2014/15 Annual review of Meridian Energy Limited

Transcription

1 2014/15 Annual review of Meridian Energy Limited Report of the Commerce Committee Contents Recommendation 2 Introduction 2 Meridian s place in a competitive retail market 2 The security of supply of energy production 3 Relationship with Tiwai Point smelter 3 Support of solar and battery power 4 Transmission costs and access to the grid 4 Appendix 5

2 Meridian Energy Limited Recommendation The Commerce Committee has conducted the annual review of the 2014/15 performance and current operations of Meridian Energy Limited and recommends that the House take note of its report. Introduction Meridian Energy Limited is an energy retailer and New Zealand s largest electricity generator. Meridian generates about 30 percent of New Zealand s electricity entirely from renewable sources (hydropower and wind farms). It retails power to about 276,000 New Zealand customers through the Meridian and Powershop brands. Meridian also operates in Australia, where it owns two wind farms and retails to more than 48,000 customers through Powershop. Meridian is a mixed-ownership model company under the Public Finance Act The Crown is Meridian s majority shareholder. The Chief Executive is Mark Binns, and the Chair of the Board is Chris Moller. Financial and service performance In 2014/15, Meridian generated total revenue of $2.904 billion. It reported a net profit after tax of $247 million up $17 million from the prior year. The Office of the Auditor- General rates Meridian s management control environment, and financial information systems and controls, as very good. Meridian s place in a competitive retail market Given the competitiveness of the New Zealand energy market, we asked how Meridian is ensuring that it remains competitive, and attracts and retains new customers. We heard that Meridian s customer numbers fell by one percent in 2014/15, although the volume of energy sold rose. Meridian acknowledged that it cannot match the silly rates of some competitors. However, it matches lower rates where possible and attracts customers through discounts and one-off incentives. We heard that Meridian also has products that are unique in the retail market. Meridian s Powershop brand allows customers to monitor their energy use online or through smartphones. Meridian told us that this point of difference makes Powershop competitive and was the basis for Meridian launching the brand in Australia. To date, Powershop has more than 100,000 customers on both sides of the Tasman. Meridian is seeking to franchise a retailer to use the Powershop platform in the Northern Hemisphere. Some of us questioned whether the market is truly competitive when, in 2014/15, Meridian delivered a 36 percent return to investors, produced a $247 million profit, and paid 132 employees or former employees more than $150,000 in remuneration (23 of whom received more than $300,000). Meridian asserted that these figures actually reveal the market s competitiveness, as Meridian must offer competitive salaries to attract good people whose specialist skills are in international demand. We also heard that the large 2

3 shareholder return was mostly because the share price appreciated, which may not continue next year. The security of supply of energy production Transpower s winter energy margin sets the minimum level of energy production needed to cover normal peak demand, as well as any unexpected system breakdowns or sudden increases in demand. We noted that, from 2019, New Zealand s existing generation facilities may be insufficient to meet the winter energy margin. We asked what Meridian was doing to alleviate this risk. Meridian believes that the retirement of three thermal plants one owned by Contact Energy and two owned by Genesis Energy would reduce New Zealand s infrastructural capacity to meet the margin. Accordingly, Meridian is renegotiating its existing swaption arrangement with Genesis to provide cover for dry years. 1 Meridian is also talking with other parties (who could not be named) about installing gas peakers, which would allow Meridian to achieve similar swaption arrangements with other generators. Meridian is also working with its turbine suppliers to expand its wind generation capacity, and is developing proposals to increase the flexibility of its hydro catchments. For example, Meridian hopes to be able to draw additional water from some of its South Island lakes, such as Lake Pukaki, during dry years. We questioned whether Meridian s decision to call on Genesis to reverse its closure of coal plants is consistent with its marketed image of being an eco-friendly power company. Meridian told us it has increased New Zealand s use of renewables but that it would be some time before New Zealand s energy is 100 percent renewable. Until then, a back-up is required to ensure security of supply. At this stage, that back-up is fossil fuels. Relationship with Tiwai Point smelter Recently, Meridian signed a variation to its electricity agreement with New Zealand Aluminium Smelters (NZAS) to supply energy to the Tiwai Point smelter. Although Meridian secured a modest price increase, NZAS retains the right to terminate the contract, with a year s notice, from 1 January This right will continue until It is unclear whether, or when, NZAS might exercise this right. The outcome largely rests on the future of international aluminium prices. We asked how uncertainty about the smelter s viability is affecting investment decisions to expand New Zealand s energy production. Meridian acknowledged that because NZAS uses 12 percent of New Zealand s energy production, the inability to rule out the closure of the Tiwai Point smelter is dissuading investment in the expansion of energy production facilities, such as new plants. In this context, a sequence of smaller investments in geothermal upgrades and wind farms is more likely than a major power station. We asked what strategies Meridian could implement if the smelter closed. Meridian indicated that it could use its retail business to go and get more customers, or it could sell the excess energy on the market at wholesale rates. Meridian did add that, should the smelter close, the retirement of Genesis and Contact s thermal plants would adjust the supply side and cushion the effect of demand dropping. 1 The arrangement is a financial contract allowing Meridian the option to access up to 150 megawatts of energy generated by Genesis at a capped rate each year. 3

4 We are concerned about the insecurity of the Tiwai Point agreement and will continue to monitor the situation. Support of solar and battery power We asked whether Meridian supported solar and battery energy. We heard that Meridian constantly considers these technologies. However, grid scale solar is not yet viable without unjustified subsidies, and battery technology is still not economic. Meridian maintains that the market should dictate the viability of these technologies, rather than subsidies. Meridian stressed that, although it does not oppose rooftop solar, it does not support buying back solar energy for more than the wholesale market rate. It believes that the rates it currently pays 10 cents in winter and seven cents in summer are fair. The Chief Executive emphasised that it makes no sense for Meridian to pay more for solar energy than for energy it can buy off the market at wholesale rates. He also rejected our suggestion that solar customers, discouraged by low buyback rates, would go off grid. We will continue to monitor this area with interest. Transmission costs and access to the grid Meridian supports the Electricity Authority s review of the transmission pricing methodology and is confident that the authority will reach competent conclusions. Meridian strongly supports a beneficiary-pays approach. It argues that the variance in what people pay to access the grid presents a real equity issue and that not everyone is paying their fair share. Meridian also indicated that it did not support the current low fixed user charge, on the grounds that it operates contrary to the initial policy intention. 4

5 Appendix Committee procedure We met on 12 November 2015 and 18 February 2016 to consider the annual review of Meridian Energy Limited. We heard evidence from Meridian Energy and received advice from the Office of the Auditor-General. Advice and evidence received is available on the Parliament website, Committee members Melissa Lee (Chairperson) Kanwaljit Singh Bakshi Ria Bond Dr David Clark Hon Judith Collins (before 10 February 2016) Hon David Cunliffe (from 2 December 2015) Clare Curran Kris Faafoi (before 2 December 2015) Brett Hudson Gareth Hughes Simon O Connor Maureen Pugh (from 10 February 2016) Evidence and advice received Office of the Auditor-General, Briefing on Meridian Energy Limited, dated 12 November Organisation briefing paper, prepared by committee staff, dated 10 November Meridian Energy Limited, response to written questions Meridian Energy Limited, Commerce Select Committee presentation, 12 November