Investors breathed a sigh of relief that there would not be structural separation between the big generators and their retail arms as part of the Government’s plan to usher in changes for the electricity sector.
The Government, in response to a long-awaited report from consultancy Frontier Economics, said it would open up the big three partially state-owned power generators to fresh capital and would look into import of liquefied natural gas (LNG) to augment flagging gas reserves.
Finance Minister Nicola Willis said she had written to Genesis, Mercury and Meridian to advise the Crown was prepared to support capital funding requests for “strategic and commercially rational investments” that support energy security.
A review undertaken by Frontier Economics said the mixed-ownership model (MOM) companies, in which the Crown has a 51% stake, had faced constraints in their ability to invest in larger generation projects, due to a perception that the Government would not provide equity injections to support those investments.
Willis said the Government wanted to correct that perception.
“The Government is committed to maintaining its legally mandated 51% stake in the MOM companies, and we accept we would need to participate in any equity raise required for major new investments.”
Much of what was recommended by Frontier was rejected by the Government.
Frontier had proposed structural reform involving the creation of a single Crown entity to take responsibility to secure thermal fuel and firming capacity.
Instead, the Government said it would start a procurement process for LNG infrastructure.
It also opted to go against Frontier’s advice to remove electricity from the Emissions Trading Scheme.
Likewise, it went against advice to sell its 51% stakes in Meridian, Genesis and Mercury.
The Government opted not to amalgamate the Electricity Authority and the Gas Industry Company.
Finally, it also went against Frontier’s advice to amalgamate the 29 electricity distribution businesses into five “super” distributors.
The share prices of all four companies rallied, with Meridian gaining 22c in late trading to $5.78.
Craigs Investment Partners portfolio manager Mohandeep Singh said the changes put forward by the Government were marginal “and sort of long-dated”.
“If we’re looking at it from an investment perspective, there was going to be some risk of structural separation [between the generators and their retail arms], and clearly that’s not been part of the proposal,” Singh said.
Senior NZ First minister Shane Jones said last month that he wanted his party to consider re-nationalising the generator-retailers as part of a massive energy market shake-up.
The electricity market is notoriously volatile and today’s report is largely the result of last August’s power shortage, which saw prices spike up to $820 per megawatt hour (MWh) and forced some big businesses to close.
Ironically, prices this week have plummeted to just $6/MWh because of significant rain in the lower South Island catchments, very high output from wind generation and demand coming off winter peaks.
Singh said the main beneficiary of the proposed changes appeared to be Meridian, whose assets are tied up in hydro and wind generation, plus some solar.
Singh told the Herald Meridian was “the most exposed to a dry-year risk because hydro generation makes up the bulk” of its portfolio, so out of the big four, it was the ”most acutely impacted”.
Of the big-four power generators, Meridian Energy fared the worst from last year’s droughts, booking a $452 million net loss – much of that arising from its need to pay New Zealand Aluminium Smelters to button back on production at its Tiwai Point aluminium smelter – the country’s biggest power user.
Singh said an LNG facility would benefit Meridian the most because of its dry-year exposure.
“It obviously helps the whole sector and helps New Zealand.
“At the moment, they’ve been exposed because we don’t have a firming alternative in gas that’s cheap.
“I don’t know what the pricing of the LNG and the import facility would be, but all else being equal and the Government putting some money in, it is positive for the sector and certainly more positive for Meridian.”
Singh said the implication from the announcement on the Government’s power company ownership was that it had in the past acted as a handbrake on the companies’ ability to raise capital.
However, he noted that the companies had been instigating dividend reinvestment plans which were “an equity raise in disguise”.
An estimated $200 million was spent last year on paying Methanex to free up gas for Contact and Genesis to generate power.
Gas is responsible for a significant amount of the country’s power generation – about 8% of total demand.
“There are steps being taken to make sure the lights stay on but ultimately, when you’re 85%-plus renewable, with a big chunk of that in hydro, you are going run that risk of prices blowing out if you don’t have your back-up source in gas,” Singh said.
The four big generators were already highly bankable enterprises with strong credit ratings and ready access to credit, he said.
Singh said that “optically”, with the Government keeping an open mind on new capital, it was showing that it was not doing anything to hold the big state-controlled companies back.
“In the bigger picture for New Zealand Inc, I think this is probably a positive that the Government hasn’t been too aggressive and hasn’t tried to structurally separate,” Singh said.
“The issue that New Zealand has probably had in the last three to six years is an increase in sovereign risk, with offshore investment being a bit more nervous about the goalposts moving,” he said.
“So it’s sigh of relief for the sector.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.