Contact Energy - CEN Chart

[Snoopy]

I am not sure this is the way to think of the relative importance of hydro/wind/geothermal, at least as far as Contact Energy is concerned.

Without an associated battery storage system, I would suggest that wind turbines are of no value to an electricity generator. Of course if you combine wind generation assets with hydro and have the ability to switch between the two as a source of power, then wind turbines suddenly have significant value, because suddenly they have a hydro-lake 'battery' in the combined wind/hydro generating system.

Looked at in this context it is interesting that despite having consents for wind farms, Contact Energy has chosen not to build them.

Instead of building wind farms, Contact Energy has put a lot of effort into natural gas power alternatives. The main benefit of natural gas power stations is that you can build them close to where the power is going to be used, and build them at modest capital cost (at least in power station terms). The big negative is that you have to pay for the fuel to keep them running.

Contact has chosen to develop natural gas, principally the Otahuhu B station just south of Auckland. Contact has even drawn up plans for bringing in tanker loads of gas from overseas should local gas supplies dry up. All this at the expense of other energy generation projects (excepting the very recent Te Mihi geothermal project) tells a story in itself.

Contact is majority owned by Australian company Origin Energy. And Origin has extensive natural gas interests off the coast of Australia. It is interesting to speculate whether Contact Energy would have put so much effort into natural gas energy production if Origin were not there on the share register.

I haven't really followed exactly what the tipping point was that saw Contact develop Te Mihi as a geothermal replacement for their natural gas plans. Perhaps if an Origin shareholder is lurking out there they would like to comment?

I guess one advantage of Te Mihi is that although it is not on the doorstep of Auckland, it is at least in the right island. Could it be that Transpower putting a bit more money into the national distribution grid has been a factor?

SNOOPY

[Snoopy]

I haven't really followed exactly what the tipping point was that saw Contact develop Te Mihi as a geothermal replacement for their natural gas plans. Perhaps if an Origin shareholder is lurking out there they would like to comment?

I guess one advantage of Te Mihi is that although it is not on the doorstep of Auckland, it is at least in the right island. Could it be that Transpower putting a bit more money into the national distribution grid has been a factor?

I am not really sure what CJ meant when he said geothermal energy was 'unlimited'. I can remember concerns in the 70s and 80s in Rotorua where concern was expressed that excess use of thermal bore water was affecting the geyser field at Whakarewarewa. I think restrictions since have at least halted the decline.

AFAIK all the modern geothermal developments are subject to resource consents and can't just pipe out unlimited hot water for power.

Geothermal is I think the best renewable source of power in that reliability of production is not weather dependent. But within the limits of current engineering practice, I would say it is really very limited, probably more limited than any other power source I could name.

SNOOPY

[CJ]

I thought I would reply so you dont have to keep talking to yourself

My contention is that wind and hydro are both theoretically 'unlimited'.

Hydro is potentially limited. In a drought, the battery doesn't fully charge. From memory, CEN Hydro network doens't have much storage capacity so the recent droughts had an impact. If it is really wet, then the batteries get fill and they have to spill excess water. Resource consents dictate minimum/maximum lake levels.

I have changed my wind on wind - in theory unlimited but you cant control when it blows.

Contact is majority owned by Australian company Origin Energy. And Origin has extensive natural gas interests off the coast of Australia. It is interesting to speculate whether Contact Energy would have put so much effort into natural gas energy production if Origin were not there on the share register.

I would guess you are correct.

I am not really sure what CJ meant when he said geothermal energy was 'unlimited'.

I assume you would only build a plant big enough to use your resource consent quota. Therefore you can pump out thermal energy to your hearts content and that heat will be forever (the human race will be in big trouble if it wasn't). In fact, with Geothermal, I think you run it 24/7 as there is never a reason to turn it off (unlimited 'battery' and low operating cost). Hence why it is known as base load.

My view on 'unlimited' is if you decided you need 10Mw of power tomorrow is there any constraints on which plant you use:

Hydro - is the dam full or should we think about conserving water (not unlimited)
Wind - will the wind be blowing (not unlimited)
Gas - we can get more gas if we need it, though it may cost more (unlimited but potential increased cost)
Geothermal - we can pump that thermal heat out to our hearts content (unlimited)

[Snoopy]

Hydro is potentially limited. In a drought, the battery doesn't fully charge. From memory, CEN Hydro network doesn't have much storage capacity so the recent droughts had an impact. If it is really wet, then the batteries get fill and they have to spill excess water. Resource consents dictate minimum/maximum lake levels.

You rightly highlight the issue of hydro storage capacity CJ. That doesn't get talked about much because I guess most believe we can't do much about it. Yes the Waitaki river lake reservoirs are 'shallow' in an international sense. But you could say exactly the same thing for MRP and the dams that feed off Taupo.

I suppose instead of spending money on covered rugby stadiums in Dunedin and Christchurch, it might have been worthwhile investigating covering some of those Waitaki reservoirs instead? I read recently that much of the gain from redeveloping the irrigation system on the Canterbury plains will come from piping the water that was previously in open channels. Much less water lost to evaporation that way. I wonder how much power potential is lost from reservoir evaporation in those long hot central Otago summers?

I would guess you are correct.

An alternative viewpoint is that the drive for gas is coming from within New Zealand, due to the well established gas industry in and around New Plymouth. As I said previously I don't follow Origin closely but I think they were eyeing up customers in Asia for their gas off Australia, rather than thinking of little ol' New Zealand.

I assume you would only build a plant big enough to use your resource consent quota. Therefore you can pump out thermal energy to your hearts content and that heat will be forever (the human race will be in big trouble if it wasn't). In fact, with Geothermal, I think you run it 24/7 as there is never a reason to turn it off (unlimited 'battery' and low operating cost). Hence why it is known as base load.

I am not familiar with how these geothermal resource consent quotas are derived. My guess is that it is not 'think of a number' though. I think it is somewhat akin to drilling for oil. You sink a hole into the ground and see how much superheated steam comes up. Then you wait for objections form the neighbours and if there aren't any you get permission to put a turbine on top of your well. Of course if you do well, I am not sure what there is to stop a neighbour sinking their own well and 'tapping in' to what you thought was your resource...

SNOOPY

[CJ]

You rightly highlight the issue of hydro storage capacity CJ. That doesn't get talked about much because I guess most believe we can't do much about it. Yes the Waitaki river lake reservoirs are 'shallow' in an international sense. But you could say exactly the same thing for MRP and the dams that feed off Taupo.

I am not familiar with how these geothermal resource consent quotas are derived. My guess is that it is not 'think of a number' though. I think it is somewhat akin to drilling for oil. You sink a hole into the ground and see how much superheated steam comes up.

I actually had CEN and MRP mixed up - the storage of the NI network are a lot less than the SI network I think : http://www.systemoperator.co.nz/hydro-status. They are also feed differently - NI relies on rain whereas the SI relies more on snow melt. Rain happens all the time whereas snow melt more so in the summer when energy demands are lower.

Re geothermal, I dont think you build a $300m+ Geothermal plant unless you have a 30 year resource consent to take out x amount of liquid (I think it comes up as 'hot water' that through a thermal exchange, turns different water into steam). Whether that well produces the the required heat, and therefore electricity is where the gamble is.

[Snoopy]

I actually had CEN and MRP mixed up - the storage of the NI network are a lot less than the SI network I think : http://www.systemoperator.co.nz/hydro-status. They are also feed differently - NI relies on rain whereas the SI relies more on snow melt. Rain happens all the time whereas snow melt more so in the summer when energy demands are lower.

Interesting looking around that Transpower website.

http://www.systemoperator.co.nz/

I can't say that I have spent much time there before today.

One point of note was that Transpower lump power generation into two camps: "hydro" and "non-hydro". When you look at the national mix, with hydro making up 55-60% of total energy generated you can see why. But from the point of view of a Contact Energy shareholder, I am not sure that we should be considering the electricity market that way.

SNOOPY

[Snoopy]

All the stars are coming into line-cook strait cable upgrade,dry year for north island-so far,more geothermal,gas storage,more high value industrial customers,nz manufacturing increasing.
Other forces are currently shaping the market-hopefully your estimation of a couple of years will see the sp increase-anywhere from $6 to $9 is my guess.

One star remains out of line, and it is a big one. The overall electricity market is just as likely to shrink as it is to grow, as 'economic growth' now seems decoupled from power consumption. And short of selling Tiwai to the Chinese and bringing in billions of Chinese national capital and labourers, the inevitable corollary to no new investment is that the aluminium smelter will close.

I think that going forward from here, the sensible investor must view the NZ power market as a static one in terms of demand. On the customer side, power company switching will ebb and flow. But I think the big five are large enough to survive and customers swings are likely to be balanced by customer roundabouts in the longer term.

For me then the key factor in the profitability of power companies going forwards comes under the heading "resilience". It will be the companies who are best prepared to fill holes in the power production line that will prosper. 'Holes' might mean a drought. But it also might mean a spike in gas prices. It looks like those reasonably strategically located geothermal powerstations are the most holeproof going forwards.

As for the CEN share price going forwards. I agree $6 is possible. $9 occurred when power was a 'growth' market and Origin didn't have any gas field development in Australia and when there were far fewer CEN shares on issue. I do think CEN will eventually get back to $9. But sadly I don't think anyone on the share register now will still be alive at that point. Except perhaps for you fish, as I believe the Orange Roughy can live for a couple of hundred years.

SNOOPY

[Snoopy]

For me then the key factor in the profitability of power companies going forwards comes under the heading "resilience". It will be the companies who are best prepared to fill holes in the power production line that will prosper. 'Holes' might mean a drought. But it also might mean a spike in gas prices. It looks like those reasonably strategically located geothermal powerstations are the most holeproof going forwards.

I have been perusing the CEN annual report over the last week or so. Superficially it looks comprehensive. Yet I have been unable to find any of the information I consider necessary to understanding where this company is going inside it. I am sure CEN management are fulfilling all of their legal requirements, but this is very disappointing. Fortunately the information that I was after (power produced and power sold to customers in GWh) does appear in the analyst briefings that usually follow results announcements. So all is not lost.

To get a better understanding of CEN in an overarching way, I looked at last years (FY2012) power supplied, listed at 8280GWh or 8280GWh per year. Then I transform this figure as follows:

a/ Multiply that by 1000 to get MWh per year
b/ Divide by 365 to get average MWh
c/ Divide by 24 to get average MW drawn.

I get 945MW as an average customer demand.

Now to the supply side.

Average daily power available and supplied consisted of 330.6MW (hydroelectric) and 270.7MW (geothermal). So what I consider as the "baseload capacity with no fuel cost" was 601.3MW.

This amounts to 63.6% of power sold by CEN.

The balance is made up by running gas powered generating capacity, and buying in power from other generators.

So there is a 'benchmark' with which to measure CEN against other generators. Now how does it compare?

SNOOPY

[Snoopy]

This amounts to 63.6% of power sold by CEN.

The balance is made up by running gas powered generating capacity, and buying in power from other generators. So there is a 'benchmark' with which to measure CEN against other generators. Now how does it compare?

Repeating the above exercise for Mighty River Power, which has the same balance date as CEN.

Electricity Sold FY2012 10,257GWh. That translates to a 1171MW average power demand.

Average power actually produced by combined MRP hydro dams was 489.9MW.

Average power actually produced by combined MRP geothermal stations was 368.4MW.

That makes a total of 858.3MW.

This 'free fuel' total represents 73.2% of underlying demand.

This doesn't represent the full story of course.

Nevertheless I would argue that on an 'overarching underlying basis', Mighty River Power are in a better position than Contact Energy.

SNOOPY

[fish]

snoopy-do study the monthly operational figures-the may report was released last week.
CEN appear to be doing well-"netback" is improving .
They are going for high value customers and profitability is increasing and my guess is that churn will not be as much a problem.
They are going for more flexible and cheaper generation and upgrades in cook strait transmission will help delivery .
With the above,vast gas storage facility and te mihi operational expect less buy in power.
Future demand is an unknown-so many factors involved. Increased population,use of airconditioning and electric cars make me feel optimistic.
Generational change in use could be a be big growth-my sons use massive amounts of power.