Transpower investments 'put credit rating at risk'

Fitch Ratings expects proposed investments by Transpower to lead to a deterioration in the national grid operator's credit profile, unless the Government is willing to inject more equity.

The outlook for New Zealand power and utilities was broadly negative, but there might be some positive developments over the medium term, Fitch said yesterday.

The approval of pending transmission network projects, particularly the $672 million inter-island link upgrade, were expected to reduce uncertainty and regulatory risk for the electricity sector.

Substantial investment in the transmission grid was needed to support growth in generation capacity and to meet the growing demand.

But with the first-capacity upgrade expected only by April 2012, electricity companies' credit quality, particularly South Island-based generators, remained exposed to the inter-island transmission constraints during extended dry periods, Fitch said.

Transpower's overall five-year plan to invest more than $3.8 billion in new transmission projects would be positive for the industry, leading to improved security of supply and an easing in some extreme wholesale price volatility.

"Transpower's credit metrics are likely to deteriorate unless it receives new equity from the NZ Government," Fitch said in its New Zealand Power and Utilities Outlook 2010.

This country's security of supply challenges resulted from factors such as its small size, isolation, the dominance of hydro generation units and the location of those power stations away from the main demand areas.

Hydro-power provided relatively cheap and low-carbon electricity, but exposed the economy to dry-year risk when electricity prices and volatility rose sharply.

On average, 2009 wholesale electricity prices were significantly lower than in 2008 and recent years as catchment areas received above-average rainfall in the first nine months of the year, Fitch said.

But with hydro storage limited to around three months of electricity consumption, a return to average rainfall conditions would see the return of a need for coal-fired generation.

That, and a return to normal electricity demand at the Tiwai Pt aluminium smelter, could result in higher wholesale prices in 2011.

Retail electricity prices largely remained steady in 2009, with low wholesale prices and Government pressure on state-owned retailers not to increase prices while a ministerial review was carried out.

An increase in pressure on retail margins was expected this year because of higher wholesale prices, transmission upgrade costs and new generation capacity.

- NZPA