Low inflows of water into the South Island's hydro-electricity storage lakes are expected to knock Contact Energy's earnings in the second half of the current financial year but should boost prices for electricity to residential, commercial and industrial users next year, says analysis from investment firm First New Zealand Capital.
"South Island hydrology has shifted gear from flood to trickle," wrote analyst Nevill Gluyas in a research note dated May 23. "Storage in southern lakes has fallen to now reach the 1 percent risk level, ie, one previously observed extreme hydro sequence could result in future shortfall."
New Zealand has experienced periodic winter electricity savings campaigns in the 1990s and 2000s, caused by so-called 'dry winters' in the eastern South Island catchments, which account for around 80 per cent of the country's relatively limited hydro storage capacity in an electricity system where 70-to-80 per cent of all electricity is generated from renewable sources, primarily hydro.
In recent years inflows have been normal or above average while the combination of falling electricity demand and major investments in new wind and geothermal power stations have seen wholesale electricity prices sag and kept pressure off prices to consumers.
While Gluyas notes that inflows "could bounce back at any time", the current low inflow sequence "has restored tension in 2018 financial year forward prices, lifting our FY18 earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments (ebitdaf) by 1.5 per cent to $533 million".
