Meridian warns wholesale electricity prices may stay high for 'some time'

Wednesday, 6 October 2021

Meridian declared an unchanged final dividend of 11.2 cents per share this year, but acknowledged commercial customers had been “doing it tough”.

The country’s largest power company is forecasting wholesale electricity prices may remain high for “some time to come”, with gas shortages that have affected prices likely to take another year or two to resolve.

Speaking at the company’s annual general meeting, chief executive Neal Barclay said Meridian’s “vertically integrated model” had allowed it to shield most of its retail customers from high wholesale prices.

“But we do acknowledge that some of our commercial customers have been doing it tough,” Barclay said.

“We have been working with these customers to assist with extended contract solutions that help to smooth their costs over time.”

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The vertically integrated model that Barclay referred to allows ‘gentailers’ including Meridian to supply low-cost hydro generation direct to their own retail customers.

Broker Forsyth Barr said wholesale prices had increased from an average of $72 per megawatt hour between 2010 and 2018 to $150/MWh over the past three years.

During the first half of this year, spot market prices frequently sat above $300/MWh, prompting manufacturers including NZ Steel and paper mills to curb production.

Neal Barclay, chief executive of Meridian Energy, said 100 per cent renewable power was “on the cards” for 2030 but then appeared to qualify that.

Meridian chairman Mark Verbiest said at least $7 billion would need to be spent on new renewable generation over the next 10 years for the industry to ensure New Zealand “achieves its climate goals”.

The company later clarified that included $2b of investments that were already planned by the industry, but said the total required could be upwards of $10b depending on the pace at which electricity displaced other power sources.

The estimates allowed for the retirement of all “base load” thermal generation, the retirement of ageing renewable generation assets, and some modest organic demand growth, a spokeswoman said.

Despite the need for investment, Barclay said the long-term trend was for the cost of power to consumers to reduce.

“I know that may not seem obvious when we look at recent high wholesale prices, but it is hard to argue against given the forecast future costs of both wind and solar, which will continue to plummet,” he said.

The Electricity Authority is due to publish the results of a review of the wholesale market on October 27.

A $7b investment in renewables is needed over 10 years for NZ to meet its climate change goals, Meridian says.

John Harbord, the chairman of the Major Electricity Users Group, which represents large power users, has called for major reforms, including power prices that are “more reflective of the cost of supply”.

The Ministry of Business, Innovation and Employment (MBIE) estimates that the “levelised cost” of generating power from new hydro, geothermal, wind and solar power plants would all have sat at or below $70/MWh, or 7 cents per kilowatt hour, in 2019.

That cost calculation takes into account the cost of building power plants and running them over their lifetime.

Barclay told shareholders the rapid growth of renewable energy was inevitable as costs fell “and I believe a 100 per cent renewable electricity grid by 2030 is on the cards”.

But he later appeared to clarify that he envisaged some gas generation being used beyond that date.

“I think by 2030 we're probably looking at about 98 per cent, 99 per cent renewables in most years, with some reliance on gas particularly in strong drought periods,” he said.

MBIE is investigating the feasibility of instead constructing a huge pumped hydro scheme at Lake Onslow in the South Island, in part to provide an alternative to gas peakers when normal hydro generation is in short supply.

But, fielding questions from shareholders, Verbiest said Meridian saw that as “quite an expensive option”.

“That said, there's a lot of water to flow in terms of considering all of these options and we're just genuinely looking forward to participating in that debate,” he said.

Commenting on the commercial impact Lake Onslow could have on Meridian, Verbiest said there were a lot of questions to be answered.

“It's not entirely clear who might own the project, how it would play in the market, it’s pricing, and so on.

“But obviously a key from our point of view in terms of New Zealand meeting its decarbonisation goals is ensuring that we don't upset the rest of the sector’s investment incentives in terms of building new generation.”

That was something that needed to be considered with “some care”, he said.

Verbiest was questioned at the online meeting on Meridian’s involvement in an “undesirable trading situation” that the Electricity Authority determined occurred in 2019.

“We've always disagreed with the accusation that we deliberately spilled water, that's not what we've ever been about,” he said.

“But notwithstanding that, we've accepted the authority’s decision and the important thing is, we move on.”