Here We Go Again: Rising Electricity Prices 2010

Greetings and welcome to the first issue of BusinessSense for 2010. This week´s fire under power transmission lines on a Waikato farm raises all sorts of questions. Should major infrastructure providers like Transpower have immediate 24 hour a day access to their assets, despite them being on private land? Should a small scale farmer be able to hold the nation´s largest population centre to ransom because he has a gripe with Transpower?

Should there be more transmission lines into Auckland to ensure security of supply, and should the Govt act to ensure this happens?

Of course a new transmission line has been approved, but other NIMBY farmers and the RMA have conspired to make sure it is being completed at a snail´s pace.

Should more effort be being put into infrastructure aside from roads?

Of course these are all serious questions, but the reality we are all going to have to face is rising power prices for some time to make new generation infrastructure viable.

As NZ Energy & Environment Business Week www.nzenergy-environment.co.nz reports, the big generating companies are indicating they need an increase of at least 10% to make the creation of more power worthwhile from a commercial point of view. "MightyRiverPower And Contact Signal Electricity Prices Must Rise

The next best options for new electricity generation are brown-fields geothermal fields, owned and under development mainly by MightyRiverPower and Contact Energy, which are expected to produce electricity in the range of $85 to $95 per Megawatt hour, compared with recent spot prices of well below $60 per MWh.

But Contact and MRP are both warning these price ranges are too low to guarantee new investment beyond the known five or so remaining geothermal opportunities with scale. Both see the long run marginal cost of electricity moving to $100 per MWh once those are built in the next few years. $100 MWh is where wind sits now and is basically uneconomic at current average wholesale prices.

At $100 MWh and then some, new wind and smaller hydro opportunities start making commercial sense, probably ahead of geothermal greenfields exploration and development.

In the meantime, however, Contact is able to say with a straight face "prices at present currently don´t support the continued operation of existing thermal plant." After a year of tariff restraint and political fear, the electricity sector is starting again to raise legitimate questions about whether they are to be truly commercial or not.

We are back to the age-old argument which says nothing will get built unless there's a clear path to a higher LRMC over the next three to five years. Among the various risks this runs is too little investment too late to prevent shortages emerging in half a decade, especially as the economy rebounds.

Max Bowden
Publisher In Chief
The Main Report Group

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