Eco Investor December 2015

Core Securities

NZ Utilities Safe from Technology Changes

While the rise of renewable and distributed energy and energy storage are expected to severely challenge the business models of Australia's largest utilities, this is not the case for New Zealand's renewable energy based utilities such as Meridian Energy and Mighty River Power.

Meridian Energy says marine and wave technology are not expected to be cost competitive in NZ for the foreseeable future, while grid scale solar PV is not expected to be cost competitive for 20 years.

Nor will the imminent rise of battery storage dramatically change the market as NZ already has significant energy storage capacity through its many hydro lakes. Both Meridian and Mighty River Power have hydro power. This means battery storage will not add much flexibility in the near term.

However, New Zealand is running out of potential new hydro lakes and as battery storage costs fall the value of battery storage will increase over time. Although the transition point will not be for some time, there is an option for network companies to defer new investment in distribution by installing batteries if they choose.

While solar PV is growing, battery trials have begun, and industry participation is spreading, overall, their penetration is very low and is currently less than 0.5 per cent of NZ customers.

This contrasts with Australia where better economics mean solar PV is growing and battery storage is expected to make a big impact in the market.

Where new technology can make a difference in New Zealand is though improvements in wind turbines as these are expected to give cost reductions and Meridian said it is collaborating with manufacturers to reach cost of wind options below NZ$70 per MWh.

Electric vehicles are expected to make a big difference in NZ. While numbers are currently small, growth is expected and is encouraged by the utilities to increase electricity demand. Electric vehicles are also environmentally better than petrol and diesel as most of NZ's grid energy is renewable. Growth is initially expected to be dominated by hybrids, as the popularity of battery and hydrogen cars is yet to be seen.

The take-up of electric vehicles in NZ.

New Zealand demand for renewable energy will also increase with the closure of thermal power plants. In September Contact Energy closed its 400 MW Otahuhu B plant, this month Mighty River Power is closing its 140 MW Southdown thermal power plant, and in December 2018 Genesis Energy is expected to close its 500 MW Huntly Rankine Units.

The three plants will remove two thirds of thermal energy in New Zealand and could result in less power security if there are no new plants built.

Meridian Energy has hydro and wind energy and Mighty River Power has hydro and geothermal energy. For investors, the message is clear - renewable energy based utilities such as Meridian and Mighty River Power are more secure investments as they can cope and even benefit from the latest technologies while in Australia the older style coal and gas based utilities are very vulnerable and need to adapt quickly. (ASX: MEZ and MYT)






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