Power price rise if sale enforced

Meridian Energy says South Islanders will pay more for their electricity if the state-owned company is forced by the Government to sell two of its Waitaki hydro generation power stations.

The claim is in a five-page report by Meridian, released to the Otago Daily Times yesterday under the Official Information Act.

The report says the loss of Tekapo A and B power stations, at the start of the Waitaki hydro system, will increase the security-of-supply risk in dry years for the South Island, cut Meridian's annual income from electricity sales by $74 million, make the Waitaki generation system less efficient, expose the company to a higher risk of defaulting on debt in dry years, put more pressure on Transpower's HVDC link to move electricity from the North Island, pose problems for the minimum flow in the lower Waitaki River and reduce Meridian's value as a company.

Energy Minister Gerry Brownlee announced in December Meridian should sell Tekapo A and B to Genesis Energy to improve competition in the South Island electricity market.

He was in an all-day caucus meeting yesterday but his office released a letter on the issue sent to other ministers.

It rejects some of Meridian's claims.

It says Meridian and Genesis would be expected to enter a water agreement so Meridian met its resource consent obligations and so that secruity of supply and efficiency were not compromised.

And if they could not, ministers would determine the matter.

Meridian would still control 50% of the country's hydro storage and Rio Tinto Alcan New Zealand, the owners of the Bluff aluminium smelter, had indicated they supported the increased competition in the South Island.

Meridian's report has said the implications of the sale would need to be discussed with that company.

The smelter takes 40% of Meridian's generation.

In December, Meridian was reluctant to comment on the effects, partly because, as a state-owned enterprise, the Government owned the company.

However, Minister of Finance Bill English, Associate Minister of Finance Steve Joyce and Minister for State-owned Enterprises Simon Power subsequently requested Meridian's views, provided by company chairman Wayne Boyd.

Meridian said it was "a matter of particular concern" it had no opportunity to comment on losing Tekapo A and B without offsetting it with new generation.

The loss of Tekapo A and B would reduce Meridian's generation by about 1000GWh a year - 8% of its total, the company said.

This significantly worsened Meridian's dry-year revenue risk and compromised its ability to cover prudent financial earnings.

The implications had not been discussed with Rio Tinto under its contracts with Meridian.

Rio Tinto's approval might be needed for selling the power stations.

Splitting the Waitaki system across two operators would result in less efficient water management, Meridian said.

Generation can vary markedly due to in-flows.

In the 2008 winter, the Waitaki chain produced only 70GWh one week, compared with the normal 150GWh.

Meridian would have to hold its lakes higher to counter the security of supply risk, resulting in a much higher likelihood of spill and loss of efficiency.

Meridian estimated a 3% loss of efficiency as a result, equating to about 360GWh a year - about the entire output of its new West Wind farm near Wellington.

"This has the potential to compromise South Island security of supply," it said.

The Transpower link between the North and South Islands limited the amount of thermal generation that could be sent south.

Electricity prices in the South Island would reflect the increase risk of shortages.

"South Island retailers then face much higher purchase costs than their North Island counterparts," Meridian said.

If it lost the two power stations, Meridian's value as a company would fall, not just by the value of Tekapo A and B but because of additional negative impacts on its generation and retail business.

david.bruce@odt.co.nz