Fri, 13 Aug 2004

Genesis e3p risk sharing questions and answers

Additional information on the provision of the e3p risk sharing agreement

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Q1. What are the details of the plant being built? Huntly e3p is a combined cycle gas turbine electricity generation plant that Genesis Energy Limited will install at its Huntly site. It will produce electricity using a gas turbine engine, with additional power from what would otherwise be waste heat from the exhaust. This technology is up to 50% more efficient than the existing Huntly coal-fired plant.

Its 385MW output will provide enough power to meet three years of national demand growth, and can supply the equivalent of 350,000 households.

The plant already has all the necessary resource consents, and construction is anticipated to start in the coming weeks. Commissioning is scheduled for late 2006.

Q2. What's the government involvement? Genesis approached the government for assistance to enable the project to proceed. The company advised that without a risk sharing agreement with the government the project would not have proceeded at this time.

This is due to the transition from Maui gas to replacement gas fields. Because the new fields have not yet been fully developed Genesis was not able to secure sufficient certainty, within normal commercial parameters, about future gas supplies.

Because this is an exceptional situation, the government has agreed to share a limited amount of risk with Genesis. This is viewed as a one-off agreement to assist with certainty in the electricity sector during the transition to the post-Maui environment.

The government's advice was that it was desirable for e3p to proceed, and that other potential alternatives would not provide the same certainty and capacity as e3p does at this time.

E3p provides domestic and commercial electricity users greater certainty and offers a substantial boost to the margin between supply and demand.

Q3. What is the nature of the agreement with the Government? The government has entered into an agreement with Genesis to share a limited and specified amount of risk around Genesis' long-term gas supplies for e3p.

Under the agreement the Crown will compensate Genesis in the event it is unable to secure the gas that it needs.

The compensation is based on a complex formula that shares the financial losses arising from a shortfall of gas due to gas field shortfalls in supply and Genesis' inability to secure extra gas, less any liquidated damaged due from existing gas suppliers.

The agreement provides for the Crown to initiate a mid term review to evaluate the gas status and reduce the Crown's exposure.

Genesis has secured the majority of the gas required for e3p over the first 10 years of operation, with contracts for gas from the Kupe and Pohokura fields that are in the process of development and should be in operation at the time of e3p's commissioning. Advice is that the risk of insufficient gas being available is slim, but outside the commercial comfort levels of the company.

Further details of the arrangement are commercially confidential. Release of the specific monetary values or gas quantities could impact on the market for gas to the detriment of users. Officials are currently working through what information contained in the agreement can be released with the company. The intention is to make as much public as is possible, as soon as possible.

Q4. Is support being provided because Genesis is a State Owned Enterprise? No. The status of Genesis as a State Owned Enterprise (SOE) is irrelevant. Had a similarly advanced project been under development by a company that is not an SOE, the government would have been open to a similar approach to enable investment certainty during the current transition in the gas market.

Q5. What is being done to address the uncertainty around gas supplies beyond the Pohokura and Kupe fields? The government recently announced a suite of changes to the permitting and royalty regimes for petroleum exploration to make exploration more attractive to investors. This was prompted by concern that, while exploration activity had picked up significantly, it may not have been sufficient to discover enough gas to meet demand a decade from now.

New Zealand's petroleum-bearing regions are largely unexplored, and it is considered highly likely that further significant gas discoveries will be made.

Q6. What happens if Kupe, Pohokura or other gas fields don't deliver enough gas to run e3p? In the unlikely event of there not being sufficient domestic natural gas supplies, then LNG (liquefied natural gas) may provide an alternate fuel. Genesis and Contact Energy are currently studying the feasibility of importing LNG.

If necessary it is also possible to convert the plant to run on distillate (diesel) fuel.

Q7. What impact will the decision to proceed with e3p have on the electricity sector? The decision to proceed with e3p has been widely expected within the electricity sector, so the sequencing of other investments is unlikely to be impacted materially. Its confirmation allows other prospective developers to finalise their own plans.

In undertaking discussions with Genesis, the government has been mindful that any agreement should not deter investment in generation by other market participants. The agreement with Genesis represents a one-off, and is a response to the uncertainty created by the transition in the gas market. Similar support should not be needed, or expected, in future.

Parallels can be drawn with the government's targeted intervention in contracting with Contact for the Whirinaki reserve energy plant last year. That decision was prompted by the need to provide greater electricity security of supply in dry winters, and needed to be taken before the transition of these responsibilities to the Electricity Commission could be made.

The Genesis decision to proceed with e3p provides useful breathing-space for the new Electricity Commission and gas industry governance arrangements to be completed and to bed in, and for gas uncertainties to be better resolved, before the next major investment in plant is needed.

Q8. What does the decision to proceed with e3p mean for consumers and businesses? The decision to proceed with e3p should improve confidence in New Zealand's electricity supplies. This is good for consumers as well as for New Zealand's broader reputation as an investment destination.

Q9. How does this relate to the Electricity Commission's security of supply responsibilities? The government has established the Electricity Commission, and given it primary responsibility for electricity security of supply, through supply and demand forecasting, making improvements to the market, and contracting for reserve energy when necessary for dry years. The forthcoming Electricity and Gas Industries Bill, currently before Parliament, provides the Commission with additional regulatory powers to enable it to fulfil these functions. The Commission's planning in this area is already well advanced.

The confirmation that e3p is to proceed will give the Commission more certainty on the input parameters for its security of supply and transmission grid upgrade planning.

Q10. What about the Government's commitment to renewable energy? The decision to proceed with e3p is unlikely to impact materially on current investment plans for renewable energy, because e3p was widely expected to proceed and investors would have already factored it in.

After e3p, Ministry of Economic Development modelling suggests that the bulk of new generation over the next 15 years is expected to come from renewable sources, including wind, hydro and geothermal, because these are expected to be the most cost-effective options.

The government has a target for an additional 30PJ of renewable energy by 2012. The government supports development of clean, renewable energy through the climate change office's Projects to Reduce Emissions scheme, and by working with industry associations.

Renewable generation is being built. For example, wind generation is set to have grown four-fold by the year to April 2005. First power was supplied last week from what is set to be the southern hemisphere's largest windfarm at Te Apiti.

Q11. Could the need for e3p be avoided by better efficiency of energy use? The government has set a target for improving economy-wide energy efficiency by 20 per cent by 2012. Achieving this target will reduce, but not eliminate, the need for new generating capacity.

Electricity demand, fuelled by our rapidly growing economy, is currently increasing by around 2 per cent per annum. This level of growth requires an extra 120-150MW of grid-connected new generation each year, depending on the type of technology used.

Q12. What are the climate change implications of proceeding with e3p? Because e3p was widely expected to proceed, its emissions are already factored into forecasts for New Zealand's greenhouse gas emissions levels.

Like all coal, gas and oil-fired generation, e3p will be subject to an emissions charge from 2007 to account for the climate change impact of its fuel use. The Government does not consider it acceptable to ignore the environmental impacts of fossil fuel use. The commissioning of e3p will also ease the pressure on the current coal-fired station at Huntly, moderating coal use.

Q13. If gas supplies are uncertain, why not use coal? It is considered unlikely that there will not be sufficient gas for e3p.

A number of electricity companies are investigating new coal-fired plant, but none of these investigations are at a stage where they could have replaced e3p. If any coal plants are built, they are generally not expected to eventuate until the end of the decade.

ENDS

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