Grid hungry for capital injection

A $5 billion investment over the next decade is needed to keep pace with demand. Photo / Amos Chapple

Transpower chairman Wayne Brown says the "financial engineering era is over" at the electricity transmission company as it concentrates on the "real engineering challenge" - fixing major problems with the deteriorating national grid.

At the height of last year's international financial crisis, the state-owned transmission monopoly faced more than a few headaches as US counter-parties to a controversial US$701 million cross border deal Transpower signed in 2003, involving the "sale and lease back" of the South Island high voltage grid threatened to go belly-up.

Its immediate counterpart, the troubled US Wachovia Bank, was ultimately "rescued" by Wells Fargo and US insurance giant AIG, whose financial products division financed the $701 million deal, suffered the ignominy of being bailed out by the US Government to the tune of US$267.5 million.

Finance Minister Bill English says Transpower still has some real issues trying to unwind the Wachovia arrangements. "They're not as interested in some of those things as they used to be ... any tricky off-balance sheet stuff, whether you are a Government or a bank, isn't going to look good in the next five years."

Brown says Transpower has already got rid of two of the Wachovia cross-border leases. Though the complex deals could present a problem, they are still cash-flow positive to the tune of $30 million-$40 million.

Transpower executives continue to maintain that the company still owns the grid, but critics argue it would not have needed an option to repurchase the grid after a 25-year period if that was the case.

Irrespective, Brown maintains the fixation on cross-border lease arrangements was symptomatic of the previous "glide path era".

In English's book the more intensive discussions the SOE board now has about the ramifications of their major investment planning the better it will be from a Crown ownership perspective.

Investment in new transmission lines peaked in the 1950s and 1960s. Brown is concerned there has been no significant investment in grid since the 1970s, yet demand has strongly increased.

He says Transpower needs up to $5 billion capital expenditure over the next 10 years to make the grid "fit for purpose".

Assuring New Zealand's business powerhouse - Auckland - of secure electricity supplies is a major priority.

Executives responding to a World Economic Forum Executive survey last year ranked NZ ranked just above the mean 4.2 score on a 1-7 scale where the top mark indicated the quality of a country's electricity supply met the world's highest standards; 52nd place among 67 countries surveyed.

Brown says there has been a shift away from the "old belief" that Auckland should be supplied by "embedded" generation - a bunch of power plants surrounding the city. The reality is though there is a significant load concentration in Auckland, its electricity needs are primarily served by remote renewables power generation.

The complex transmission grid upgrade entails a series of major projects including the $824 million Whakamaru to Pakuranga 400V line, which is scheduled to be commissioned in 2012 (North Island grid), the $473 million reinforcement of the Auckland to Northland link as well a $99 million upgrade of the Otahuhu substation.

Brown makes the point that the high voltage direct current link from Benmore in the South Island to Haywards on the Wellington Coast is "critical for New Zealand".

It is the only high voltage transmission link between the two islands and balances the distribution of energy between islands by helping to carry electricity from where it is generated to where it is needed.

The existing Pole 1 is now 44 years old and its core technology is obsolete. A $672 million contract will be awarded in September to replace the existing mercury arc values with thyristor values with a nominated 700MW rating.

The New Zealand Council for Infrastructure Development points out other comparable nations have much more extensive high-capacity transmission networks than New Zealand.