At the heart of this financial performance was the fact that the mix of generation, which has historically largely insulated Contact’s earnings from weather driven volatility, was stymied due to the limitations arising from transmission constraints, primarily (although not solely) due to the loss of pole one of the HVDC.
As an illustration of this, in the first quarter of the financial year, the South Island experienced one of the worst droughts in recorded history. During that period, some of the lowest inflows in 75 years limited Contact’s South Island generation to around 80 % of Contact’s South Island demand, and the company was required to purchase the additional electricity from the wholesale market at an average price of $148 per MWh. This was around 250 % of the average purchase price during the prior corresponding period (when there were two poles in operation) primarily due to transmission constraints.
However, the average price Contact received for its North Island generation in the first quarter of the current financial year was $96 per MWh, just 65 % of the cost of South Island electricity purchases.
Towards the end of 2008, the winter drought conditions had reversed with some of the highest recorded inflows into the South Island’s hydro lakes. In addition to the deluge, the removal of around 180 MW of Southland electricity demand following the unexpected closure of an aluminium production line at the Tiwai Point aluminium smelter in November 2008 further limited generation from Contact’s Clutha power stations. As a consequence of transmission constraints in the lower South Island, and an excess of energy, Contact and other South Island hydro generators were forced to spill significant volumes of water over the summer months.
While there is no certainty as to the timing of the return of the Tiwai demand, Transpower is currently implementing a plan which is expected to increase the transmission capacity out of Southland/Otago and therefore largely alleviate this lower South Island constraint.
The importance of a modern transmission system
“What the six month period reinforces is how dependent New Zealand is on a robust and reliable transmission grid. It’s the backbone to move electricity from power stations across the country to customers,” said Mr Baldwin.
“For a country with a heavy reliance on hydro generation and the potential requirement for increasing quantities of wind generation, and with major load centres geographically isolated from key generation sources, a modern transmission grid that accommodates changing electricity generation and demand patterns is critical to the efficient operation of the electricity market.
“Over the past year it has become manifestly clear that many parts of New Zealand’s transmission system have been unable to cope with requirements. “We are dealing with the impacts of historic underinvestment in the country’s transmission network. Contact is actively supporting Transpower in its efforts to bring the transmission system up to an acceptable standard,” he said.
Strategic initiatives are progressing well
Despite a slowing of demand growth due to prevailing economic conditions, the country will continue to require new generation. The lack of certainty of domestic gas resources and prices beyond the second half of next decade means that renewable options will continue to be at the forefront of new generation development.
“The execution of Contact’s strategy, which was outlined two years ago, is progressing well. Projects currently under construction include the first phase of the Tauhara geothermal project near Taupo, and a 200 megawatt gas-fired fast-start peaking power station at Stratford. In addition, in December 2008, Contact commenced injecting natural gas into New Zealand’s first underground natural gas storage facility near Stratford.
“These three projects represent expenditure of more than $500 million at precisely the time when the country needs infrastructure investment most,” said Mr Baldwin.
“The next stage of the company’s geothermal development programme is also progressing well. Geothermal is generally accepted as the most economic next tranche of baseload energy for the country, which will also increase the amount of energy generated from renewable, low carbon sources.”
Baldwin said while Contact is making good progress on consenting two North Island wind farm sites, the current economics of wind will require energy prices to rise before execution of these projects would be justified.
“There is a significant role for wind in New Zealand’s energy future and Contact is preparing these projects for execution when market conditions support them.
“Despite a challenging half year, Contact remains well positioned to continue to lead investment in New Zealand’s most important energy projects, and deliver growth for the company’s shareholders and the country.”
