TrustPower would 'vigorously' fight loss of revenue from TPM proposal
By Jonathan Underhill
May 18 (BusinessDesk) - Trustpower could be among the biggest losers under the Electricity Authority's proposed changes to charges for the national grid and is likely to "vigorously" fight changes to distributed generation pricing changes that could slash $25 million of annual revenue.
Trustpower's annual revenue includes about $25 million of avoided cost of transmission (ACOT) payments. The authority has proposed scrapping the existing rules in favour of a system where distributed generators would have to convince grid operator Transpower that they are reducing transmission costs to qualify for payments.
"Yesterday we saw the Electricity Authority come out with new proposals of transmission pricing and the cost of transmission regime," said Marko Bogievski, chief executive of Infratil, which owns 50.6 percent of Trustpower. "Those happen to be quite negative for Trustpower. It probably singles out Trustpower on the receiving end of that."
Analysts at First NZ Capital said Trustpower is the most exposed to any changes because of the amount of ACOT revenue at risk and "will fight this approach vigorously." It was too early to say whether Trustpower would successfully argue to re-secure most of that revenue from Transpower under the new proposal, they said in a report.
The authority said yesterday that there had been an almost trebling of ACOT payments since 2007-2008 and it was clear some distributed generators were getting the payments "even when this demonstrably doesn't reduce transmission costs", sends the wrong signals on DG investment and gives them "an artificial competitive advantage over other generators." It estimated consumers were paying an extra $25 million to $35 million a year with no corresponding benefit.
The authority's consultation paper on transmission pricing proposes replacing the current two main charges - $150 million a year for the HVDC link between the North and South islands and an interconnection charge of $639 million a year - with two new charges: an area-of-benefit (AoB) charge of $296 million and a residual charge for Transpower's costs of $500 million a year, spread across the country.
Because consumers in Auckland and the Far North have received the biggest benefits from upgrades of the national grid, ensuring the nation's biggest city has one of the most reliable power supplies, they would face the biggest increases under an AoB regime, the authority said. A 'heat map' of increased charges for an average household show the upper West Coast and areas in Canterbury south of Christchurch would also face higher charges. The HVDC charges would be spread across the country rather than carried by South Island generators as at present.
Electricity Authority chairman Brent Layton said yesterday that he "doesn't expect much cheering" for the proposals and it was inevitable some sectors would be unhappy.
Today Vector chief executive Simon Mackenzie said Aucklanders would have to shoulder an extra $78 million of grid costs under the proposed changes to the transmission pricing methodology while generators were being asked to bear a relatively smaller share of the overall burden.
"How can the EA reconcile the fact that generators are only required to contribute less than 9 percent to the cost of transmission," Mackenzie said. "It makes little sense and is inherently unfair."
Grant Smith, general manager for strategy and business development at community-owned generator Pioneer Energy, based in Alexandra, said the proposed changes to transmission pricing and distributed generator regulations "could threaten the viability of many small power station owners who have invested in renewable energy at the government’s urging."
“The bottom line for small generators is the EA's proposals could reduce revenues by 25 percent and halve their profit," Smith said. "These are small companies who cannot absorb that hit to their balance sheets.”
First NZ Capital said South Island generators are the main beneficiaries of changes that spread HVDC charges wider. It estimated annual grid cost reductions for Meridian Energy of $57 million a year while the savings for Contact Energy would be $16 million. Genesis Energy and Trustpower each got a benefit assessed at $1 million. By contrast, North Island-based Mighty River Power would face a $4 million increase in annual grid charges while among major electricity users, NZ Steel's charges could rise by $12 million, Norske Skog's by $7 million and NZ Refining by $3 million, the brokerage said
The Rio Tinto-controlled aluminium smelter at Tiwai Point would get an estimated benefit of $20.8 million - less than half the $50 million upside mooted in proposals the authority put out for discussion last year. The smelter could also benefit from a separate but interlinked proposal to expand the so-called prudent discount policy, which provides discounts to generators who are transmission customers but are looking to exit the grid in favour of a local distribution network.
"Despite weak metal prices and price outlook, we don't see closure as a compelling proposition for the smelter owners, but a sufficiently credible risk and with major implications for cost recovery on other grid users," the brokerage said in a report. The TPM proposal "leaves a wide door open for material NZAS grid cost savings".
The major hurdle for the smelter owners, however, remains remediation costs for the Bluff site of about $225 million if the smelter is closed, the analysts said.