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Electricity Network Projects To Reduce Uncertainty

Fuseworks Media
Fuseworks Media

Wellington, Feb 8 NZPA - 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 may be some positive developments over the medium term, Fitch said today.

The approval of pending transmission network projects, particularly the inter-island $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 for electricity.

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.

But "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 electricity generation.

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

A sizeable tariff increase by electricity retailer Contact Energy in October 2008 and the consequent aggressive marketing campaign by Mighty River Power-owned retailer Mercury Energy resulted in a significant rise in customer switching among major electricity retailers in 2009, Fitch said.

But 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 electricity margins was expected this year due to higher wholesale prices, transmission upgrade costs and new generation capacity.

Fitch said it expected the Electricity Amendment Bill, now before a parliamentary committee, to generate a mix of positive and negative developments for utilities in the longer term. The actual impact on the companies' creditworthiness would depend on the details of the final legislation.

The aim of the bill is to introduce greater retail market competition. Its proposals include transferring ownership of the Tekapo A and B hydro stations from Meridian Energy to Genesis Energy. There are also proposals for one-off 15-year financial hedge contracts and for all the major electricity generators to put in place an accessible and liquid electricity hedge market.

Climate change legislation was not expected to produce any short term material impact on the credit quality of electricity generators, given the largely renewable nature of electricity generation in this country and the reduced obligations over the transition period to December 2012.

Stationary energy, industrial processes and transport sectors are to join the emissions trading scheme from July 1 this year.

Limited sources of gas remained a long term issue for this country, Fitch said.

The country continued to face the prospect of a demand and supply gap around 2015, which could lead to a need to import liquefied natural gas or compressed natural gas. Such imports were likely to be significantly more expensive than gas from existing fields, and would expose this country to higher and more volatile international oil and gas prices.

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