The Ministry of Economic Development’s (MED) 2011 electricity review and comments from Contact Energy’s result earlier this week highlight the low growth environment that NZ electricity companies currently face.  The outlook for this industry is particularly important with the upcoming privatisation of our three state owned electricity companies.

Since 2009 electricity generators have had to deal with low electricity prices brought about by weak electricity demand post the global financial crisis, excess generation capacity as a number of new power stations came online and reasonable lake levels keeping our South Island hydro stations well fuelled.  Demand growth is required to eliminate this excess capacity and increase electricity prices.  However as New Zealand struggles to recover from the recent recession, we are seeing little growth in electricity demand (see chart below).

On the 26th of January the Ministry of Economic Development released their 2011 review of the electricity price outlook.  The average electricity demand growth forecast has been cut to 1.2% from 1.4% in 2010 and 1.5% in 2009.  This compares to an average growth rate of 1.6% over the last 20 years.  Sluggish industrial demand growth is the major reason behind the falling forecasts.

On Tuesday Contact Energy reported another earnings figure that fell short of analysts’ estimates.  The company has struggled over the last few years as the low electricity prices caused its gas fired thermal generation plants to be unprofitable to operate much of the time.  Contact has flagged that it may decommission its Otahuhu power station if electricity prices do not rise or it cannot secure cheaper gas contracts.

To achieve substantial earnings growth our electricity generators need increased electricity demand and higher prices.  When considering the upcoming SOE IPOs investors must be wary not to pay for growth that may fail to occur over the next few years.  The recent fall in Contact Energy’s share price shows that many investors have given up waiting for this growth.

William Curtayne