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Meridian toes the line with support for electricity industry reform

Meridian Energy surprised a select committee this morning with support for changes to the electricity industry, including asset swaps that would see Genesis Energy taking on two of its hydro power stations in the South Island.

Previously, Meridian has said it would prefer to avoid a physical asset swap and instead focus on financial hedging arrangements.

In a lengthy written submission made public in December on the findings of Energy and Resources Minister Gerry Brownlee’s electricity industry review, Meridian said the asset swap was “key”.

Today, when asked if the state-owned generator was putting on a brave face during a hearing of evidence, chief executive Tim Lusk said it was far enough down the track to believe it could be done.

“What we’ve discovered in our discussions with Genesis is that a water management agreement doesn’t have to be complicated.”

Under the changes proposed in the bill, drafted after a review of the electricity industry and subsequent recommendations in August last year, Meridian would have to transfer Tekapo A and B hydro power stations to Genesis Energy, in a swap for state-owned Whirinaki in the North Island.

Meridian would keep Ohau and Lower Waitaki power stations further downstream.

Swap risks failures - IPENZ

The Institute of Professional Engineers New Zealand (IPENZ) argued the swap would be counterproductive as Meridian would lose 990GWh of production through the swap and therefore probably cut its retail base, meaning competition would remain as it is.

IPENZ chief executive Andrew Cleland told the hearing a complicated management arrangement could increase the risk of “cascade failures” and it recommended not to include it in the bill.

Mr Lusk said he saw the asset swap as one lever the government could use. “We struggle to find a downside. We think that having another partner on the river could well innovate the way we have run our river for many years.”

But when asked to explain the benefits of the arrangement to finance and expenditure committee member David Cunliffe, Mr Lusk struggled to make his point.

After Meridian’s submission Mr Lusk said it was the company’s role to work towards a smooth transition to what the government had implied it was going to do.

“The choice we have is to work with the government to implement these arrangements as smoothly as possible.”

The bill addressed problems through a range of solutions and should be looked at as a package, he said.

“There are a number of things that will increase competition and you have to look at that in the totality.”

He said the asset swaps, in addition to virtual asset swaps (or one-off long term two-way energy hedge agreements with Genesis and Mighty River Power) and other hedge market arrangements, would enable competition.

The intention of the virtual asset swap was to provide the companies with access to electricity at fixed prices in the island where they currently had little or no generation capacity.

Genesis pleased

Genesis Energy chief executive Albert Brantley said he was “pretty pleased and satisfied” to hear Meridian say the two companies would be able to come to a working agreement and a lot of the risks had been overstated.

Speculation that the asset swap would lead to inefficient water management and inefficient security of supply was misleading and miscalculated the basic commercial drivers of the company, he said.

“I believe it’s an opportunity for additional perspective on the management of water.”

Genesis had already taken the decision to enter the South Island retail market in Dunedin and planned to expand into Queenstown and Christchurch – based on the premise of the asset swap taking place, he said.

At $212 cheaper than the incumbent for the average household, Genesis said it was still profiting from its electricity offer.

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Comments and questions
3

Water management agreements are complex. Asset swaps reduce the value of Meridian as a company. ??????? What is Tim Lusk on? isn't he supposed to be acting in the best interests of Meridian rather than pandering to the pollies? I'm sorry their submission doesn't make sense

That's all a bit sad. Roll over Meridian.

Not sure about a this Meridian rethink on reforms, maybe it's time for an SOE rethink. A listing might force ministers to keep their fat fingers out and companies to behave commercially