Genesis sees more growth, more volatility in the year ahead

Genesis Energy's outgoing chief executive Marc England. Photo / Supplied

Genesis Energy's outgoing chief executive Marc England sees more growth for the company in the current year and still more volatility in the electricity market.

The company's operating earnings jumped 24 per cent to $440 million in the June year - the top end of its guidance range - aided by favourable derivative contracts and good hydro generating conditions.

The result compared with ebitdaf of $355m in 2021 - which was depressed by a $33m arbitration cost relating to prior years - and was up 6 per cent on an adjusted basis.

The company forecast its ebitdaf to be around $455m in the current year subject to hydrological conditions and gas availability.

England, who was paid $2.3m for the June year, said the main driver for the lift in earnings was the gross margin on the company's gas contracts, which had previously been "out of the money".

"Now that those contracts have rolled off, they have been put to better uses," he said.

The company had not raised its retail power prices during the year but had increased its gas and LPG prices as it passed on higher carbon prices.

Genesis declared a steady final dividend of 8.9 cps, taking the total for 2022 to 17.6 cps.

England said it had not raised dividends appreciably but that the payout was still in line with Genesis' policy.

Future investment would require capital.

"We want to preserve capital and make sure that our balance sheet is in a good place to be able to do that," he said.

Transpower chairman Keith Turner told the Herald last month that New Zealand's power generation system could do with more capacity, but England said there was enough to go around - for the moment at least.

"That being said, it is an issue that will grow," he said.

"As time goes on, New Zealand is going to have to make sure that it has the right market incentives to enable what we call fast-start peaking - so that it can turn on generation quickly in order to meet demand every time there is a cold evening," he said.

"We think it is the wrong paradigm to say that the market is either not working or that it is perfect."

The New Zealand electricity market had done its job effectively over the last 20 or 30 years.

Now, he said, it was a matter of focusing on market design to enable more renewable, low-cost, and reliable generation.

Market volatility is good for Genesis and England expects to see more of it in the year ahead.

"Our generation portfolio can flex quite quickly in response to that volatility, so when there is plenty of water in the lakes like there is now, we are able to turn expensive plants off.

"Then we can be there when plants are needed to back the system up."

England is due to leave the company later this year after six years in the job.

Genesis Energy's chief customer officer and Genesis veteran of 25 years, Tracey Hickman, will fill in as CEO until a replacement is appointed.

In its result, Genesis said the revaluation of derivative contracts supported an increase in net profit to $222m, up from $31.7m a year earlier.

The company said fixed price gas supply contracts and coal purchased well in advance of global supply issues had cushioned New Zealand's electricity system from price shocks seen elsewhere in the world.

More recent rainfall has also added to a healthy level of hydro energy for the rest of 2022.

Jarden senior analyst Grant Swanepoel said the result was in line with expectations.

"Key downside risks are regulation, less-than-optimal management of the exit of NZ Aluminium Smelter from New Zealand, inability to pass on an increasing carbon price outlook and increased costs for thermal fuel," Swanepoel said in a research note.

"Upside risks are better monetisation of carbon credits, positive outcome from a capacity market creation and strong growth in retail pricing."

Genesis operates the coal and gas-fired 953 megawatt Huntly Power Station - New Zealand's biggest by capacity.

The company remained on track to meet its target of sustainably reducing 1.2m tonnes of annual carbon by 2025.

Annual emissions would fluctuate depending on weather conditions and demand-driven use of thermal generation.

England said that as New Zealand transitioned to an even higher level of renewable electricity, thermal back-up would remain essential to maintain security of supply through the transition, even though it would be used less often.

"Our forecasts show New Zealand's electricity generation will be 96-98 per cent renewable by 2030, but there will still be times when it doesn't rain, the wind doesn't blow, and the sun doesn't shine."

Huntly can continue to provide security to the renewable electricity system day-to-day for the country's energy consumers to decarbonise over the long term, he said.

"However, the security Huntly provides needs to be supported by appropriate commercial agreements and market settings."

England said market reforms were being implemented overseas to secure back-up generation through the renewable transition.

In addition to Huntly, Genesis has extensive hydro generation assets in the central North Island.