Yesterday Contact Energy announced that it will close its gas-fired Otahuhu power station in September this year. This follows Genesis Energy’s recent announcement to close the remaining two of its four 250MW coal-burning electricity generators at the Huntly power station by 2018. These power station closures will remove overcapacity in New Zealand’s electricity market and therefore potentially improve the earnings outlook for electricity generators.
Over the past decade New Zealand electricity generators have continued to develop low-cost renewable generation, principally wind and geothermal. Due to the low cost to operate, these new assets are the first to supply our electricity, pushing the older and higher cost coal and gas-fired plants further down the queue. The Otahuhu power station only operated at 24% of its capacity over the last year meaning revenue received was not enough to cover costly maintenance and operating costs. A similar dynamic has played out for Huntly’s coal-burning generators resulting in the planned closures by 2018.
New Zealand is fortunate that we are endowed with attractive geography for hydro, wind and geothermal electricity generation meaning we can produce “clean” electricity rather than heavily polluting electricity generated from coal and other fossil fuels.
The effect of these closures is likely to be higher wholesale electricity prices in the future, which will benefit the earnings of electricity companies. Already we have seen traded electricity future prices rising (these are contracts to purchase or sell electricity at certain dates in the future). If these companies do not compete away the benefits through aggressive retail pricing tactics, forecasts earnings are likely to rise.
Head of Australian Investments
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