Tense times for electricity sector

This week's 10 per cent rise in the price of dairy products sold at global auction might, in other circumstances, have been regarded as a sign of good things to come.

Rather, it is a sign of a tightening supply of exportable dairy commodities, of which Fonterra is the world's largest supplier, caused by widening drought conditions across the country.

Just as the global economic outlook seems calmer, an agricultural production shock is threatening New Zealand's stuttering economic recovery. If it persists, it could knock half a percentage point off the growth rate this year.

So far, the most heavily affected areas are the top half of the North Island, including the Waikato.

That also happens to be the seat of MightyRiverPower's hydro-generation assets, strung along the Waikato River and fed from Lake Taupo, which is tracking well below normal storage levels for this time of year.

While the South Island has been dry lately too, various Christmas-New Year deluges filled the southern hydro lakes, so they're fuller but still below average. Wholesale electricity market spot prices have been rising in recent weeks to reflect this increasing short term scarcity of water.

Given the industry's success in managing low South Island lakes last year, there's little threat of a winter power shortage.  

Now that they must pay every customer $10.50 a week if a public conservation effort is called, the electricity generators have got better at not letting hydro shortages occur.

These latest electricity market dynamics come at a ticklish time for the industry, not only because MRP will be a focus of national attention during its partial sale over the next two months, but also because it should coincide with the much-delayed fix-up of the Cook Strait cable.

For the last several years, the two islands have been less electrically connected than usual, as the national grid operator Transpower spent close to $900 million installing the so-called Pole 3 Cook Strait cable, replacing the ageing and unreliable Pole 1.

Pole 3 was supposed to go live in February last year, in time for winter. Thirteen months later, we're still waiting, with late April or early May now the commissioning date.

If Pole 3 is further delayed and access to southern hydro lakes is hampered by inter-island cable constraints, that could mean high spot prices in the North Island instead of a fairly normal winter.

The focus on the Cook Strait connection also comes at a time of deep tension with electricity generators and consumers ranged as unlikely allies against the industry regulator, the Electricity Authority. At issue is just how to divvy up payment for the cost not only of the Pole 3 upgrade, but a swag of others in the North and South Islands. 

In total, according to the briefing to incoming Energy Minister Simon Bridges from the EA, the upgrade programme will more than double the value of Transpower's assets to $4.8 billion and will see transmission revenues almost double from $624 million in 2010/11 to $1.1b by 2019/20.

That extra cost is the reason electricity tariffs continue to rise, despite the current over-supply of electricity, as transmission charges will rise from about 7 per cent to around 10 per cent of the average power bill over that period.

The potential for such eye-watering sums to be split in new and complicated ways could have material impacts on the earnings of power companies and major electricity users, as well as an impact on small consumers' tariffs.

Judging by the rash of submissions published earlier this week, no-one, apart from Meridian Energy, appears to be happy with the radical proposals, which were supposed to cut through two decades of inconclusive industry bickering.

In short, they variously argue the EA proposal will create unnecessary new price volatility, has not proved a positive cost-benefit ratio, and shifts costs from industrial consumers to residential customers and from southern to northern consumers.

Some argue the EA has also crossed into the Commerce Commission's territory and should back off. Others say it fixes a problem which was about to disappear anyway.

It looks as though the arguments will run for some time yet.

Given the division of billions of dollars of industry revenue is involved, it's a fair bet the MRP prospectus is going to have to give some serious detail on the risks to earnings of the EA's proposal. That's far from enough to kill the float, but it is a risk worth watching.

In the meantime, these issues should make this morning's commerce select committee hearings at Parliament into the recent performance of MRP and the Electricity Authority all the more lively affairs.