Giving more water away free to Meridian Energy unwise

Sunday, 7 September 2025

OPINION: Businesses and households are fretting about the price of power, and there is a growing risk of another energy crunch next winter.

So why not let the country’s electricity generators dip a little deeper into the country’s lakes to generate more cheap hydro electricity?

The country’s largest power firm, Meridian Energy, has been campaigning to be allowed to do just that at Lake Pukaki, asking for the right to draw down the lake by five metres below its normal lowest-allowable level.

It is easy to see why Meridian would like the extra water.

It would be enough to generate 545 gigawatt-hours of electricity, or about $80 million worth of power at current average wholesale prices — replenished each time the lake refilled from its low, and all free to Meridian.

Leaving aside any visual and environmental impacts, letting the power giant have its way might seem like a pragmatic way to boost electricity generation.

But Transpower, the country’s state-owned electricity system operator, isn’t convinced.

It can already allow Meridian to draw down the lake by an extra five metres during an energy crunch of the type that occurred last winter.

Its concern is that if Meridian was allowed to use the so-called “contingent” water as of right, the extra generating capacity might simply displace investments Meridian and others made in new power plants, and the extra water might not be there when it was needed most.

In other words it could backfire by reducing the country’s energy security and mean the electricity market was more exposed in a crisis.

Transpower operations manager Chantelle Bramley says that when it consulted on the issue, most submitters agreed contingent hydro storage was the “fuel of last resort” and should only be used where there would otherwise be an impact on the security of consumers’ electricity supply.

Permanently changing water rights could provide “short-term relief” but have longer-term consequences, she warns.

“If we use our contingent hydro storage faster, or earlier, than necessary and it doesn’t rain, we can run out of energy very quickly with our relatively small hydro storage reservoirs.”

But Meridian’s argument is that it currently needs to manage its hydro lakes more conservatively than it would otherwise do, because it can’t know in advance whether and when Transpower will let it tap into the contingent resource.

And the effect of that is to constrain its hydro generation and push up power prices in more normal times, it suggests.

After getting firmly knocked back by Transpower, Meridian last month got approval from ministers to try a different tack and sidestep the system operator by applying for resource consent for the right to the contingent water resource through the fast-track regime.

Chief executive Mike Roan reassured investors on a conference call that — when combined — access to more water at Lake Pukaki, an agreement struck last month to keep coal burning at Genesis’ Huntly power station, and arrangements for the aluminium smelter in Bluff to cut production when electricity supplies were short should ensure the lights stay on.

Aside from Transpower’s objections, there is another reason why Meridian might have a fight on its hands.

Fellow majority-state-owned gentailer Genesis Energy this week advised The Post that lowering the lake level at Pukaki could have knock-on effects on the hydro plants Genesis owns on Lake Tekapo, which is connected to Lake Pukaki.

Chief operating officer Tracey Hickman says it is studying how its assets could be affected and “advising Meridian of our concerns and the assessment work we have commissioned”.

“Genesis is an ‘adjoining landowner’ under the fast-track legislation” and expects to “formally engage” on Meridian’s application, she says.

If the current arrangement under which Transpower controls access to the contingent reserve at Pukaki isn’t deemed to be working well enough for the sector, one solution would be to give Meridian access to the water but to charge for it.

What if Meridian was required to pay the Crown 90% of the revenue it earned, and a minimum of 20 cents a kilowatt-hour, for the electricity it produced from the extra five metres of water?

Given the virtually-zero cost of producing power from its existing hydro plants at Lake Pukaki and on the Waitaki River it would still have the incentive to offer the extra power into the market during a period of energy shortage when wholesale electricity prices rose above 20c/kWh.

But only after it had committed all other more profitable energy from its solar and wind farms, meaning the deeper depths of Lake Pukaki should still be preserved for times of need.

And the disincentive that access to the water would create for Meridian investing in other forms of generation would be minimal.

Best of all, almost all of the $110m-plus of value that would be released each time the extra five metres of water was drawn down at that 20c/kWh minimum price would go to the public via the Crown.

That is rather than potentially no more than half of that accruing to the public though the Government’s 51% ownership of Meridian.

Roan, unsurprisingly, is less than enthused by that concept.

“Charging for water has been suggested before,” he observes.

But he contends that despite the way the price of electricity is determined through the market, Meridian would find a way of passing that cost on to the public, if it was imposed, and that less would be charged for power if Meridian got the water for free.

The extra profits Meridian could expect to earn from the extra water it was seeking at Pukaki would be in the region of $12m to $15m a year, he told analysts.

The thing is though, that the market price of electricity is determined by scarcity, with the input cost setting only the floor price.

So the water cost should be more likely to come out of Meridian’s profits than customers’ wallets.

Accommodating Meridian’s wishes, on the other hand, would mean the Government giving away what is effectively electricity in liquid form to the country’s largest power firm, for it to on-sell to customers, with no conditions attached.

That seems about as smart as it sounds.

Yet it could happen. It’s called the fast-track regime, not the “Let’s think about it for five minutes first” regime, after all.

Energy Minister Simon Watts says that since Meridian’s fast-track application is now “in a statutory decision process”, it would be inappropriate for him to comment on it at this point.

But he says the Government is not looking at charging hydro generators, or other water users, for their use of freshwater — even, it appears, new water for which they don’t currently have consents.

Freshwater allocation issues will be considered as part of “the broader resource management reform process”, with legislation being introduced later this year, he adds.