2007/08 Financial review of Mighty River Power Limited

Transcription

1 2007/08 Financial review of Mighty River Power Limited Report of the Commerce Committee Contents Recommendation 2 Introduction 2 Financial performance 2 Geothermal development 2 Wind turbines 4 Low-income and vulnerable customers 4 Pre-pay smart meters 4 Labour Party view 5 Appendix 6

2 Mighty River Power Limited Recommendation The Commerce Committee has conducted the financial review of the 2007/08 performance and current operations of Mighty River Power Limited, and recommends that the House take note of its report. Introduction Mighty River Power is a State enterprise operating electricity generation, trading, retailing, and metering businesses. It owns or manages a range of generation assets in the North Island, largely using renewable sources. The bulk of its generation comes from nine hydro power stations along the Waikato River. This capacity is complemented by output from the Southdown hydro and gas co-generation station, and increasingly from geothermal plants in the Taupō and Bay of Plenty regions, together with a small amount of bioenergy production. The company is also developing several wind energy sites. The group s retail business, Mercury Energy, sells electricity and gas to over 350,000 customers. Its metering business, Metrix, provides meters and meter-reading services to residential and commercial customers in Auckland, and to other electricity retailers. Financial performance In 2007/08 Mighty River Power generated revenue of $1.2 billion, and a post-tax profit of $111 million. The company informed us that it considered this a good result given the drought in the Waikato that year. It reported that the interim profit for the six months to 31 December 2008, at $113.9 million, 1 was the highest in its history and the largest of any of New Zealand s electricity generators, despite the company s smaller size. The company emphasised that retail price increases had not been a significant factor in its increased profit. Rather, the six-month operating result had been driven by increased market share, generation from its new geothermal plant at Kawerau, and lower costs as it reduced gas use from its Southdown plant in favour of hydro generation. The company considered that it was in a robust position to complete its substantial programme of capital investment in new geothermal generation. Geothermal development Mighty River has embarked on a major programme to build its geothermal capacity and capability, describing this as its biggest priority. In August 2008 it commissioned a 100- megawatt geothermal power station at Kawerau, bringing geothermal capacity to 18 percent of its portfolio. A new plant under construction at Nga Awa Purua, close to Rotokawa, is due to be completed in mid-2010, and exploration at the Ngatamariki geothermal field is planned for 2008/09. 1 Adjusted to exclude the effect of new accounting standards, NZ IFRS, which report unrealised gains and losses on financial instruments. 2

3 The company informed us that geothermal development entailed significant capital risk in the exploration phase, and long lead times around seven years from concept to commissioning but according to industry assessments, now offered the lowest-cost option for developing new capacity. Rebuilding geothermal capability We were interested in the historical ups and downs of geothermal development in New Zealand. Mighty River informed us that New Zealand was once at the forefront of this industry. With the discovery of the Maui gas field in the mid 1980s, cheaper gas displaced geothermal generation and New Zealand s talent in this field moved overseas. Mighty River sees itself picking up where the industry left off 30 years ago. It is seeking to rebuild the skills base through international recruitment, training of university graduates, and apprenticeships. Among the expected benefits of its recent investment in the American company GeoGlobal Energy LLC are opportunities to attract and retain skilled people, and to tap into GeoGlobal s international expertise. The venture with GeoGlobal has also allowed Mighty River to diversify into geothermal exploration in Chile, which could offer overseas experience to young graduates. Partnerships with iwi We were interested in the business arrangements Mighty River has entered into with Māori land trusts to develop geothermal resources in the central North Island, which appear to be a promising form of public-iwi partnership. Mighty River explained that the form of collaboration varied. In the case of the Mokai development, the Tuaropaki Trust holds 75 percent ownership; in other projects, such as the Tauhara North No.2 Trust at the Rotokawa and Ngatamariki fields, and Putauaki Tuwharetoa ki Kawerau, there is a royaltytype arrangement, with the trust providing access to the steam and Mighty River building and operating the plant. In each case, the company added, the collaboration has been very positive, with a shared commitment to preserving the resource in perpetuity. Sustainability We emphasised the importance of managing New Zealand s steam resource responsibly, as excessive draw-off could affect other areas such as tourism. Mighty River confirmed that its resource use is closely monitored, and assured us that it is committed to fully renewable geothermal development. It views its business partnerships with Māori as a good fit in this respect; as landowners, they also have a strong interest in long-term sustainability, and tend to impose even higher requirements than those specified in resource consents. Reinjection of condensed steam is central to Mighty River s geothermal programme, to preserve the resource. The company injects some 38 million tonnes of fluid a year back into the geothermal reservoir; after 12 to 18 months it percolates through into steam again. We were informed that the lifespan of a geothermal field is indefinite, although efficiencies can be gained by modernising plant and equipment, as Contact Energy is now doing at Wairākei after 40 to 50 years of operation. 3

4 Wind turbines As part of its diversification strategy, Mighty River is advancing several wind generation possibilities. It has notified a resource consent application for a significant 122-turbine wind farm at Turitea, near Palmerston North, and has entered into arrangements with the Christchurch company, Windflow Technology Limited, to build a smaller wind farm at Long Gully in Wellington on its behalf. Mighty River informed us that the smaller turbines produced by Windflow suit several of its sites better, but it considers there is also a place for larger imported turbines, as at the Palmerston North project. Low-income and vulnerable customers We asked about compliance with the Electricity Commission s guidelines relating to lowincome and vulnerable customers, noting that it said little about this in its annual report. We recalled that the tragic death of a medically dependent customer of its subsidiary, Mercury Energy, had prompted the introduction of these guidelines in Mighty River acknowledged that its annual report should have specifically referred to the steps it had taken to apply the lessons learned from that tragedy. It noted, however, that a recent audit by the commission had commended the company for going beyond the requirements of the guidelines. Mighty River added that the number of customers who had registered with the company as medically dependent had increased from 61 before May 2007, to over 1,500 now. The Electricity Commission has been working with all electricity retailers to close any gaps in the protocols to be followed with such customers. We asked about trends in the level of bad debts. In the light of the current economic downturn, we emphasised the importance of businesses monitoring vulnerability as indicated by customers ability to pay their bills so that appropriate and timely action can be taken if necessary to avert crises. Mighty River said that it monitored bad debts on a daily basis, and had observed a slight rise over the past 12 months from historically low levels. The company works with community budgeting agencies that help clients manage their bills. It considers avoiding the creation of bad debt in the first place to be the socially-responsible approach, and gave this as one reason it is investing in smart meters to give people better information with which to manage their budgets. Pre-pay smart meters Like its competitors, Mercury Energy has launched a programme to replace existing meters with advanced meters which can be read and controlled remotely, and which customers can monitor on a screen in their home. We noted that Mercury has opted for a different technology from other power companies we had spoken to, and asked whether this was likely to create problems of compatibility. We were informed that there were several different technologies, both for meters and the systems by which they communicate. Mighty River was collaborating with other power companies and the Electricity Commission to ensure that the systems would be compatible, and did not envisage any difficulties. The meters used by Mercury Energy operate on a pre-pay system, and the company envisages benefits for its customers in the 4

5 ability to pre-load, monitor usage, and avoid a build-up of debt. We were assured that adequate systems, including short-term emergency credit and deferred payment options, would ensure that no customer would be disconnected without due warning. Labour Party view The Labour Party members of the committee are concerned that the lack of integration across the energy sector, given New Zealand s geographic challenges and population spread, remains an impediment to the best utilisation of New Zealand s energy resources at the least cost to the consumer. 5

6 Appendix Approach to this financial review We met on 26 March and 30 April 2009 to consider the financial review of Mighty River Power Limited. We heard evidence from Mighty River Power Limited, and received advice from the Office of the Auditor-General. Committee members Hon Lianne Dalziel (Chairperson) John Boscawen Charles Chauvel Clare Curran Te Ururoa Flavell Jo Goodhew Melissa Lee Peseta Sam Lotu-Iiga Katrina Shanks Evidence and advice received Mighty River Power Limited, Annual Report Mighty River Power Limited, Statement of Corporate Intent July 2007 June Mighty River Power Limited, Responses to supplementary questions, 3 April Office of the Auditor-General, Briefing on Mighty River Power Limited, dated 26 March Organisation briefing paper, prepared by committee staff, dated 26 March