Contact Energy - CEN Chart

[Snoopy]

Business with electricity to 3 sites with Contact

Nova said they could do it ~15% cheaper

Rang Contact to see whether they would 'discuss' pricing - 'No, you already on best rate.' When pushed 'We don't compete with competitor prices'

Obviously churn hasn't been too bad this month and below budgeted levels so need to 'discuss'

Looking at p13 of the Annual Results for 2017 presentation, it does appear as though Contact are able to price themselves into an electricity market sweet spot.

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1/"Contact’s hydro inflows typically peak during summer."

2/"Traditionally, wholesale and futures prices are lowest between October and February."

3/"Contact seeks to maximise the value of its renewable assets by selling all renewable generation at a fixed price."

4/ "Flexible thermal generation, limited hydro storage, gas storage and hedges allows us to “firm” the renewable variability"
"Over the past 3 years this has enabled fixed priced sales at 125% of mean renewable generation, in contrast to integrated renewable generation only peers who sell between 70-85%"

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The above comments are made about a graph of "Contact’s mean renewable energy and purchase position." The graph shows the purchase price paid by Contact dipping over summer, which is no co-incidence, because according to 1/ above: Contact will have plenty of hydro inflows to generate their own power over that time.

Point 4/ is interesting in that it seems to be a tacit admission that Contact are 'gaming' the electricity market. I am not surprised a large gentailer would game the electricity market. But I am surprised they would admit to doing so in so public a way. I will need to work through this slowly as there is quite a lot that can be gained from studying this one presentation page.

If Contact are really selling all their renewable energy at a fixed price, as per point 3, that means either:

1/ Contact are out of the spot electricty market entirely, and only sell their expected generation capacity via fixed price hedge contracts OR
2/ Contact have decided on a sell price and will not sell into the wholesale market until the wholesale market price reaches that level, no matter what else is happening.

What does “firming the renewable variability" mean? One interpretation of that comment could be that when hydro storage is low, Contact will not bring their thermal stations on line until much later than when the first increased demand signal fires up the spot market price. Thus they leave the market price to overshoot, meaning they earn more from their renewable generation before the required thermal generation finally kicks in. If you only have renewable generation, that means you are a much more of a 'price taker' as you can't use (or not use in my example) the thermal generation that you don't have to manipulate the electricity spot market.

SNOOPY

[Jantar]

......
If Contact are really selling all their renewable energy at a fixed price, as per point 3, that means either:

1/ Contact are out of the spot electricty market entirely, and only sell their expected generation capacity via fixed price hedge contracts OR
2/ Contact have decided on a sell price and will not sell into the wholesale market until the wholesale market price reaches that level, no matter what else is happening.

All electricity generated is sold into the spot market, as is all electricity for retail and/or commercial bought off the spot market.

What it means when Contact say that they are selling all their renewable energy at a fixed price is that their retail and industrial sales are 125% of mean renewable generation, hence the fixed price.

Any additional thermal generation would not be sold into the electricity market unless the average price obtained is greater than they would recieve from their own retail and commercial customers.

That is not gaming the market. It simply ensuring that they receive value for their generation.

[cyclist]

Hi Jantar

You mentioned a while ago you had adjusted your exposure to the different generators based on your assessment of who the winners would be for the high power prices. You were unable to go into details at the time. Is that something you can now safely discuss or comment on? (e.g. after the fact, what did you change, and why?).

Thanks. Completely understand if it still inappropriate for you to go into the details.

[Jantar]

Hi Jantar

You mentioned a while ago you had adjusted your exposure to the different generators based on your assessment of who the winners would be for the high power prices. You were unable to go into details at the time. Is that something you can now safely discuss or comment on? (e.g. after the fact, what did you change, and why?).

Thanks. Completely understand if it still inappropriate for you to go into the details.

Based on the countries hydrology, I reduced my holdings very slightly in CEN, slighlty in GNE, about 50% in MEL and I bought more MCY. MEL is still my largest holding by value of the gentailers.

I was very surprised when CEN SP rose on what was really a very poor annual result.

[fish]

Based on the countries hydrology, I reduced my holdings very slightly in CEN, slighlty in GNE, about 50% in MEL and I bought more MCY. MEL is still my largest holding by value of the gentailers.

I was very surprised when CEN SP rose on what was really a very poor annual result.

I feel it was the news that they intend to be increasing their dividends.
I have been disappointed by their recent monthly results so reduced my holdings by 1/2 since they went ex-dividend and invested it in mercury and MEL to capture their dividends.
Spot market prices have been low in recent weeks as the hydro lakes have been filling.
I sold completely out of GNE

[Hectorplains]

Agreed, increased dividend payout has underpinned the sp increase. The result was mud. Still waiting for Norris to shine his light. Wasn't Pryke supposed to be the cause of all their ills?

[Snoopy]

Thanks for the clarifications below Jantar.

All electricity generated is sold into the spot market, as is all electricity for retail and/or commercial bought off the spot market.

I assume that if Contact generate their own electricity and sell that electricity to their own customers there is no need to put that electricity on the (spot) market. So while you are no doubt correct when you say "All electricity generated is sold into the spot market", it is not correct to say that all generators are receiving the 'spot market price' for everything they generate.

What it means when Contact say that they are selling all their renewable energy at a fixed price is that their retail and industrial sales are 125% of mean renewable generation, hence the fixed price.

Following on from my previous comment, if Contact are:

1/ in the business of selling kWhs of energy, AND
2/ they produce 100kWh of renewable energy, BUT
3/ their customers are expected to buy 125kWh of energy (yes, I know the absolutes of those numbers are not right),

THEN the energy price Contact receive for their renewable energy is 'effectively fixed', because Contact have enough customers signed up to fixed energy price deals to purchase all the renewable energy they generate.

Any additional thermal generation would not be sold into the electricity market unless the average price obtained is greater than they would receive from their own retail and commercial customers.

That is not gaming the market. It simply ensuring that they receive value for their generation.

So the reason that Contact are receiving more for their renewable energy than other gentailers in price terms is because they know that they won't have any renewable generation output left over to sell to other market players, because all their renewable energy generation is spoken for. By contrast the likes of Meridian has more renewable energy to sell and no physical thermal station back up (I am leaving out the back up option power deal that Meridian have in place with Genesis). So we can expect a good chunk of Meridian's hydro generation to end up on the spot market, when there is plenty in the lake tank and power prices are low. Thus 'overall' Meridian will get a lower price per kWh for their renewable generation that Contact will?

SNOOPY

[Jantar]

.......when you say "All electricity generated is sold into the spot market", it is not correct to say that all generators are receiving the 'spot market price' for everything they generate.

Well, yes and no.

Lets say that CEN are dispatched 1000 MW, and the spot price is $80, then for that 1/2 hour period they would receive from the market $40,000, (1000 x $80 x 0.5). If at the same time their retail side was buying 900 MW at that same price of $80, they would pay to the market $36,000, (900 x $80 x 0.5). The spot exposure being the remainder of 100 MW for which they would recieve $4000.

You could say that they have generated all that they need and sold an additional 100 MW into the market at the spot price. But that does not truely reflect the cost of generation, so they would have an internal price transfer, being the price at which the generation side charges the retail side. For the sake of this example lets say that transfer price is $76. In this case the generation side would re-imburse the retail side the sum of $1,800 (900 MW x ($80 - $76) x 0.5).

It is also highly like that they would have a number of CFDs with other companies, which may or may not net out in their favour.

[Snoopy]

Well, yes and no.

Lets say that CEN are dispatched 1000 MW, and the spot price is $80, then for that 1/2 hour period they would receive from the market $40,000, (1000 x $80 x 0.5). If at the same time their retail side was buying 900 MW at that same price of $80, they would pay to the market $36,000, (900 x $80 x 0.5). The spot exposure being the remainder of 100 MW for which they would recieve $4000.

You could say that they have generated all that they need and sold an additional 100 MW into the market at the spot price. But that does not truely reflect the cost of generation, so they would have an internal price transfer, being the price at which the generation side charges the retail side. For the sake of this example lets say that transfer price is $76. In this case the generation side would re-imburse the retail side the sum of $1,800 (900 MW x ($80 - $76) x 0.5).

It is also highly like that they would have a number of CFDs with other companies, which may or may not net out in their favour.

Leaving out the CFDs, which I acknowledge but which are not relevant to the point I would like to make, I am having trouble digesting the rest of your explanation Jantar.

The true incremental 'cost of generation' for a hydro station is surely close to zero? Granted this ignores the depreciated capital costs which arose from the depreciating capital value of the dam and associated electrical ancillaries. (Although I do note that, at least in the in the case of Mercury Energy, these costs are usually clawed back in subsequent years via generation asset revaluations anyway). But: -

With 'spot market power' costs determined by the lowest cost incremental offer to generate power by switching on some more generating capacity, THEN the spot price, particularly when a thermal power station has just been brought on line, does not affect the cost of running a hydro dam, does it? Our power pricing system pays all of those who are supplying power in any 'half hour period' the same price, equal to that of the highest cost provider of the instant, that is true. But I see that as an 'artificial market construct' in terms of costs.

If Contact chooses to see the electricity they generate from hydro as 'costing' the market price, then their retail arm may indeed have to reimburse the generation arm for 'market costs' as your example outlines. But surely an equally valid way of viewing things would be to take all of the internal transactions, where Contact generator sells to Contact retailer, 'off market' and let the pricing system handle the transactions between different generators and retailers only?

With a purely 'internal transaction', I can't see the point in valuing it at 'market levels'. Because in reality the perfect match of 'Contact Energy Buyers' and 'Contact Energy Sellers' means that you could price the transaction at whatever price you like. The price you chose could make it look like one arm of Contact was doing really well while the other arm was doing equally and oppositely badly. But since buyer and seller are both 'Contact Energy Parent', whether 'Contact Generator' takes all the profits or whether those profits are shuffled across to 'Contact Retailer' makes no difference to 'Contact Energy' at 'parent' or 'shareholder' level, does it?

SNOOPY

[Jantar]

The true incremental 'cost of generation' for a hydro station is surely close to zero? ......

That is not correct. G. Grilli did some work for Electrocorp back in the late 1990s that showed an incremental cost for the Waikato stations at around $2:00 per MW. That was 20 years ago. Next add on Transpowers HVDC cost of close to $9.00 per MW for all south Island generation, then add to that the cost of every circuit breaker operation at around $110 and there are measurable costs. Granted they are still very small compared to a thermal station.

But. and a BIG but, here is the difference. Thermal stations are cheap to build and expensive to operate. Hydro stations are expensive to build and cheap to operate. When selling enegry from a hydro station, if it is simply the incremental cost (SRMC) that is being recovered then the company will quickly go broke. Base load hydro needs to be priced at close to its long run marginal cost (LRMC), and the transfer price may reflect that.
Additional generation could be offered to the market at SRMC. but why would anyone sell to the market at a lower price than to their own customers?