Drying conditions in the South Island and the outlook for more of the same had resulted in Forsyth Barr paring back its Meridian Energy and Contact Energy operating profit forecasts by $15million and $22million respectively.
Mr Foster said temperatures were up 1.3degC in November versus the previous corresponding period in the main centres. Inflows into lakes had been 84% of average for the past three weeks.
New Zealand electricity demand in November was up 6.5% versus the pcp. In South Island regions exposed to irrigation, demand lifted by about 20%.
"That said, the strength of demand growth is exaggerated by low irrigation in 2016. Total demand is only 1.3% above the five-year average."
Wholesale electricity prices at Otahuhu averaged $99 MWh in November and the year ahead ASX futures price increased $21 MWh to $90 MWh as the market priced in falling hydro storage, he said.
The consensus from international climate models was a weak La Nina pattern was expected over the next three months (75% probability). Niwa’s climate outlook over the period was for continued above-average temperatures nationwide (60% to 70% confidence).
To the benefit of North Island hydro generators, Niwa was also expecting above-average rainfall in the upper part of the country, although with less confidence, Mr Foster said.
River flows in the lower South Island, where most of the large hydro catchments were, were expected to be below normal.
In response, Forsyth Barr had moved its Genesis Energy and Mercury forecasts up modestly by $4million each.
"We believe the sector is fairly valued at present. All of the generator/retailers offer an attractive yield, but limited growth."
Macro factors, in particular interest rates, were likely to determine near-term sector returns, he said.
Forsyth Barr’s preferred stock was Tilt Renewables which had an outperform rating. The brokerage was neutral on Central, Genesis, Mercury, Meridian and Trustpower.
