Low hydro inflows and constrained gas supply over July and August cost Meridian Energy $200 million, chief executive Neal Barclay told the company’s annual meeting.
The shortages drove spot prices to over $800 a megawatt hour (MWh) in early August, putting some heavy industrial users under financial stress.
Since August,an abundance of water and increased gas supply has seen spot prices drop back to around $36 per MWh.
Barclay told shareholders it had been a challenging time.
But he said the high spot prices and the market’s structure did facilitate a series of physical responses that ensured the system remained secure and helped moderate the high prices.
Meridian had worked with Transpower and the Electricity Authority to improve the rules that gave Meridian and the sector confidence that contingent hydro storage would be accessible if needed.
The company also invoked its newly-minted demand response deal with NZAS - owner of the Tiwai Point aluminium smelter - to cut back on its power usage and take pressure off the system.
Separately, methanol exporter Methanex curtailed production to make more gas available for generation.
“We incentivised NZAS to reduce demand and make that energy available to other users, and, while Meridian didn’t purchase gas directly from Methanex, we underwrote the transaction by procuring electricity from Contact, and that was enabled by Methanex gas transactions,” Barclay said.
Meridian Energy chief executive Neal Barclay says in the very short term, hedge costs from the drought were weighing on its financial performance.
“These actions were necessary and came with significant cost and, all up, for Meridian that cost was around $200m.
“That is a lot of money, but it is what we plan for when we experience very severe but relatively infrequent droughts.
“And clearly since late August, nature has played its part replenishing all the hydro catchments across the country and adding significantly to the snowpack in the Southern Alps, which will turn up in the Southern Hydro lakes in due course.”
Meridian said hydro storage is now well above average for this time of year but that in the very short term, the hedge costs from the drought were weighing on its financial performance.
“And while the rapid return of wet conditions is welcome, high inflows into our Waiau catchment with its limited storage, has meant we have had to clear large volumes of water through the wholesale electricity market at low prices,” he said.
“Generation numbers, hedge and demand response costs, all reflect the impact of the huge swing from very dry to very wet conditions and our relatively light financial performance this quarter.”
During the price spike, Meridian supported its larger commercial and industrial customers who were rolling off their existing contracts by offering to extend their current pricing through to November 1.
Looking ahead, Barclay said the decline in domestic gas availability was a concern as the electricity sector relied on it to fill the gap when hydro storage is low.
Gas would be needed as back-up fuel for the foreseeable future, he said.
Barclay noted Government moves to incentivise investment in domestic gas production, but said there was a degree of risk that domestic gas would not recover to meet the needs of gas users or the electricity system in the future.
Meridian, along with others in the sector, is now looking at how the country can improve its energy resilience by creating a liquefied natural gas import facility.
Chairman Mark Verbiest defended the electricity market.
“And while wholesale market volatility is a known and expected part of our system, we expect that in the long term, we will see average wholesale prices soften as the costs of new renewables continue to fall and more renewable projects are built and integrated into our energy system,” he said.
“While we all know the energy mix is evolving to be even more heavily weighted to renewable sources, we will continue to rely on other back-up fuel, namely gas, for a considerable time yet.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
