Energy

Contact Energy prepares for ‘turbulent time’ after Tiwai exit

In announcing the company's full-year results,, Contact Energy CEO Mike Fuge warned of a "turbulent time" for the electricity market amid the exit of Tiwai Point, Marc Daalder reports

If ongoing negotiations to delay the shut down date of the Tiwai Point aluminium smelter are not successful, a disorderly exit would have far-reaching impacts, Contact Energy CEO Mike Fuge has warned.

Fuge was speaking to shareholders, energy industry stakeholders and the media after announcing the company's full-year results, which saw underlying profits fall by 27 percent from the previous year. Although New Zealand's second-largest electricity generator and retailer still raked in $129 million in underlying profits and paid out dividends at 39 cents a share, Fuge said the company would reconsider how it paid out future dividends.

The lower-than-expected returns were due to uncertainty in the wholesale market, constraints on the supply of gas, increased costs of running geothermal generation and the impact of the Covid-19 lockdown, which saw demand from business and industry slump more than residential demand increased.

Nonetheless, Fuge and CFO Dorian Devers insisted the company was well-positioned for a disorderly exit by Tiwai from the market, which would push the sector into a volatile situation.

"Going forward, I think for the industry players, it is going to be a turbulent time and we think that Contact Energy is going to be well-positioned with its portfolio and the agility in its customer base to sail through those times," Fuge told Newsroom.

Contact's comparatively heavy reliance on geothermal generation meant it would ramp up production when wholesale prices are high and pull back when prices fall, Fuge said.

However, the company's much-hyped Tauhara geothermal station, which is shovel-ready and able to provide 70 MW of power nearly immediately with plans to scale up to 150 MW, has been put off in light of the new situation.

The combination of the withdrawal of Tiwai Point, the potential closure of other big industrial power users and several large wind energy projects coming online over the next 12 months means that the market is likely to be flooded with electricity.

"Our base assumption is that [Tiwai] will exit in 14 months' time," Fuge said.

"We see for the market that it's going to be very disruptive. You've got to see it in the context of other dynamics going on. It's not only Tiwai's exit which frees up five terawatt hours, there is also the potential closure or scaling back of both Refining New Zealand and New Zealand, which is about another terawatt hour, and over a terawatt hour of wind coming into the market over the next 12 months."

Fuge said that represented over a third of the gas market, which Contact also participates in.

"The key bit that actually hasn't been talked about a great deal is there's 13 percent of electricity demand disappearing but you could be seeing 20, 25, 30 percent of gas demand going as well," Devers told Newsroom.

That gas could instead be sent to Methanex, which converts it into methanol, but methanol prices are also extremely low at the moment, Devers said.

"Methanex can only pay quite a low price for gas. If you end up getting less investment in oil and gas going forward, which we think is highly likely, what you're going to see is the reliability of gas as well is going to start to decline. And therefore that gets priced into electricity wholesale prices and leads to that increased volatility."

Companies more reliant on wind energy than Contact could also face challenges, with Fuge saying that when the wind blows, wholesale prices could fall to zero.

Some of the excess supply could be soaked up by conversions of coal-powered dairy facilities to electricity or the construction of electricity-hogging facilities like data centres, Fuge said, but none of that was ready to scale up in the near term.

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