans to float Mighty River Power, Meridian Energy and Genesis Energy.
The debate has been on whether the floats are a good idea for taxpayers generally and whether the sales may be blocked or delayed by the Waitangi Tribunal's review of water rights.
The assumption of investors and the SOE floats' political opponents is that they will be a brilliant buy.
Opponents say it makes no economic sense to sell off to private investors massively profitable assets with monopolistic characteristics.
Those in favour of the sales say New Zealand's stock market needs these high dividend-yielding companies to lure conservative investors back to the market.
Few on either side of the debate have questioned that strong profits, high dividends and ever-rising share prices are inevitable for the three state-owned power generators. But this is far from certain, particularly given some big changes in our power consumption habits and the risks of more to come.
The assumption is that New Zealanders' demand for electricity is insatiable and the only question is how we generate the extra money to build new power plants.
Historically, New Zealanders kept adding gadgets and heaters to their houses. Factories and farms grew and used more power-hungry machines. But that has changed. Ministry of Economic Development (MED) figures show total observed electricity consumption has fallen in three of the past four years.
MED's data, dating to 1975, records only one other annual fall, in 1992. Something is changing here. Export manufacturing operations have moved offshore and thousands of houses have been insulated.
The long recession after the Global Financial Crisis has deepened the slump in demand for power. Norske Skog is halving production at its power-hungry Kawerau pulp and paper plant because of falling global demand for newsprint. The plant generates 2.9 per cent of NZ's power demand.
Also this month, Rio Tinto's Pacific Aluminium asked Meridian Energy to renegotiate its contract to supply electricity from its Manapouri station to the Tiwai Point aluminium smelter in Bluff. Rio Tinto is grappling with weak aluminium prices globally. It may shut the smelter, freeing up 15 per cent of NZ's electricity supply.
Transpower says it could easily upgrade to feed that power into the grid. This creates the risk of a perfect storm for power generators: a surge of new supply just as demand dries up. This would put downward pressure on prices, profits and dividends.
Maybe the "sure thing" SOE floats aren't so sure after all. This is no one-way bet.
Most consumers don't realise the product manufacturers of all kinds have been specifically lowering the energy consumption of their devices and products large or small to meet critical budget conscious consumer demands.
The other factor that has played the major role in reducing the power consumption of electrical devices which few would even imagine is the development of small compact yet super high strength magnets for electric motors, solenoids, switches etc. Therefore be careful people not to lose on shirt when it comes to investing in power companies. Also note the lack of buyers for such assets worldwide.
So what is the real reason for the sell down, too much Government debt? But we can afford to give Telecom boss Reynolds a $300,000 annual tax cut. Or, as Bill and John have claimed, an avenue for all the money sitting around in Kiwi savings accounts with no where to go - yet we are told we have to bring in foreign money 'cause we lack domestic capital. Could just be an ideological obsession, or pressure from the IMF. Hard to know but none of it makes any real sense. Could we have the truth please.