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23/5/2018 — Alternative Energy
Trustpower’s hydro energy small but effective

The energy company Trustpower Ltd benefits from owning a larger number of small hydro electricity assets spread across New Zealand.

Morningstar analyst Adrian Aitkins told the Otago Daily Times Trustpower is a small power producer, with its hydro power stations generating less than 4% of NZ’s electricity. Hydro capacity was expensive to build but cheap to run, providing cost advantages over thermal power stations.

While small, and having limited storage capacity, Trustpower’s stations were still considered relatively high-quality assets capable of producing cheap baseload power.

Aitkens said there was flexibility to increase supply when prices were high.

Being widespread, New Zealand’s hydro electric assets benefited from diversity in rivers and catchments, helping stability of output. In addition to cost advantages, Trustpower’s assets benefited from efficient scale, given high upfront construction costs for would-be new entrants and fairly fixed electricity demand.

Morningstar said wholesale prices had been hurt by oversupply following years of investment in wind and geothermal generation. Now, prices were below the marginal cost of building a new power plant, and further new generation capacity was unlikely to be built in the medium-term.

“No new major hydro schemes are likely in NZ and the incumbents own the best geothermal sites, in our opinion, leaving intermittent wind and higher-cost gas-fired power plants as the best options for would-be new entrants.”

Aitken said a sustainable wholesale price of about $80 per MWh was needed to justify building more generation capacity. At that price, the incumbents would make strong returns from their existing assets.

Trustpower was a relatively large energy retailer, with a market share of 13% of the retail electricity market. Residential and business sales were mostly under fixed price contracts.

Electricity was a commodity product, customer switching costs were low, and major players actively competed for market share with price discounting. Nonetheless, returns remained attractive because of price discipline within the oligopoly and cost advantages over smaller players who lacked scale benefits and faced greater risk from volatile wholesale electricity prices.

Source: odt.co.nz

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Trustpower’s Coleridge - one of New Zealand’s first hydro power stations.