Meridian may be forced to sell Manapōuri hydro scheme, Forsyth Barr speculates

Friday, 1 October 2021

12-stl-Photo Barry Harcourt . The Meridian power station at West Arm lake Manapouri.

Meridian Energy could be required to sell its largest power station, the Manapōuri hydro scheme, as a result of the Electricity Authority’s review of the wholesale market, broker Forsyth Barr has speculated.

Forsyth Barr analysts Andrew Harvey-Green and Mark Robertson made clear they didn’t see a need for Meridian, which is the country’s largest generator, to be forced to sell power plants.

But Forsyth Barr said that breaking up Meridian’s generation assets would make sense on the face it “if the Electricity Authority thought Meridian had excessive market share”.

Manapōuri, which is the country’s second-largest power station by capacity after Genesis Energy’s Huntly coal and gas power station, would then be “the logical asset” to require it to sell, the broker said.

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The Electricity Authority expects to release the results of its wholesale review towards the end of the month.

Fonterra is among the major power users that have this year called on the Electricity Authority to toughen up to ensure confidence in the power market.

Electricity Authority chief executive James Stevenson-Wallace said in March that Meridian Energy had been “front and centre of the confluence factors” that resulted in an ‘undesirable trading situation’ (UTS) in December 2019 when it withheld hydro generation “to stop South Island prices reducing”.

The authority ruled that Meridian and Contact Energy, which were both subject of complaints from independent retailers, had not breached its rules as they stood at the time.

It has been conducting its review of the wholesale market this year in the context of controversy over the outcomes of its UTS investigations, a sharp increase in wholesale prices, and a loss of confidence among independent retailers in the power market.

Geoff Bertram, a senior associate at the Institute of Policy Studies at Victoria University and a longstanding critic of the current electricity market model, has suggested forcing Meridian to shed assets would achieve nothing.

He has advocated instead for the Government to reactivate Labour’s 2013 plan to introduce a more centrally-planned “single buyer” market model to bring down power prices.

Energy Minister Megan Woods told Parliament in April she was taking the situation in the electricity market very seriously.

The Major Electricity Users Group, which represents large power users, called last month for the Electricity Authority to ensure power prices were “more reflective of the cost of supply”.

That has been a key objective of the single buyer model, that would allow a monopsony state-owned buyer acting on behalf of power users to pay generators less for electricity that was cheaper to generate, such as hydro power, than for other forms of generation.

Forsyth Barr said record-high 2021 wholesale electricity prices and the August 9 blackouts had “raised questions about whether the wholesale electricity market is delivering for consumers”.

But it said that in its view, at a high level, current market mechanisms were “working fine”, with higher wholesale prices leading to more investment in new generation.

It said that “if politicians decide to address the wholesale electricity market directly” hydro generators – of which Meridian is the largest – were most at risk.

“Renewable generators, and hydro generators in particular, have benefitted the most from rising thermal generation operating costs,” it said.

Forsyth Barr said other possible outcomes of the Electricity Authority’s price review included caps on wholesale prices and the creation of a “capacity market” – favoured by Genesis – that would pay generators to have spare capacity on hand that they would need to use to reduce price spikes in times of shortage.

“Whilst we believe the risks are modest”, all gentailers faced some regulatory downside risk, it said.

A Meridian Energy spokeswoman noted that Forsyth Barr’s report mainly attributed high wholesale prices this year to higher gas prices.

“In what appears to be new research they reference a strong correlation between gas plant running costs and the wholesale electricity prices observed between 2018 and 2021,” she said.

There were suggestions that peak may now have passed, she said, citing a report from energy analyst Enerlytica.