Power prices need to rise: Contact Energy

Contact Energy says electricity retail prices need to rise, after reporting flat underlying earnings for the six months to the end of December.

Contact managing director David Baldwin said challenging conditions posed by high hydro inflows resulted in low wholesale prices during the latest half year.

Extreme weather and transmission constraints which negatively affected Contact's performance by about $40m in the late winter of 2008 had not reoccurred.

But operating costs in the latest period were higher by about the same amount, largely due to higher costs of gas-fired generation.

Contact focused on its earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items (ebitdaf) figure, which was $225 million in the six months to December, 0.1 percent up on a year earlier.

The $80.1m in underlying earnings after tax was up just 0.3 percent from the year before, while after tax profit increased from $25.1m to $88.1m, with Contact saying the 251 percent increase was mainly due to change in the value of financial instruments.

Mr Baldwin said that during the six months to December, neither wholesale nor retail prices had reflected the true costs of energy.

"While we have seen some encouraging trends in wholesale prices since December 2009, we are still yet to see the true costs of electricity reflected in retail tariffs, which is a concern," he said.

This country's generation capacity remained tight and for investment in new generation to occur, prices needed to reflect the cost of that capacity.

New geothermal generation needed a price of around $80 per megawatt hour, but Contact's retail margins were unsustainably low to enable such an investment, which must be committed shortly to ensure ongoing security of supply.

Also, electricity prices during the six months to December had not covered the costs of having gas-fired capacity available to the market, Mr Baldwin said.

"If the investment in new capacity that New Zealand needs is to be made, and if existing thermal plant is to continue to support the system, retail prices will need to rise."

Last week Contact filed resource consent applications for a 250MW geothermal power development at Taupo.

In its half year report, the company said that wholesale electricity prices fell 42 percent to $42 per MWh in the six months to December.

In the latest half year, extreme weather and transmission constraints which negatively affected Contact's performance by about $40m in the late winter of 2008 had not reoccurred, Mr Baldwin said.

But operating costs in the latest period were higher by about the same amount, largely due to higher costs of gas-fired generation.

The costs of generating electricity increased by 9 percent, while transmission and distribution costs rose 5 percent, and customer retention costs and debt write-offs were up 76 percent.

Recent price increases reflected some of those higher operating costs, most of which were external to Contact, Mr Baldwin said.

An unchanged interim dividend of 11c per share is to be paid.

Mr Baldwin said Contact's financial performance for the second half of the current financial year would depend on various factors including hydrology, wholesale prices and the extent to which higher operating costs could be reflected in retail prices.

Retail competition remained intense and Contact would be faced with a further increase in gas costs in the second half of the financial year as there was a major step up in gas price in one of its major contracts, Mr Baldwin said.

Shortly after the sharemarket opened today Contact's share price was down 10c to $5.70