MightyRiverPower And Contact Signal Price Rise

Tuesday, 26 January 2010, 3:40 pm
Press Release: NZ Energy and Environment Business Week

MightyRiverPower And Contact Signal Electricity Prices Must Rise

NZ Energy & Environment Business Week says leading suppliers
MightyRiverPower and Contact have signalled they need prices
to rise for new generation, particularly wind and hydro, to be viable.
They warn current tariffs are too low to encourage investment in
wind and smaller hydro power schemes.

The next best options for new electricity generation are
brown-fields geothermal fields, owned and under development
mainly by MightyRiverPower and Contact Energy, which are expected
to produce electricity in the range of $85 to $95 per Megawatt
hour, compared with recent spot prices of well below $60 per
MWh.

But Contact and MRP are both warning these price ranges are too
low to guarantee new investment beyond the known five or so
remaining geothermal opportunities with scale. Both see the long
run marginal cost of electricity moving to $100 per MWh once
those are built in the next few years. $100 MWh is where wind
sits now and is basically uneconomic at current average wholesale
prices.

At $100 MWh and then some, new wind and smaller hydro
opportunities start making commercial sense, probably ahead of
geothermal greenfields exploration and development.

NZ Energy & Environment Business Week reports in the meantime,
however, Contact is able to say with a straight face "prices at
present currently don’t support the continued operation of
existing thermal plant." After a year of tariff restraint and
political fear, the electricity sector is starting again to raise
legitimate questions about whether they are to be truly
commercial or not.

We are back to the age-old argument which says nothing will get
built unless there's a clear path to a higher LRMC over the next
three to five years. Among the various risks this runs is too
little investment too late to prevent shortages emerging in half
a decade, especially as the economy rebounds.

NZ’s leading Energy and Environment sector newsletter reports at
present, Contact says the energy component of its tariffs is
about 30% of the total bill after third party network and
metering charges, retail costs and profit margins are included.
Its current energy tariffs reflect a long run marginal cost of
around $70MWh.

New brownfields geothermal needs $80MWh - plus, so there is a bit
of pressure there. Contact is making good progress completing its
200MW peaker at Stratford and filling the adjoining Ahuroa gas
storage facility, whose operation should afford the troubled
generator much-needed portfolio flexibility.

Meanwhile, the recent unprecedented burst of retail competition
may be over for now, unless Ari Sargent at Powershop gets his
way. Mercury was the main aggressor and has pulled its
acquisition activity rather than create electricity supply
liabilities that it no longer understands because of the real and
virtual shake-up of electricity assets. Margin restoration is the
name of the game and, for Contact an end to the trend for net
customer losses.

ENDS

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