As the share float looms, chief executive is matter-of-fact about the risks

When Meridian chief executive Mark Binns says the country's biggest power generator has some "grunty" assets, he's not kidding.

Binns says "iconic" is an over-used word but that Meridian's power stations - deftly hewn as they are into a breathtaking South Island landscape - probably fits the bill.

"They are stunning assets in a stunning part of the country," he says during a media tour this week before the planned partial privatisation of the state-owned enterprise.

As the share float looms, Binns is matter-of-fact about the risks.


He acknowledges that there is an element of uncertainty as to what will happen at Tiwai in the longer term but he is more comfortable with it now that the contract with Tiwai's ultimate owner, Rio Tinto, has been signed.

Of more concern to him is the Labour-Greens plan to centralise the electricity market.

"It has to be a risk going forward," Binns says.

He says the fact that the country endured one of its worst droughts on record last year without disruption to the power supply showed the current system - designed to match supply with demand 24 hours a day - works well.

"The electricity market is unbelievably complex if you look under the hood," Binns says. "The code has 800 pages and it is a mathematical nightmare.

"To basically throw the market-based system that we have now out and substitute it with a centralised buyer brings with it a huge number of issues that need to be resolved and questions that need to be answered."

Details are sketchy as to how the Labour-Greens centralised control system would work, but Binns fears that it would distort the risk/reward element needed for new investment.

"I don't know how they could do it in one electoral cycle and I don't know how they could do it without incurring significant cost," Binns says.

As it stands, the system is running well "and it is not as if Meridian's rate of return is significantly higher than its cost of capital".

Binns says it is difficult to see how market participants could front up to fund the next big power project under a centralised price control system.

The current model, in place since 1996, has ushered in a stricter discipline for new investment.

He fears a centralised market will result in centralised decision making when it comes to new investments - an area that has been fraught with problems in the past.

As examples of poor centralised planning, he points to the fiscal horror that was the Clyde Dam - the brain child of a National Government led by the late Sir Robert Muldoon.

Tongariro, in the central North Island, also turned out to be hugely expensive.

Then there was the Whirinaki gas turbine power station, which had barely cranked out a megawatt before it was put into mothballs and later broken down and sold.

Binns says billion-dollar decisions need to be subjected to investor scrutiny, not that of a bureaucrat from Wellington.

"When New Zealand starts growing again, how are you going to get the next participant to front up with a billion dollars to do the next power project" he says.

While Meridian faces some risk, it also has some potential positives on the horizon, he says.

Transpower's upgrade of the HVDC link - Pole 3 - between the islands is an important development.

With Pole 3 now commissioned, attention turns to upgrading the Pole 2 control system, which will boost the overall link to 1200 megawatts by the end of the year from 1000 at present.

Binns says the upgraded link will vastly improve Meridian's ability to shift its power north and help in its risk management by aiding the transmission of North Island power to the South as well, to cope with the odd dry year.

As it stands, Meridian pays the lion's share of the costs - about $100 million out of a total of $160 million - for the right to ship power north while North Island generators don't pay a cent to shift their power south. Binns says Meridian stands to gain if the Electricity Authority decides that a more equitable system needs to be put in place.

The system was originally set up to transmit power from south to north, but there is a lot more two-way traffic these days as participants try to juggle demand and supply across the country.

Meridian's venerable Benmore Dam - one of Meridian's "grunty" assets, was commissioned back in 1965 but it still packs a punch, and remains an integral part of Meridian's portfolio.

In its heyday, Benmore was a centrepiece of New Zealand engineering achievement and engineering types get all dewy eyed when they talk of the on-site concrete "batcher" - the same one used to rebuild Pearl Harbour after World War II - used for the dam's construction. By itself, the station meets about 5 per cent of the country's power demand.

Meridian produced about 12,000 gigawatt hours last year - about 5000 of which came from Manapouri - 7000 from the Waitaki chain of stations and about 1000 from its wind farms.

Its energy sources are all renewable and, unlike its peers, the company has no thermal assets.

If you are thinking Meridian, it pays to think big.

It has the country's power customer - NZ Aluminium Smelters (NZAS) at Tiwai Point.

NZAS is ultimately owned by one of the world's biggest companies, the mining giant Rio Tinto.

A single potline at Tiwai uses 170 megawatts - enough to power Napier.

Just one of Benmore' six massive turbines pumps out 125,000 horsepower.

Together, all six put out 540 megawatts, second only to Manapouri, which is rated at 800 megawatts.

Lake Benmore is the country's biggest man-made lake, holding 1.5 times more water than Wellington Harbour.

Meridian's Waitaki Valley assets form the backbone of the country's power generation system.

As a generator, Meridian looms large but it's not big enough to dominate the market. It is responsible for 30 per cent of the country's power supply, but Origin-controlled Contact is not far behind.

Powered by hydro and wind power - Meridian's fortunes very much depend on now much water it has in its South Island hydro lakes and how much wind there is.

Meridian's Waitaki Valley dams run at about 50 per cent capacity, rating it a lot higher than any other chain of stations in the country.

Between the Waitaki assets and Manapouri, Meridian's contribution to the grid is huge.

The assets are firmly etched into New Zealand's history and culture and each - particularly Manapouri - represent big achievements in engineering. Manapouri - thanks to the high Fiordland rainfall - functions at an average capacity of 73 to 75 per cent - making it one of the world's most efficient projects.

The company's assets are also steeped in history.

The potential of the Waitaki Valley as a power-generating source was recognised back in 1904, but work did not start there until the 1920s under the then Government's "make work" schemes during the depression years.

A medical fund was set up for dam workers, the kernel for what later became Arnold Nordmeyer's social welfare system.

Overall, Binns says the fate of Tiwai is not as bleak as many would make out but the future regulatory environment is without doubt the biggest issue facing Meridian.

So it seems that through the years, from the days of the Waitaki projects, to Muldoon's ambitious Think Big projects, and to today's Labour-Greens proposal, politics has never been too far away from power.

Smelter close no 'slam dunk'

Meridian chief executive Mark Binns thinks the eventual closure of Rio Tinto's aluminium smelter at Tiwai Pt is not the "slam dunk" that some think it will be.

After 13 months, Meridian and Rio have reached an agreement on the supply of power to the smelter - New Zealand's biggest consumer - but the new deal still allows the multinational mining giant to walk as soon as 2017.

"Yes, it is a risk, but a lot of people are treating it as an automatic slam dunk that they are going to go, and I just don't think that it is," he said.

The "price break" given to Rio would have brought the smelter down the cost curve.

"We know that they produce a very high purity grade aluminium there and we don't think that they would have put all that effort into the negotiations over 13 months just [to] buy themselves three more years," he said.

The smelter is Meridian's biggest customer - taking about 40 per cent of its production - but the prospect of 13 per cent of New Zealand's power supply coming back on to the market will be a problem for the industry as a whole, not just Meridian, should Rio decide to pack its bags, Binns said.

Rio - one of the world's biggest companies - is not exactly a shrinking violet when it comes to negotiating, but Binns, despite being a relative newcomer to the industry "gave as good as he got" at the negotiating table, according to one insider.

In the end, Binns said Meridian was happy with the outcome.

"And we think that Rio, at the end of the day, were reasonably happy," he said.

As part of the deal 172MW of the current usage of 572MW will come up for renegotiation.

That means Tiwai will need to find the extra 172 megawatts from somewhere so the South Island generators - including Meridian - could negotiate a higher price for that chunk of power.

To that end, Binns said, Tiwai still has "some potential upside" for Meridian.