Trustpower says retail electricity prices will rise

Supply and demand for electricity are now in balance and that means wholesale prices will be much more volatile, says Trustpower chief executive Vince Hawksworth.

That’s because changes in storage levels in the hydro lakes will have a more direct impact on wholesale pricing and prices will have to rise from current levels to justify the building of new generation.

That will also feed through into retail prices

 “What we’re saying is there will be more volatility in the next period than there has been in the past few years,” Mr Hawksworth says.

“Clearly the balance in wholesale between supply and demand means that prices are more sensitive to hydro conditions – to some extent, we saw that last winter,” he says.

“Wholesale prices have to get to the point where new investments become economic,” Mr Hawksworth says.

“That marginal new investment cost might be, in our view, small-scale additional generation and it will also be the investment in energy efficiency, but both of those would indicate a firmer wholesale price and that generally flows through to retail over time,” he says.

“That said, retail is incredibly competitive still. New Zealand’s been a huge beneficiary of competition in the retail market. The only things that have really flowed through to (retail) prices have been shifts in transmission and distribution prices.”

Higher transmission and distribution prices benefit national grid operator Transpower and the electricity lines companies, not generators and retailers like Trustpower.

Rising profit margins
Nevertheless, Trustpower’s retail gross margin rose $11 million in the six months ended September and its higher electricity and gas margins were the biggest contributors to retail earnings more than doubling to $29 million.

The company’s retail strategy is to try to persuade customers to buy two or more of its electricity, gas and telco services, what it calls its “triple play” strategy.

Total net profit for the six months rose 82% to $82 million.

Mr Hawksworth says his company is unlikely to invest in building significant new generation in the near term.

“Trustpower, absent its investment in wind farms, has never really invested heavily in large-scale new generation – it’s not our sweet spot,” he says.

Trustpower’s wind farms were spun out last year into a newly listed vehicle, Tilt Renewables, making Trustpower a pure hydro generator.

“We think the game to play in this new emerging world is to look at small-scale investments,” Mr Hawksworth says.

“After all, if you were looking at a large scale investment that had both a large capital risk and a long payback period, the large levels of uncertainty around both demand and the change to technology, I think, would make you think twice.”

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