May 02 2019
New Zealand’s wholesale electricity prices have surged over the past two years, boosting revenue for electricity generators. The Hydro-Electric Generation industry represents the most important segment of New Zealand’s energy mix, and typically supplies almost 60% of the country’s total energy. However, reduced water availability over the two years through 2018-19 has significantly affected both wholesale electricity prices and the generation output from industry firms.
These market conditions have had a mixed effect on industry operators. Total industry generation output is expected to decline from 25 TWh in 2017-18 to approximately 21.5 TWh in 2018-19. While lower electricity generation has limited the industry’s performance, higher wholesale prices mean operators can charge more for energy generated. Overall, industry revenue is expected to increase at an annualised 8.6% over the five years through 2018-19, to $2.4 billion. This result includes an anticipated revenue spike of 12.3% in the current year.
Limited hydro-electricity generation has meant other industries have needed to increase output to meet demand. In particular, gas-fired turbines in the Fossil Fuel Electricity Generation industry have increased output, supporting revenue for a segment that has otherwise been in long-term decline. Gas-fired turbines are more expensive to operate compared with renewable energy sources, which has driven up wholesale electricity prices. A temporary shutdown of the Pohokura natural gas pipeline in the first half of 2018-19 has put further pressure on the market. Natural gas power stations’ ability to operate was also curtailed, as the supply of natural gas was limited. Surging wholesale prices and increased generation are anticipated to contribute to revenue increasing by 81.6% for the Fossil Fuel Electricity Generation industry in 2018-19.
Operators in the Geothermal, Wind and Other Electricity Generation industry have also benefited from rising wholesale prices and increased demand. Geothermal energy generation has proven to have higher profit margins and lower operating costs than coal-fired electricity generation. In addition, geothermal power tends to have lower capital requirements than hydro-electricity generation. These attributes have made geothermal power generation highly competitive, with industry revenue expected to increase at an annualised 14.2% over the five years through 2018-19, to $1.2 billion. This includes an anticipated jump of 41.8% in the current year due to higher wholesale prices.
Revenue growth for electricity generators has come despite difficult conditions for many operators. Even with strong population growth, residential energy use has remained largely steady over the past decade. Advances in technology have made many household appliances more energy efficient, while strong household uptake of small-scale solar panel systems has contributed to declining electricity consumption per household over the past five years. Government initiatives, such as the Warmer Kiwi Homes program, have also contributed to more energy-efficient households. Transmission network costs have also increased, which has placed pressure on industry profit margins. Although surging wholesale prices have contributed to sharp spikes in power-generation revenue, wholesale prices are projected to decline over the next five years as water availability recovers and more renewable power generation comes online. As a result, many industry operators will likely face the prospect of declining revenue over the next five years.