Contact Energy CEO Mike Fuge says big projects subject to ‘whims and fancies of commissioners or judiciary’

Contact Energy chief executive Mike Fuge is surprisingly upbeat given the number of potential set-backs the company is facing.

Last month, its proposal for a 330MW, 55 turbine, wind farm in Southland was declined, and a decision on its $2 billion takeover of Manawa Energy by the Commerce Commission has been pushed back to May 9.

But Fuge is confident the wind farm will one day go ahead and says Contact would not have proposed the farm if it didn’t believe it to be an outstanding project and one that would comply with the law.

“What it highlighted is that our planning laws are in a mess,” Fuge told the Herald.

“They are subject to the whims and fancies of commissioners or judiciary, and that is not appropriate when we have such an important job ahead in the energy transition.”

NZX-listed Contact - the only one of the big four power companies not majority-owned by the Government - has put in an appeal “because we fundamentally believe that we are right in law”.

It has also entered the new fast-track resource consent process “because it’s actually really important that this project gets built”.

“It’s important for New Zealand that we add another one terawatt hour of renewable energy to the system, and it’s an outstanding project.

“It’s got a good capacity factor and if you can’t build a wind farm on a hill in Southland that’s never been designated as an outstanding natural landscape ... then where on Earth are we going to build these wind farms?”

Water being spilt from Contact Energy’s Roxburgh Dam. Photo / Andrew Morrison

On Manawa, market commentators say approval could be a close-run thing, but Fuge believes it will get the green light.

He likens the planned takeover to the Southland wind farm issue.

“We’re confident that in law and precedent, we should get clearance.

“We wouldn’t have started that process if we didn’t believe that.”

Contact Energy chief executive Mike Fuge. Photo / Supplied

In February, the Commerce Commission issued what it calls a statement of issues, which said: “On the basis of the evidence collected to date, we are not currently satisfied that the proposed acquisition will not have, or would not be likely to have, the effect of substantially lessening competition in a New Zealand market.”

The statement was not a final decision and does not mean the commission intends to decline or clear the merger.

In its cross submission, Contact said it was clear that a merged entity would not have market power in any market, post-transaction.

Contact said it had the data to back up its argument.

Fuge said the sector is one of the most quantitatively analysed in the world.

“We have data for every five minutes, and so you can have an opinion or a hypothesis, but it’s very easy to test that in terms of analysis.

“And so we have to go back to the facts and the analysis, and we believe the facts and analysis bear our position out.”

“It’s important that I’m patient and my team are patient and Manawa are patient, but we do believe that the right decision will be made and that the deal will be approved.”

Contact and other “big four” players are heavily involved in the generation of electricity and energy retailing, and Fuge says there is intense competition in both.

Manawa, which is due to release its annual result on May 16, said in its March quarter update that wholesale spot prices were elevated across most of the period, driven by declining national hydro storage, low national wind generation, and below-average inflows.

Forsyth Barr expects Manawa’s earnings to come in towards the bottom end of its downwardly revised guidance range of $80m-$95m (ebitdaf).

The broker puts the chances of Contact-Manawa takeover clearance at 50/50.

Fuge said Manawa, with its North Island generation, and Contact with its big southern hydro power stations, would make a stronger and more resilient combination for both parties.

Manawa is a “run of river” generator, which means it has to take the water as it comes. Unlike the big players, it has little water storage.

Still smarting

The sector is still smarting from last August’s wholesale power price spike, which saw prices hit $820 per megawatt hour (MWh) due to constrained gas supply, low hydro lake levels, and calm wind conditions. The August peak compared with an average winter price between 2018 and 2023 of just $180 per MWh.

Gas and coal-powered generation backs up the mostly hydro and wind power dominated system when supply and demand conditions dictate.

As it stands, the national power grid is looking better than it did last year, but wholesale prices have been firm, hitting $400MWh earlier this month.

Fuge says today’s prices still reflect the faster than expected decline in the upstream gas industry.

“We have to respond to that, but what we cannot lose sight of is that it’s a supply issue, and the way to resolve a supply issue is to build more generation.

“And so we will, as an industry, but I think we’re in a far better position than we were last year.”

Manawa's Matahina power station on the Rangitāiki River is the largest earth dam in the North Island, at 86m high. Photo / Manawa Energy

Back-up for the system largely rests with Genesis, with its coal and gas-fired Huntly power station, and Contact with its gas-fired Taranaki combined cycle plant, and two fast-start gas peakers near Stratford.

Genesis Energy has been stockpiling more coal to avoid a repeat performance of last year, and Contact has been picking up gas from the spot market.

Contingent storage - water that is only made available for generation at specific times to mitigate the risk of shortage - remains a big issue for the sector.

The conditions under which contingent storage can be used differ with each hydro lake, depending on the terms of their resource consents.

Fuge says the untold story of last year was that if that contingent storage had been released three weeks earlier - then August’s price spike would never have happened.

He says the big hydro generators have, over the last three decades, given away a terawatt hour of renewable energy because of the individual resource consents they signed up to.

The disruptor

Contact’s origins trace back to the restructuring of New Zealand’s electricity sector in the mid-1990s.

The company was spun out of the then state-owed Electricity Corp of NZ (ECNZ) as a disruptor.

Fuge says ECNZ made sure that Contact was given what they considered to be the worst of the assets - geothermal, the Maui gas contract, and Clutha hydro.

“It was set up, not necessarily to succeed, but over time, we have succeeded and have been deliberately disruptive.

“There may have been maybe strategic errors on the way. We doubled down on thermal when we could have got into geothermal.

“But we did invest into Te Mihi 1 and 2 [geothermal]. We did invest in Te Huka 1 and 2, and so that foray into geothermal was a major part of that disruption.”

Fuge says the company - about 70% owned by New Zealanders - has an advantage with its balance sheet.

“We’re not constrained by a 51% (Government) shareholder right who has a different focus and isn’t prepared necessarily to inject capital and so that enabled us to get Tauhara [geothermal project near Taupō] off the ground early.”

Contact had committed to Tauhara, despite the then-uncertainty surrounding the future of the Tiwai Point aluminium smelter.

Fuge said the electricity industry has to move off gas for the generation of baseload - or continuous - electricity generation.

“And if we get it right, that investment in renewable energy over the coming decade will be as big as the development of gas in the 70s and 80s in terms of propelling the next stage of economic growth in this country, because we do have an abundance of wind and solar opportunities which haven’t been developed yet.”

There was still an abundance of conventional geothermal opportunities.

He said “super critical” geothermal which involves tapping into resources deeper beneath the Earth’s crust - would be the natural next step, which would be more expensive and technically challenging.

“But that doesn’t mean we should shy away from it. We have the skill set in this country of any country in the world to do it - we would be the most ideal.”

“We have the reservoir engineers. We have the drillers. We have the people who know how to manage those risks.”

“We are able to grow and build and we’ve demonstrated that.

“Remember, we’re not government-owned, we don’t have what I call a gorilla shareholder between the board and the deep blue sea.

“That’s it. And so the responsibility for taking high quality well-thought-out decisions rests with me and the board.

“There’s no outside party demanding a dividend or a certain return.”

Fuge says to resolve New Zealand’s the supply issue, more generation needs to be built.

“You have to actually make the boat go faster,” he says, “and not rearrange the deck chairs”.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.