Contact Energy will today officially open its new $623 million Te Mihi geothermal power station, near Taupo's long-established Wairakei power station.
Te Mihi will provide a big step up in Contact's operating profits, by more than $60m a year, and it is already allowing Contact to heavily cut back the use of its gas-fired power stations in Taranaki and Auckland.
Work began on Te Mihi in 2011, and the first power was produced late last year.
Completion of the project was about 10 months behind original plans, but Contact Energy's contract meant it was compensated for that delay. The project had been expected to be finished in early July last year, but it was not fully commissioned till May this year.
But that delay would not have an impact on Contact's financial results, due out next week, chief executive Dennis Barnes said.
Te Mihi was effectively a "mid-life" refurbishment of Wairakei, Barnes said.
It also meant that Contact was not using and maintaining "very old kit", which was expensive to do, elsewhere in its generation portfolio. About 40 megawatts of generation would drop out of the Wairakei plant, so it would discharge less water into the Waikato River.
Te Mihi, including the capital cost, was competitive with coal and gas generation.
"What we will do is replace our gas production with geothermal production," Barnes said.
At the operating earnings level, that would add $60m to $70m to ebitda profits.
A couple of years ago, Contact was buying about 40 petajoules of gas a year, about a quarter of all New Zealand's gas. Te Mihi would displace about 11PJs of gas.
As a result, Contact was already running its gas-fired plants in Taranaki and Otahuhu in Auckland "more flexibly" and much less than in the past.
Despite being the middle of winter, when demand is usually high, both plants were not running this week.
"That's a reflection of the low cash cost of Te Mihi and other geothermal and wind built in the last few years and the increasing cost of gas," Barnes said.
It was too early to say when the gas-fired plants might close down, "but they do close eventually".
Contact could run those gas-fired plants for a further couple of years before the company would need to spend a lot of capital to refurbish them.
And the cash operating costs for Te Mihi power station would be "very low".
It would cost the equivalent of about $5m a megawatt to build, compared with about $1m a megawatt to build a combined cycle gas-fired station, but there was a higher cost for gas, compared with less than $10 a MW hour for running Te Mihi.
"Standalone, if the load were growing and you were looking to build a new power station, geothermal is more competitive than gas or coal," Barnes said.
Contact has a consent to build a 250MW Tauhara geothermal project, which the company said was "New Zealand's most attractive new generation option".
But it would be built only when electricity demand made it viable, which meant not "for a little while".
Meanwhile, Contact would use its geothermal expertise in Chile and Indonesia in ventures along with Australian parent company Origin Energy, which owns 53 per cent of Contact.
Te Mihi geothermal power station
Cost: $623 million Generation: 166 megawatts, enough to power about 160,000 homes
Peak workforce: About 500 people
Local spending: $60 million
Construction started: February 2011
Construction partners: McConnell Dowell Constructors, SNC-Lavalin Constructors and Parsons Brinckerhoff
Location: Near the existing Wairakei power station, Taupo, which has been running since 1958. Wairakei is due for retirement in 2026 when its consents run out.
- The Dominion Post