MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

To predict the consequences of the future behaviour of the operators of Onslow, I am going to rely on Jantar's vision (espoused in the Contact Energy thread) on how this might occur

Onslow would not pump, or generate, based on the season, but rather it would do so based on the wholesale price. It is likely that it would be pumping when prices are less than around $50 per MWh, and generating when prices are above $100 per MWh. Because it can bid (for pumping) and offer (for generation) there would be a number of price bands, not a single price in each direction. It is likely that it would do both: Pumping overnight when prices are low, and generating during the day when prices are high on many days.

Returning to my quest trying to figure out how the profitability of Mercury Energy would be affected if Onslow is built....

Mercury provides the market with quarterly operating reports, and for the purposes of this discussion I am looking at their June 2022 quarterly report. The 'Otahuhu Wholesale Market Price and National Hydro Storage Levels' graph (misnamed because it contains wholesale price information on the Benmore node as well) contains:

a/ A trailing twelve monthly price trace of 'Wholesale Electricity Pricing' at the OTA (Otahuhu) and BEN (Benmore) nodes, based on a 12 month average 'rolling price' PLUS
b/ An accompanying trace of national (hydro) energy storage for both the current year, the previous year and a longer term historical average.

If we now move back to the 'Mercury Operating Statistics' page and cast our eye over the 'Electricity Generation' section, then we get a breakdown in unit terms of:

i/ How much energy Mercury has generated from Hydro, Geothermal and Wind generation respectively.
ii/ Into which customer classifications that energy was sold.

Of those three energy generation sources, I suspect it is only hydro that can be 'ramped up' to meet peak demand. This is consistent with the VWAP received for hydro energy in the table below being the highest of the three energy generation operational groups.

With hydro-energy, opening and closing the turbine gates are part of normal operations. So the timing of exactly when the water moves through the turbines will not affect the wear and tear on those turbines. IOW there will be no 'incremental depreciation' at the Mercury dams because of Onslow. Neither will Mercury's interest on debt change according to when Onslow operates. So IMO it is more correct to think about Onslow affecting profits at EBITDAF level, and not NPAT level.

Nevertheless, when determining peak demand pricing, it will be a thermal generation asset from another generator provider that sets the price benchmark. The price figures in the table provided are retail, which is inconsistent with the accompanying graphed wholesale prices - very annoying! This means I have to guess what the equivalent wholesale prices are using a formula estimate (1). I have repeated some information on p3 of the June 2022 quarterly report in my own table below.

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June 2022 Quarter	Power Sold (GWh)	Power Generated (GWh)	VWAP Retail ($/MWh)	VWAP Wholesale ($/MWh) (1)
Mass Market	636
Commercial & Industrial	594
Line Losses	58
CfD sell contracts (total)	685
Hydro		925	$199.82	$193.83
Geothermal		647	$182.46	$176.99
Wind Power Purchase Agreement (Genesis) (2)		252	$72.14	$72.14
Wind Spot Generation		103	$169.07	$164.00
Buy CfD (Financial contracts)		676	$287.92	?
Total (2)	1973	2351

From this we can work out the net power generated to be: 2351GWh - 1973GWh = 378GWh

Calculation Notes

1/ Wholesale calculation prices are retail calculation prices multiplied by: 1/1.035= 0.97. This is based on the average EBITDAF margin for Mercury Energy over the last four years (2019 to 2022 inclusive) (see 'Power Shares' thread post 1120).
2/ This is not spelt out in the report. But I believe the PPA referred to is the long term agreement between Genesis Energy and Tilt Renewables (now Mercury) where the full output of the 133MW Waipipi wind farm in South Taranaki has been agreed to be purchased by Genesis Energy for twenty years. The information as tabulated by Mercury suggests this is a retail arrangement. But this is not true. It is clearly a long term wholesale arrangement. This generation figure has therefore been not added to the power generation total, as it is outside of the day to day Mercury operational business model.
3/ The Mercury table explanatory note 7 on the 'Net Position' number states that this total "Includes all physical and financial buys and sells except spot customer purchases." I believe this note is at best misleading, because it doesn't mention that the net totals do not include wind generated under the PPA agreement with Genesis. But the net total does include wind spot generation.


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Operational reporting by Mercury has been affected by the 'tyranny of averages'. If we believe Jantar's proposition that wholesale prices above $100/MWh will be capped, and all of Mercury's wholesale prices are above that level for the three month June 2022 quarter, then what does that mean for any future scenario profits? One word - disaster! Or to quantify that, the EBITDAF reduction that Onslow would have trimmed from Mercury's profits for the quarter if such hydrological and market conditions were to be repeated in the future would be:

($193.83/Mwh-$100/MWh)925,000MWh + ($176.99/MWh-$100/MWh)647,000MWh + ($164.00/MWh-$100/MWh)103,000MWh
= $86.8m + $49.8m + $6.6m = $143.2m

To put this in context EBITDAF for the full year FY2022 was $581m. Multiply that quarterly loss over four quarters and all of Mercury's profits disappear! Fortunately I do not believe such a scenario would come to pass, and this is where my 'tyranny of averages' remark becomes important. Average prices can be affected by very high short term peaks. So if, for example, wholesale electricity prices spiked to $2000/MWh for one day in a month, while on the other 30 days the price was $80/MWh, then the average price for the month would be:

(30 x $80/MWh + 1 x $2000/MWh) / 31 = $142/MWh

Taking that average figure as typical, you would expect Onslow to crash profitability for Mercury for a whole month. But if you look at the individual daily figures, you can see that in fact Onslow would only affect the profitability of Mercury on a single day of that month. The lesson here is that judging what Onslow might do to profitability of Mercury based on an 'average price for the month' would give *completely the wrong impression* on what might occur when looking at electricity pricing on a day to day basis.

Finally to return to my original question:
"How would the profitability of Mercury Energy be affected if Onslow is built?"

The answer is that from the information published by Mercury, this is unknowable. That is because we don't have any information of frequency and duration of the wholesale power price peaks, and how high the wholesale power prices rose during those peaks. Extremely disappointing. It is almost as if the quarterly operational reports were written in such a way as to deliberately obscure the prospects of the company.

SNOOPY