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Early on in the year, the ridiculous, distortional, and unnecessary “quasi-ban” on new thermal generation was repealed. As the year progressed, announcements were made regarding transmission investment, and towards the end of the year the ETS returned to Parliament. The ETS is meant to support a more sustainable future so it is somewhat ironic that the sustainability of the enacted statute itself is questionable, given the failure of the select committee to agree on its content. It is unlikely that we have heard the last on this subject. More interesting were developments on the regulatory front. The Commerce Commission has still not pronounced on the default price path for network companies, but there has been a growing tone of pragmatism in its handling of a number of matters. The infamous Wolak report was deftly handled and whilst there was considerable comment in the media, the Commission quietly put it to one side. The electricity retail investigation was also sensibly dealt with, and a line firmly drawn underneath the long-running saga. The all important details of the new regulatory regime may still be outstanding, but there are encouraging signs that a sensible outcome is achievable. A certain environment can provide a platform to invest, but it can also have the opposite effect and in this regard it was certainly not a good year for renewable electricity generation, in particular wind. Wind projects in New Zealand remain unattractive relative to the opportunities in subsidised regimes overseas. Exchange rates and power price volatility also make projects here risky and unappealing. Add to this the form in which the ETS is likely to finally emerge, and the outlook for wind projects is relatively bleak. The year aheadSo, what might the year in prospect hold? Within the next 12 months the all important numbers will have been applied to the price path for regulated electricity lines companies. There is good reason to be optimistic that the outcome will be sensible and pragmatic, which will in turn provide a stable platform for some much needed investment in the network sector. A highly theoretical approach which produces a rate of return threshold out of step with longer term market norms could still plunge the sector into turmoil and create a hostile climate for further investment. Regardless of the prospects in their core electricity network operations, lines companies will be jockeying for position to provide fibre networks in various parts of the companies. This provides lines companies with a rare opportunity to create real scale in their unregulated operations. There will be winners and losers in the process but the winners are likely join the top tier of New Zealand infrastructure businesses. After more than a year in office and ongoing fiscal pressure, we can expect Government to take a more assertive stance around the future of its investment in energy SOEs. This may not extend to privatisation in this term of office, but it is likely that the way will be prepared for this as an end-game in the event National is re-elected. This could take a number of forms but floating a minority stake is a distinct possibility. Such a move would not only provide some stimulus to capital markets, but would also go some way to relieving the financial pressure Government is under as a result of rising debt levels. The rapidly improving health of financial markets could also encourage the Government to head down this route. The recession has reduced the pressure on electricity demand and this is likely to remain muted for the immediate future. In this environment, generation companies are likely to have to look outside New Zealand for their development opportunities, if they are to continue to grow. Several have particular expertise in niche generation technologies such as geothermal and, to a lesser extent, wind or small and large hydro. Attractive opportunities exist in subsidised regimes offshore to capitalise on these skills. At least one generation company has put New Zealand wind opportunities on the backburner while making investments in Australia, enjoying the benefit of the renewable obligation scheme and associated credits market across the Tasman. The global renewables playing field is far from level. It is slanted steeply against New Zealand and companies here will continue trying to play uphill for only so long. Oil and gas exploration levels are at historic highs and Government is keen to encourage more. Commentators have likened New Zealand to Norway just before the development of North Sea oil and, regardless of whether the opportunity is quite this large it certainly appears to be substantial. New areas are being explored and success on any scale has the potential to dramatically impact both our export sector and stationary energy sector. All in all, the prospects for the coming year are bright but, as always, we have the potential to miss the opportunity. Much of the responsibility for capitalising on it lies with Government. With the right incentives and policy environment, coupled with sensible decisions around the stewardship of its investment in SOEs, we have the potential to make a step-change in our economic performance. Much of what has been done in the energy sector by Government so far has been measured and sensible, but it has also been confined to rolling back the sillier excesses of previous administrations. The decisions from now on are less clear-cut, but getting them right is more important than ever.
Energy NZ Vol.4 No.1 Energy Perspectives 2010 |
The 2009 year could be described as the year of reducing uncertainty, and this was good for a number of reasons, not least of which was the encouragement it provided for investors to invest... or not, as the case may be. By Paul Callow, who leads the company’s energy team at Deloitte.