Meridian Energy plans to invest another $3 billion in renewable energy projects by 2030. Photo / Supplied
Electricity looks set to become a big issue at next year’s general election, and with power once again in the spotlight, incoming Meridian chief executive Mike Roan is keeping an open mind on how the system can improve.
The sector is still smarting from last year’s price spike, but the weather looks to have come to the rescue this year; hydro lakes are close to full and the thermal generators have secured extra gas and coal to back up the system.
Attention is now shifting to a ministerial review and a report from Frontier Economics, the same consultancy that made a case for nuclear energy in Australia, is understood to be with the Government.
In addition, the Energy Competition Task Force (ECTF) is reviewing 42 submissions on the level playing field proposals – many of which made a case for separating retail and generation operations among the big four “gentailers”.
While the system is looking better, there remains the issue of New Zealand’s dwindling gas reserves and its diminished ability to back up the power grid.
Roan, who officially takes over from Neal Barclay as CEO on July 1, is no stranger to industry reviews.
He accepts that electricity is a hot potato and probably always will be, particularly as the economy decarbonises.
“If I go back, I reckon there have been over 10 reviews or market tests since the market was formed,” Roan, a 30-year veteran, says.
“So I think we’re always under scrutiny, and that’s the right thing.
“We play such a big role that the level of scrutiny on us should be reasonably high.
“I love the set-up of the electricity system in New Zealand and I think, longer term, we can drive out what I’d call durable competitive advantage for the economy.
“But in the short term, of course, there are some challenges.”
The change at the top of Meridian, which is 51% owned by the Government, comes at a time when attention on the sector dominated by the big four generator-retailers is at an all-time high.
Brokers Forsyth Barr said it was difficult to tell where the various sector reviews would land.
“We maintain that any resulting changes are unlikely to materially impact company valuations,” Forsyth Barr said in a research note.
It said the core issue facing the sector is the limited supply of “firming” capacity – reliable back-up to intermittent energy sources – caused by the gas supply shortfall, which structural changes were unlikely to resolve.
Forsyth Barr noted there had been a rise in reports from lobby groups seeking to influence politicians and regulators, alongside the high volume of submissions to the Electricity Authority.
“At this stage, we are not sufficiently concerned to apply a political or regulatory discount to our valuations, as we did in 2013 and 2014,” the broker said.
“Nevertheless, we continue to monitor political and regulatory developments closely.
“The fundamental issue in the sector, from our perspective, is the sudden loss of back-up thermal generation has not been able to be replaced by renewables.
“We believe that most of the observed problems will ultimately be resolved through new generation — although this takes time," Forsyth Barr said.
Roan said while the current set-up has its detractors, most industry players are sheeting last winter’s issues to a shortage of gas and the impact that had on the electricity sector.
Much of the criticism of the big power generators stemmed from last August’s price spike, which resulted in wholesale prices hitting $820 per megawatt hour, up from a 2018-23 winter average of just $180MWh.
This week, prices are about $150MWh, having gone over $400MWh earlier in the year.
Roan says the criticism aimed at the sector last year was a reaction to those price rises, which forced some energy-intensive businesses to shut.
Naturally enough, questions were asked.
The EA, in its review of last winter, said: “These high prices resulted from high electricity demand and low wind generation during a fuel shortage, due to low hydro storage and gas supply.”
Later in its report, the EA said: “While high prices did greatly increase generation revenue, this did not translate through to higher energy margins”.
In Meridian’s case, the event drove the company to a first-half loss of $121 million, reflecting the cost of hedge contracts for winter 2024.
As Roan sees it, electricity is a commodity that, like others, is cyclical.
He defended the model that allows the big generators to have large retail operations attached.
“When prices are low, having a retail business is a smart thing to do because it allows you to capture a margin by providing electricity to retail customers.
“But when prices are high, being in that retail business is really hard because the margin that was there when prices are lower evaporates.
“And you’re buying energy for more than you can charge to your customer base.
“So you need a strong capital base within your business to protect you against the top of a commodity cycle like we’re going through.”
Regardless of whether prices are high or low, companies like Meridian still have to provide a reasonable return for their shareholders, Roan says.
As it stands, the vertically integrated model allows Meridian to protect consumers from the ups and downs inherent in the underlying commodity price, he says.
Roan says he’s not too “wound up” by the fact that the industry is being scrutinised.
After last year, the system has regrouped.
Thermal generators have taken on more gas from methanol exporter Methanex, and arrangements have been made with the big power users, such as NZAS’ smelter at Tiwai Pt, for them to cut back on power use when the system is stretched.
“For our business, we don’t want to go through that duress again.”
Meridian has been investing heavily in renewable energy – solar and wind – along with batteries.
The company commissioned its Ruakākā battery last month.
Meridian plans to invest $3 billion through to 2030 and expects to commit $1b of capital this year alone.
The company says it has built a strong in-house construction team that’s capable of delivering two projects at once.
“We’re going to have to work our balance sheet really hard to drive that sort of scale and speed and, you know, others are doing the same,” Roan says.
“You have got the new entrant generators that have shown their interest in our market with the prices the way they are, and our more traditional competitors are all out there as well.”
New Zealand aims to have net-zero emissions of all greenhouse gas emissions, other than biogenic methane, by 2050.
By that stage, Roan says the country can expect to have a lot more solar and wind farms.
“So that will be the primary investment that’ll be made through 2050.
“We will need more flexibility in the system, so you’ll see more batteries built.
“But I think you’ll also see existing hydro storage expanded because when the wind doesn’t blow or the sun doesn’t shine, we’ll need to get the energy from somewhere else.”
For the moment, the gas situation was unhelpful.
“I think everybody thought gas would be a transition fuel and it’s looking less likely that it will be.
“Our job is to deal with it and find other ways to maintain a stable system that is affordable.
“The country has benefited from reasonably priced electricity for a sustained period, so our job is to find solutions to ensure that continues.”
Roan defended the market-led model.
“It’s been in place for 30 years now, and the reason I reckon it works is because of the investments that we make.
“You only recover the value of those assets over the next 20 to 30 years, but you don’t recover it today.
“The competitive model works, whether it’s electricity or any other sector.
“It’s better than any other model that anyone has observed or put in place, and that’s been demonstrated time and time again,” he says.
“Electricity is no different.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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