TrustPower will 'vigorously' fight loss of revenue from TPM proposal

Trustpower [NZX: TPW] could be among the biggest losers under the Electricity Authority's proposed changes to charges for the national grid and will "vigorously" fight changes to distributed generation pricing changes that could slash $25 million from its annual revenue.

Trustpower's annual revenue includes about $25 million of avoided cost of transmission (ACOT) payments. The authority has proposed scrapping the existing rules in favour of a system where distributed generators would have to convince grid operator Transpower they are reducing transmission costs to qualify for payments.

"The Electricity Authority has come out with new proposals for transmission pricing and the cost of the transmission regime, which happen to be quite negative for Trustpower." Infratil [NZX: IFT] chief executive Marko Bogoievski says. Infratil owns 50.6% of Trustpower. "It probably singles out Trustpower on the receiving end of that."

Analysts at First NZ Capital say Trustpower is the most exposed to any changes because of the amount of ACOT revenue at risk and "will fight this approach vigorously." It is too early to say whether Trustpower will successfully argue to resecure most of that revenue from Transpower under the new proposal, they say.

The authority says there has been an almost trebling of ACOT payments since 2007-2008 and it is clear some distributed generators are getting the payments "even when this demonstrably doesn't reduce transmission costs", sends the wrong signals on DG investment and gives them "an artificial competitive advantage over other generators." It estimated consumers were paying an extra $25 million to $35 million a year with no corresponding benefit.

The authority's consultation paper on transmission pricing proposes replacing the two main charges – $150 million a year for the HVDC link between the North and South islands and an interconnection charge of $639 million a year – with two new charges: an area-of-benefit (AoB) charge of $296 million and a residual charge for Transpower's costs of $500 million a year, spread across the country.

Because consumers in Auckland and the Far North have received the biggest benefits from national grid upgrades, ensuring the nation's biggest city has one of the most reliable power supplies, they will face the biggest increases under an AoB regime, the authority says.

A 'heat map' of increased charges for an average household show the upper West Coast and areas in Canterbury south of Christchurch will also face higher charges. The HVDC charges will be spread across the country rather than carried by South Island generators as at present.

Electricity Authority chairman Brent Layton says he "doesn't expect much cheering" for the proposals and it is inevitable some sectors will be unhappy.

Vector [NZX: VCT] chief executive Simon Mackenzie says Aucklanders will have to shoulder an extra $78 million of grid costs under the proposed changes to the transmission pricing methodology while generators are being asked to bear a relatively smaller share of the overall burden.

"How can the EA reconcile the fact that generators are only required to contribute less than 9% to the cost of transmission," Mr Mackenzie says. "It makes little sense and is inherently unfair."

Grant Smith, general manager for strategy and business development at community-owned generator Pioneer Energy, based in Alexandra, says the proposed changes to transmission pricing and distributed generator regulations "could threaten the viability of many small power station owners who have invested in renewable energy at the government's urging."

"The bottom line for small generators is the EA's proposals could reduce revenues by 25% and halve their profit," Smith says. "These are small companies who cannot absorb that hit to their balance sheets."

First NZ Capital says South Island generators are the main beneficiaries of changes that spread HVDC charges wider. It estimated annual grid cost reductions for Meridian Energy of $57 million a year while the savings for Contact Energy will be $16 million.

Genesis Energy and Trustpower each got a benefit assessed at $1 million. By contrast, North Island-based Mighty River Power will face a $4 million increase in annual grid charges while among major electricity users, NZ Steel's charges will rise by $12 million, Norske Skog's by $7 million and NZ Refining by $3 million, the brokerage says.

The Rio Tinto-controlled aluminium smelter at Tiwai Point will get an estimated benefit of $20.8 million - less than half the $50 million upside mooted in proposals the authority put out for discussion last year. The smelter will also benefit from a separate but interlinked proposal to expand the so-called prudent discount policy, which provides discounts to generators who are transmission customers but are looking to exit the grid in favour of a local distribution network.

"Despite weak metal prices and price outlook, we don't see closure as a compelling proposition for the smelter owners, but a sufficiently credible risk and with major implications for cost recovery on other grid users," the brokerage says. The TPM proposal "leaves a wide door open for material NZAS grid cost savings."

The major hurdle for the smelter owners, however, remains remediation costs for the Bluff site of about $225 million if the smelter is closed, the analysts say.

(BusinessDesk)