Challenges for Electricity Companies: Weather, Economy

News Release

The Weather, Economy And Stagnant Demand Prove A Challenging Undercurrent For Electricity Companies


The electricity sector has changed markedly over the past few years, thanks to increased competition and significant changes to legislation. Yet, according to PwC’s Leading Energy publication, factors beyond the companies’ control continue to prove the most challenging of all – the weather and a sluggish economy causing demand to remain stagnant.

PwC Consulting Partner Mr Chris Taylor says, “Given all the rain we’ve had recently, I know it may be hard to believe but this (financial) year 2012 (FY12) has been one of the driest on record. As a result, South Island catchments have experienced some of the lowest recorded hydro inflows and each of the generators has been impacted.

“This is because the overall impact of these low hydrological conditions was a reduction in hydro generation, leading to the short fall being covered by higher variable cost thermal gas and coal generation. The reliance on higher priced thermal and coal stations and a more conservative approach to managing lake levels resulted in higher wholesale electricity prices in FY12 than in FY11.”

The average wholesale electricity price in FY12 was approximately $94 per MWh, nearly double the $49 per MWh in FY11.

PwC’s Leading Energy analysis of the five largest firms in the electricity generation and retail sector (Contact Energy, Genesis Energy, Meridian Energy, Mighty River and TrustPower) also reveals total electricity sector revenues increased nearly 23% in FY12.

Mr Taylor points out, “While as a headline this is impressive, this revenue growth does not translate into earnings growth, due to correspondingly higher electricity generation and acquisition costs. Overall, electricity earnings have dropped slightly in FY12.”

While changing, the generation mix has been a key issue for the sector, so too has been the continued fallout from the global financial crisis. The electricity generation and retail companies’ major consumers are changing the way they operate as they battle with tightening global demand for their products. Less production means less electricity needs, and combined equals stagnant demand conditions.

Mr Taylor says, “With demand growth stalling, many generation development options are being delayed or put on hold. During the last financial year, there have been no significant generation plants commissioned, although there are a number of generation developments currently under construction.”

In the retail area, the level of customer churn (i.e. the number of customers changing suppliers) has reached a plateau and is sitting at approximately 30,000 to 35,000 per month.

• Genesis Energy’s combined market share, as measured by customer connections, has remained relatively consistent across FY10-FY12 at 27%.
• Contact Energy’s decreased slightly from nearly 25% to 23%, as did Mighty River Power with a decrease from 22% to 20%.
• Meridian Energy (including Powershop) increased from 12% to 15% and TrustPower remained relatively unchanged on 11%.

“Churn rates while reaching a plateau continue to put a squeeze on retail margins. Therefore, marketing costs to attract new customers, retention costs (such as loyalty programmes), attrition costs (administration as customers join or leave) and bad debts have all come under increased pressure,” adds Mr Taylor.

Other key findings in the October edition of Leading Energy include:
• Smart meters deployment is gaining momentum, but there is still some way to go before the full benefits of these are realised.
• The commissioning of the Pole 3 HVOC link in 2013 is expected to ease the possibility of pricing disconnections between the North and South Islands.
• Financial transmission rights (FTRs) are expected to start trading in May 2013. FTRs are intended to provide a protection mechanism from price variations between two different locations.


PwC_New_Zealand_Leading_Energy_2012_Infographic_26_October_2012.pdf

: PwC_New_Zealand_Leading_Energy_2012_publication_26_October_2012.pdf

Notes to editors: A PDF of PwC’s annual Leading Energy publication is attached and provides more detailed comments on the Electricity generation and retail sectors.

This year, and for the first time, we have also included results from a Du Pont analysis on the financial performance of the generation companies, which provides additional insights into the companies’ financial returns.

About PwC
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