Meridian says Government needs to be more accepting of some gas generation

Wednesday, 25 August 2021

Meridian Energy is New Zealand's largest owner of hydro and wind generation assets.

Meridian Energy chief executive Neal Barclay has cast doubt on the Government’s “aspirational target” of achieving 100 per cent renewable generation by 2030, after reporting a jump in the company’s net profit.

Barclay also continued to take aim at big power users in the wake of the Major Electricity User Group (MEUG) releasing a study on Tuesday that argued Meridian had made $3.5 billion in excess profits over the past 20 years.

On Tuesday, Meridian questioned the credibility of the MEUG, whose members include Fonterra, BusinessNZ, Countdown and New Zealand Steel.

Meridian, which is 51 per cent owned by the Government, reported a 145 per cent rise in its net profit to $428 million in the year to the end of June, with revenues rising 26 per cent to $4.3b.

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But the company said its underlying profit fell 27 per cent to $232m, from $316m the previous year, after factors such as changes in the value of electricity hedges were excluded.

Its operating profit of $729m was down 15 per cent and marginally ahead of a forecast by Forsyth Barr.

At Glenbrook, south of Auckland, a small facility makes low-emissions hydrogen gas.

“I don't think anyone doubts the importance of reaching a ‘zero emissions economy’, ideally sooner than 2050,” Barclay said.

But he said the target of 100 per cent renewable electricity by 2030 had “upended the wider industry’s long-standing plans”.

“We do need government policy that is more sympathetic to the acceptance of some gas generation,” he said.

Barclay said the electricity sector scored an “own goal” when rolling power cuts saw about 34,350 homes cut off from power on August 9.

But he rejected commentary that the electricity market was broken.

“Yesterday, a group of large New Zealand businesses criticised another – us – for making too much money, with the sole motivation of lifting their own profitability,” he said.

“When you see ‘business attacking business’, it will be an economic motivation,” he said.

MEUG chairman John Harbord said he understood why Barclay might say that but he had not got that right.

“The motivation behind us commissioning the work we did was to get a better understanding of what is happening in the wholesale market, because the prices that have been charged for the past three years and are forecast for the next three to five years do put jobs and investment at risk,” he said.

The drop in Meridian’s underlying profit followed a summer drought, which dented hydro generation, and a drop in the price the Tiwai Point aluminium smelter, Meridian’s largest customer, pays for power.

Inflows into its hydro catchments were the third-lowest on record between November 2020 and April 2021, it said.

The company struck a cheaper power contract with the aluminium smelter in January to ensure that plant keeps operating until at least the end of 2024.

The smelter is believed to be paying about 3.5 cents a kilowatt-hour for power, down from about 5c/kWh.

“We certainly experienced some challenges,” Barclay said.

But he said the underlying drivers of future business value remained strong.

New Zealand experienced 0.7 per cent growth in underlying demand for electricity over the past financial year, with a recovery from Covid lockdowns evident in the fourth quarter.

Barclay said early indications suggested demand for electricity had reduced under the latest alert level 4 setting, although not to the same extent that was seen last year.

Meridian’s hydro generation over the past year was 12 per cent down on the year earlier.

But that had improved in recent months, with strong inflows in June and July lifting national hydro storage to 108 per cent of normal by early August.

Meridian is New Zealand's largest owner of hydro and wind generation assets.

Barclay said the company was committed to building its $395m Harapaki wind farm in the Maungaharuru Range northwest of Napier and expected to spend $42m to get the project under way this financial year. It is set to be New Zealand’s second-largest wind farm.

Meridian will pay a final dividend of 11.2 cents a share, unchanged from the previous year. The full-year ordinary dividend of 16.9 cents is unchanged from last year, although the company also paid a special dividend of 2.44 cents in 2020.

Shares in Meridian fell 0.5 per cent to $5.125 in early trading on Wednesday.

The company is reviewing the ownership of its Australian business and released an information memorandum to interested parties this month. The process was expected to take several more months, it said.