Contact Energy shareholders get a positive jolt from company’s latest results and renewable power prospects

Contact  Energy, New Zealand’s  largest power  company, is  also among  its  most enterprising. Currently it  is building a  168MW  geothermal plant  at Tauhara as  market demand for  renewable energy strengthens.  

The company reports  its project to investigate the world’s first-large-scale green hydrogen plant in Southland with Meridian Energy is also progressing well, with potential development partners shortlisted.

Only last week PM Jacinda Ardern said developing a “shared plan with businesses and investors” to establish a new green hydrogen industry in NZ was  one of the government’s primary economic development objectives.

Contact Energy’s shareholders  could be  understandably excited, therefore,  when the  company  this week reported a  70% rise in net profit to $134m  (from $78m  in the corresponding half),  just  as  CEO  Mike  Fuge   said the company was excited about the role its renewable generation was set to play in the decarbonisation of the country over the next decade.

Of  course,  the development of renewable energy  doesn’t  come  cheaply: the  cost of building the new geothermal plant at Tauhara, near Taupo, has blown out by $140m to $818m, which the company said was because of complexities in construction as well as higher costs caused by the pandemic.

The upside has been that the Tauhara field will be more productive, resulting in increased generation of 168MW from the original expectation of 152MW.

The completion of Tauhara had been put back to the second half of 2023 from mid-2023.

Market demand for renewable energy had markedly improved in the past year, which had improved the economic outlook of Tauhara, Fuge says.

“We’ve seen the emergence of multiple data centre projects, process heat conversions ramping up, and strong appetite from industrial users for long-term electricity supply deals.”

Last year, Contact raised $400m through a capital offer to pay for development of the new field, which the company said was the best renewable energy project on the drawing board.

This  week Fuge reported double-digit growth in  operating earnings and profit off the back of a period of strong hydro generation, and increased sales to fuel-constrained competitors.

Contact  produces more than 20%  of the country’s electricity  from hydro stations in the South Island, and geothermal and gas-fired stations in the North Island. Hydro generation was up 6%, which reduced the need for higher-cost  thermal generation.

The company secured long-term power agreements with major power users over the period, including Oji Fibre, Pan Pac, Genesis Energy and Foodstuffs.

“Long-term contracts underpin sustainable operations, support additional renewable generation development, and can also displace thermal generation.”

Contact Energy’s retail business also performed well over the half, adding 29,000 customers across its electricity and broadband offerings.

The   big  question  over the world’s first large-scale green hydrogen plant in Southland stems  from  the  news  that Rio Tinto as  the majority owner of the Tiwai Point aluminium smelter will  want to continue to operate the Bluff-based smelter beyond the end of its current price power contract in 2024. The price of  aluminium is  now so strong, high profits are rolling in.

 Some analysts have suggested that the green hydrogen plant could be shelved if the smelter continued to operate beyond 2024, as there would not be enough electricity to support both projects without new generation being built.

Point  of  Order  imagines Fuge  and  his  executive  team  have the  capacity  to  work  their  way  through the problem.

“It’s early days, but we are encouraged that the smelter’s owner recognises it needs to play a larger role to help manage dry year security of supply in NZ’s electricity system,” Fuge said.

Meanwhile Contact Energy has lodged consents with the Waikato Regional Council for a new, smaller geothermal power station at Te Huka near Taupō and  and  for  an extension of its geothermal consents at Wairakei.  It has secured land access rights to build 600MW of wind projects across the country.

In all  the  excitement which Fuge  may generate  among his shareholders there is  one  cloud  on the horizon:  the  question  of  government  intervention  on  power  prices. There is  already tension over  high prices  in the  wholesale electricity  market, with hedge contracts pointing to prices of  around $180 per Mwhour over the  next three to  nine  months.

Energy Minister Megan Woods   has  made  noises  about  “changes”  she  plans but  what she intends is  far  from  clear.

Fuge   and his  cohort   meanwhile will  press  ahead  with the  strategy   that  from Contact Energy’s standpoint  is  working  very  well.


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