Mercury scuttles big growth plans

Mercury's plans to start selling more electricity out of its home base have been put on ice. Photo / Mark Mitchell.

Mercury Energy is ditching major expansion plans due to what it says are unacceptable risks created by the electricity market shakeup, dealing a blow to retail competition.

The country's third-biggest power retailer has grown rapidly throughout the country during the past decade but has cancelled a drive into three new North Island areas over the next two months in the wake of changes announced last week. It was due to start a push into two cities and a town.

"We back ourselves to compete," said general manager of consumer market, James Munro. "We're just not sure if these series of reforms are going to encourage competition." Under the planned changes Mercury's taxpayer-owned parent, Mighty River Power, would have to sell 1000 gigawatt hours a year of electricity - enough to power about 112,000 homes - from its North Island plants to South Island-based Meridian Energy.

These 15-year hedge contracts are aimed at improving their ability to compete with each other on both islands and a power station transfer between Meridian and Genesis Energy aimed at redressing geographical generation imbalances.

The Government wants to restrain power prices, particularly for householders who have been hit with rises three times that of the inflation rate for the past decade.

Munro said the effect of Mighty River Power being forced to sell such a large amount of its generation south was "unacceptable uncertainty" over the price Mercury would have to pay to supply its North Island consumers - around 280,000 of its 300,000 customers.

This was "a big step change that leaves us short in the North Island, theoretically."

Resistance to the changes by incumbent players was expected and the Electricity Industry Bill must be scrutinised by a select committee before becoming law by about next October.

Munro said it was not a case of Mercury "throwing its toys out of the pram" when faced with changes. The market was already highly competitive in the main centres, other North Island towns and pockets in the South Island.

About 25,000 customers switched between power companies a month, which he welcomed, saying Mercury backed plans to make this easier.

Like Meridian subsidiary Powershop, Mercury is concerned about the influence third state-owned gentailer Genesis will get picking up Tekapo A and B power stations at the start of the critical Waitaki hydro system.

"The effect of the reforms as announced is to put Genesis in a position where they hold unprecedented market power during a dry winter.

"The ability to control prices in the South Island is huge," said Munro.

Mighty River had already made hedging arrangements with Meridian to allow for Mercury's rapid expansion in Christchurch and Dunedin. Mercury would not be seeking growth in the South Island where in Christchurch it started the year with just 140 customers but expanded this number to 13,000.

"The risk posed by Genesis' potential market dominance during dry years would make growing much harder in the South Island.'

While retailers and listed TrustPower have voiced concerns about some of the changes the three big SOEs have been largely silent.

Genesis said it welcomed the Government's adoption of many of the recommendations of the ministerial review of the electricity market, saying it supported all measures designed to improve competition.