Meridian plan to sell forward contracts gets mixed reception

WELLINGTON - Meridian Energy's plan to offer large amounts of electricity in long-term forward contracts received a mixed, but mostly positive, reception today.

State-owned Meridian, the country's biggest supplier of renewable power, is mulling the offer of 3000 gigawatt hours a year of electricity for 10 to 20 years ahead at prearranged prices, known as "hedging".

Meridian's proposal is seen as timely because the industry's regulator, the Electricity Commission, is considering how to tackle the lack of hedging offers in the wholesale market.

"They are many players out there who say there is not much of a liquid hedge market - well this is where people can put their money where their mouth is," Meridian chief executive Keith Turner told Radio New Zealand.

"It would not necessarily be a single offer. It could be tranched over time. There could be many tranches, there could be many players interested in this form of tender."

Large users needing certainly on power prices would achieve that and it should encourage foreign investment.

Dr Turner said the process would take around nine months. Meridian had $3 billion of hydro and wind projects planned over the next 15 years, including a 650 megawatt windfarm in North Otago, and selling forward contracts would help determine their viability.

Roy Hemmingway, chairman of the Electricity Commission, which has the power to force power companies to offer hedging contracts, said the offer would give some stability in the market place.

But he said it was a step into the unknown for companies.

"Customers will have to make a judgement about what they think the price of electricity is likely to be over the next decade, or even two, before they sign onto a long-term deal.

"That's a tricky thing, trying to predict what prices will be years out from now."

Major Electricity Users Group chairman Terrence Currie said it was unclear what was on offer and their were always questions about price.

"There will always be a tension between taking a long-term contract and the price of that contract," he told Radio New Zealand.

Grey Power's energy spokesman David Berry said he was concerned hedging deals would replicate Comalco's agreement, whereby big business got access to long-term contracts at lower costs.

"That could mean that as energy price rises, the high cost electricity production is handed on to domestic users."

But independent energy analyst Molly Melhuish welcomed the move. She said Meridian was in a uniquely good position because it had a lot renewable energy and was planning a whole lot more.

That meant it would not be affected by oil prices or Kyoto-type taxes and could even force thermal-dependent rivals to buy hedging contracts from Meridian to give them some certainty on prices.

Dr Turner said hedging could help renewable energy projects get built, offering an alternative to importing fossil fuels such as liquefied natural gas (LNG).

He has said repeatedly that importing LNG will be highly risky for the economy because LNG prices are linked to oil prices.

Contact Energy and Genesis Energy are examining importing LNG from about 2011 to fuel their power stations as New Zealand's gas supply expires.

Meridian and Comalco, which owns the Tiwai Point aluminium smelter, are in talks to renew their contract, which expires in 2012.

Failure to renew the contract would free up to 15 per cent of New Zealand's power capacity, but Transpower's $1.5 billion upgrade of the Cook Strait cable and transmission lines into Auckland and Christchurch would then be even more crucial to use the power available.

Mr Hemmingway has said forcing power companies to offer hedging contracts could be counter productive.

"We want to look at some other means for offering long-term price stability to larger customers."

- NZPA