InvestNow News – 27th August – Harbour Asset Management – Keeping the lights on
Article written by Craig Stent, Harbour Asset Management – 24th August 2021
- Decarbonisation and keeping the lights on will need significant investment
- Investment needs a stable policy environment
- Policy risk may have lessened with reviews targeted at better information sharing
Sitting at home in lockdown whilst juggling work, kids home schooling, plus various other household activities make you appreciate some things that we often take for granted. The lights and heaters come on, and learning devices get the required charge at the end of the day and the other rectangle shaped TV comes to light as we sit down to watch the latest shows on Netflix or Disney.
But it hasn’t all been as smooth sailing for keeping the power going in the last couple of weeks. Even as recently as the fateful last Tuesday night when the Prime Minister made the nation’s hearts sink with the news of the level four lockdown, the nation’s electricity system was at risk of black outs. But it wouldn’t have happened that night as the large generating companies were probably on notice.
Harbour wrote about our concern that the lights might go out in May this year. Back then the story related to low lake levels across the country. That stress came and went, as is the norm in New Zealand, when it rained. This time around it is different.
However, if we re-wind back to Monday 9th August, there were black outs across the country. Electricity demand hit an all-time peak of 7,100 MW. Transpower, being the operator of the national electricity grid network, issued emergency notices to reduce demand where possible. Households had hot water cut off, whilst some commercial customers had power cut. Wholesale electricity prices spiked, with unadjusted pricing at more than $450,000/MWh for a ten-minute period with the largest impost being on unhedged industrial customers.
These outcomes are not great, especially from an industry that, whilst having a focus on maximising profit for its shareholders, also has a responsibility for security of supply for the country. After allowing the dust to settle, and a lot of initial finger-pointing particularly at Genesis Energy and Contact Energy, it appears the gentailers (electricity generators/retailers) had little responsibility for these events. All of them had the maximum available generation running at the time, albeit could have had some thermal fleet running if the notice period from Transpower had been made earlier.
It seems, since the event, the minister and Electricity Authority have wound back the negative rhetoric towards the generators, with most of the blame now being pointed towards Transpower, its forecasting, and its communications with the sector.
But there are now several reviews running in parallel. The Electricity Authority is conducting a review focusing on Transpower, and MBIE will run an inquiry, led by former Labour energy minister Pete Hodgson, with a focus on the causes and factors contributing to the interruptions in power supply.
We had previously been concerned that the Minister of Energy might consider structural changes to the market design or breaking up certain assets held within the co-owned gentailers. The high wholesale prices for an extended period haven’t been helpful either, albeit easy to explain with low lake levels, gas outages and availability of generation plant. However, the terms of reference released by the energy minister to MBIE, specifically excludes any analysis on the ownership structure, governance, or ways to reduce demand of generation investment. This is a relief as you do not fix a market simply by shifting assets around. You need to build more capacity and resilience.
As we have written before, the gentailer sector is a crucial element in the Government’s desire and targets for carbon reduction. Collectively they are investing significantly. Large-scale capital investment into generation assets such as Contact Energy’s Tauhara geothermal development, and- Mercury and Meridian’s wind farm investments are vital in helping the economy de-carbonise. Further investment will be required by the industry on an ongoing basis if we are to meet the country’s needs. There is also the ongoing review by MBIE of the New Zealand battery project – more specifically the Lake Onslow storage option – and hopefully common sense prevails here with the industry providing more flexible, economic and near-term solutions. The industry cannot simply wait the 10-15 years it might take to build one large project. In talking with leaders in the sector, nothing is guaranteed given the events this month and talk of Lake Onslow sends a shiver down the spine of CEOs planning their next large-scale investments in new renewable energy projects.
We think the onus is on the sector to prove up their proposed investments, get them consented and approved to take the pressure off MBIE and the Government to ensure we are building ahead of likely demand. New investment in generation, technologies such as battery storage, looking at alternative demand sources, demand management and other emerging technologies are all on the table. All of which require significant capital investment and long periods of planning and construction.
Whilst the risk indicator for the sector has reduced with the scope of the studies, a hard-to-forecast factor is the potential for policy errors, or at least a time with unclear road maps for investors. We now expect the various reviews come out with recommendations which are sensible and not overarching in materially changing the market structure.
There is enough policy change coming in many sectors. The intersection of climate change and New Zealand’s target of a zero net carbon electricity sector all have challenges. They are best met through clear and stable signals that encourage investment.
Meanwhile, we hope the TV works tonight; it’s a tough day at home with both work and the kids.
IMPORTANT NOTICE AND DISCLAIMER
Harbour Asset Management Limited is the issuer and manager of the Harbour Investment Funds. Investors must receive and should read carefully the Product Disclosure Statement, available at www.harbourasset.co.nz. We are required to publish quarterly Fund updates showing returns and total fees during the previous year, also available at www.harbourasset.co.nz. Harbour Asset Management Limited also manages wholesale unit trusts. To invest as a Wholesale Investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013. This publication is provided in good faith for general information purposes only. Information has been prepared from sources believed to be reliable and accurate at the time of publication, but this is not guaranteed. Information, analysis or views contained herein reflect a judgement at the date of publication and are subject to change without notice. This is not intended to constitute advice to any person. To the extent that any such information, analysis, opinions or views constitutes advice, it does not take into account any person’s particular financial situation or goals and, accordingly, does not constitute financial advice under the Financial Markets Conduct Act 2013. This does not constitute advice of a legal, accounting, tax or other nature to any persons. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. The price, value and income derived from investments may fluctuate and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Actual performance will be affected by fund charges as well as the timing of an investor’s cash flows into or out of the Fund.. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Neither Harbour Asset Management Limited nor any other person guarantees repayment of any capital or any returns on capital invested in the investments. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this or its contents.
InvestNow News – 27th August – Harbour Asset Management – Keeping the lights on
Article written by Craig Stent, Harbour Asset Management – 24th August 2021
- Decarbonisation and keeping the lights on will need significant investment
- Investment needs a stable policy environment
- Policy risk may have lessened with reviews targeted at better information sharing
Sitting at home in lockdown whilst juggling work, kids home schooling, plus various other household activities make you appreciate some things that we often take for granted. The lights and heaters come on, and learning devices get the required charge at the end of the day and the other rectangle shaped TV comes to light as we sit down to watch the latest shows on Netflix or Disney.
But it hasn’t all been as smooth sailing for keeping the power going in the last couple of weeks. Even as recently as the fateful last Tuesday night when the Prime Minister made the nation’s hearts sink with the news of the level four lockdown, the nation’s electricity system was at risk of black outs. But it wouldn’t have happened that night as the large generating companies were probably on notice.
Harbour wrote about our concern that the lights might go out in May this year. Back then the story related to low lake levels across the country. That stress came and went, as is the norm in New Zealand, when it rained. This time around it is different.
However, if we re-wind back to Monday 9th August, there were black outs across the country. Electricity demand hit an all-time peak of 7,100 MW. Transpower, being the operator of the national electricity grid network, issued emergency notices to reduce demand where possible. Households had hot water cut off, whilst some commercial customers had power cut. Wholesale electricity prices spiked, with unadjusted pricing at more than $450,000/MWh for a ten-minute period with the largest impost being on unhedged industrial customers.
These outcomes are not great, especially from an industry that, whilst having a focus on maximising profit for its shareholders, also has a responsibility for security of supply for the country. After allowing the dust to settle, and a lot of initial finger-pointing particularly at Genesis Energy and Contact Energy, it appears the gentailers (electricity generators/retailers) had little responsibility for these events. All of them had the maximum available generation running at the time, albeit could have had some thermal fleet running if the notice period from Transpower had been made earlier.
It seems, since the event, the minister and Electricity Authority have wound back the negative rhetoric towards the generators, with most of the blame now being pointed towards Transpower, its forecasting, and its communications with the sector.
But there are now several reviews running in parallel. The Electricity Authority is conducting a review focusing on Transpower, and MBIE will run an inquiry, led by former Labour energy minister Pete Hodgson, with a focus on the causes and factors contributing to the interruptions in power supply.
We had previously been concerned that the Minister of Energy might consider structural changes to the market design or breaking up certain assets held within the co-owned gentailers. The high wholesale prices for an extended period haven’t been helpful either, albeit easy to explain with low lake levels, gas outages and availability of generation plant. However, the terms of reference released by the energy minister to MBIE, specifically excludes any analysis on the ownership structure, governance, or ways to reduce demand of generation investment. This is a relief as you do not fix a market simply by shifting assets around. You need to build more capacity and resilience.
As we have written before, the gentailer sector is a crucial element in the Government’s desire and targets for carbon reduction. Collectively they are investing significantly. Large-scale capital investment into generation assets such as Contact Energy’s Tauhara geothermal development, and- Mercury and Meridian’s wind farm investments are vital in helping the economy de-carbonise. Further investment will be required by the industry on an ongoing basis if we are to meet the country’s needs. There is also the ongoing review by MBIE of the New Zealand battery project – more specifically the Lake Onslow storage option – and hopefully common sense prevails here with the industry providing more flexible, economic and near-term solutions. The industry cannot simply wait the 10-15 years it might take to build one large project. In talking with leaders in the sector, nothing is guaranteed given the events this month and talk of Lake Onslow sends a shiver down the spine of CEOs planning their next large-scale investments in new renewable energy projects.
We think the onus is on the sector to prove up their proposed investments, get them consented and approved to take the pressure off MBIE and the Government to ensure we are building ahead of likely demand. New investment in generation, technologies such as battery storage, looking at alternative demand sources, demand management and other emerging technologies are all on the table. All of which require significant capital investment and long periods of planning and construction.
Whilst the risk indicator for the sector has reduced with the scope of the studies, a hard-to-forecast factor is the potential for policy errors, or at least a time with unclear road maps for investors. We now expect the various reviews come out with recommendations which are sensible and not overarching in materially changing the market structure.
There is enough policy change coming in many sectors. The intersection of climate change and New Zealand’s target of a zero net carbon electricity sector all have challenges. They are best met through clear and stable signals that encourage investment.
Meanwhile, we hope the TV works tonight; it’s a tough day at home with both work and the kids.
IMPORTANT NOTICE AND DISCLAIMER
Harbour Asset Management Limited is the issuer and manager of the Harbour Investment Funds. Investors must receive and should read carefully the Product Disclosure Statement, available at www.harbourasset.co.nz. We are required to publish quarterly Fund updates showing returns and total fees during the previous year, also available at www.harbourasset.co.nz. Harbour Asset Management Limited also manages wholesale unit trusts. To invest as a Wholesale Investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013. This publication is provided in good faith for general information purposes only. Information has been prepared from sources believed to be reliable and accurate at the time of publication, but this is not guaranteed. Information, analysis or views contained herein reflect a judgement at the date of publication and are subject to change without notice. This is not intended to constitute advice to any person. To the extent that any such information, analysis, opinions or views constitutes advice, it does not take into account any person’s particular financial situation or goals and, accordingly, does not constitute financial advice under the Financial Markets Conduct Act 2013. This does not constitute advice of a legal, accounting, tax or other nature to any persons. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. The price, value and income derived from investments may fluctuate and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Actual performance will be affected by fund charges as well as the timing of an investor’s cash flows into or out of the Fund.. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Neither Harbour Asset Management Limited nor any other person guarantees repayment of any capital or any returns on capital invested in the investments. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this or its contents.
