New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Electricity Sector</h2>
<p><strong>The Beginning of the End —&nbsp;TPM&nbsp;Decision Made</strong></p>
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<p>The Electricity Authority's (EA) transmission pricing methodology (TPM) decision paper reaffirms Meridian Energy (MEL) and NZAS as the main winners from changes to the TPM. However, the changes relative to the EA's July 2019 Issues Paper are relatively minor and water down the impact of transmission price increases/decreases vs. the current TPM, i.e. the winners are not doing quite so well and the losers are doing a little better. It has taken the EA more than a decade to get to this point, and there is still 33 months to go before new transmission charges are implemented on 1 April 2023 — all going well.</p>
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<h3>Meridian Energy (MEL) remains the biggest winner, Mercury (MCY) the biggest loser</h3>
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<p>MEL&nbsp;remains the main beneficiary&nbsp;with a benefit of NZ$27m vs. current transmission prices, although this benefit is -NZ$2m lower than it was under the 2019 Issues Paper. Given the delays in the&nbsp;TPM, we had taken a conservative approach to&nbsp;MEL's&nbsp;upside such that&nbsp;the&nbsp;EA's&nbsp;calculated benefit is +NZ$15m higher per&nbsp;annum&nbsp;than&nbsp;our current forecast (+NZ8cps of value).</p>
<p>MCY&nbsp;remains the worst off generator. Its transmission charges will increase ~+NZ$8m as it is the only generator without South Island generation (hence, receives no benefit from changes to&nbsp;HVDC&nbsp;pricing). Its transmission&nbsp;charges going forward are reasonably significant due to transmission work in the Central North Island benefiting its geothermal power stations. Our current forecasts assume an +NZ$5m increase in&nbsp;MCY's&nbsp;transmission charges, the +NZ$3m difference equating to NZ3cps.</p>
<p>Details of the direct winners and losers vs. the current TPM and the previous July 2019 TPM proposal are presented in Figure 1.</p>
<p>The other indirect loser is Trustpower (TPW). The TPM is estimated to provide TPW a direct benefit of +NZ$1m. However, the implementation of the new TPM will reduce avoided-costs-of-transmission (ACOT) revenue further, potentially -NZ$8m per annum as disclosed at TPW's recent FY20 result.</p>
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<h3>NZAS&nbsp;benefits about the same, but prudent discount policy creates some opportunity</h3>
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<p>NZAS's&nbsp;gain from changes to the&nbsp;TPM&nbsp;has slipped to +NZ$10m (from +NZ$11m). However, the estimate of its absolute charge is NZ$42m which is still ~-NZ$20m lower than its actual 2019 transmission charges.</p>
<p>NZAS&nbsp;also has the opportunity to apply for a "prudent discount" on transmission charges if it can prove its current transmission charges are higher than the "efficient stand-alone cost" of providing the same service. There is a great deal of uncertainty as to what a prudent discount could look like, with&nbsp;Transpower&nbsp;having to come up with a workable policy. It is also likely to be applied after the broader&nbsp;TPM&nbsp;has been implemented in 2023.</p>
<p>​​​​​​​We suspect&nbsp;NZAS&nbsp;will be disappointed with the&nbsp;EA's&nbsp;decision paper. Whilst it provides some transmission price relief, it is a long-way short of what it is seeking, is several years away from implementation (NZAS&nbsp;wants price relief now) and the prudent discount policy provides no certainty. That said, it is a step in the right direction and we doubt that it will have a material impact on Rio&nbsp;Tinto's&nbsp;decision on the future of&nbsp;NZAS.</p>
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<h3>Over to&nbsp;Transpower&nbsp;to implement the&nbsp;EA's&nbsp;guidelines</h3>
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<p>There is no consultation on this paper as it is a&nbsp;decision paper.&nbsp;Transpower&nbsp;is now required to implement the guidelines, turning them&nbsp;into formal code. It has until 30 June 2021 to do this. The EA will then assess whether&nbsp;Transpower&nbsp;has implemented the guidelines appropriately and will consult on the proposed Electricity Industry Participation Code amendments.&nbsp;</p>
<p>The aim is to implement the new TPM by 1 April 2023, which requires Transpower to formally notify its customers of the price changes by the end of November 2022.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Electricity Sector
The Beginning of the End —&nbsp;TPM&nbsp;Decision Made

The Electricity Authority's (EA) transmission pricing methodology (TPM) decision paper reaffirms Meridian Energy (MEL) and NZAS as the main winners from changes to the TPM. However, the changes relative to the EA's July 2019 Issues Paper are relatively minor and water down the impact of transmission price increases/decreases vs. the current TPM, i.e. the winners are not doing quite so well and the losers are doing a little better. It has taken the EA more than a decade to get to this point, and there is still 33 months to go before new transmission charges are implemented on 1 April 2023 — all going well.


Meridian Energy (MEL) remains the biggest winner, Mercury (MCY) the biggest loser


MEL&nbsp;remains the main beneficiary&nbsp;with a benefit of NZ$27m vs. current transmission prices, although this benefit is -NZ$2m lower than it was under the 2019 Issues Paper. Given the delays in the&nbsp;TPM, we had taken a conservative approach to&nbsp;MEL's&nbsp;upside such that&nbsp;the&nbsp;EA's&nbsp;calculated benefit is +NZ$15m higher per&nbsp;annum&nbsp;than&nbsp;our current forecast (+NZ8cps of value).
MCY&nbsp;remains the worst off generator. Its transmission charges will increase ~+NZ$8m as it is the only generator without South Island generation (hence, receives no benefit from changes to&nbsp;HVDC&nbsp;pricing). Its transmission&nbsp;charges going forward are reasonably significant due to transmission work in the Central North Island benefiting its geothermal power stations. Our current forecasts assume an +NZ$5m increase in&nbsp;MCY's&nbsp;transmission charges, the +NZ$3m difference equating to NZ3cps.
Details of the direct winners and losers vs. the current TPM and the previous July 2019 TPM proposal are presented in Figure 1.
The other indirect loser is Trustpower (TPW). The TPM is estimated to provide TPW a direct benefit of +NZ$1m. However, the implementation of the new TPM will reduce avoided-costs-of-transmission (ACOT) revenue further, potentially -NZ$8m per annum as disclosed at TPW's recent FY20 result.


NZAS&nbsp;benefits about the same, but prudent discount policy creates some opportunity


NZAS's&nbsp;gain from changes to the&nbsp;TPM&nbsp;has slipped to +NZ$10m (from +NZ$11m). However, the estimate of its absolute charge is NZ$42m which is still ~-NZ$20m lower than its actual 2019 transmission charges.
NZAS&nbsp;also has the opportunity to apply for a "prudent discount" on transmission charges if it can prove its current transmission charges are higher than the "efficient stand-alone cost" of providing the same service. There is a great deal of uncertainty as to what a prudent discount could look like, with&nbsp;Transpower&nbsp;having to come up with a workable policy. It is also likely to be applied after the broader&nbsp;TPM&nbsp;has been implemented in 2023.
​​​​​​​We suspect&nbsp;NZAS&nbsp;will be disappointed with the&nbsp;EA's&nbsp;decision paper. Whilst it provides some transmission price relief, it is a long-way short of what it is seeking, is several years away from implementation (NZAS&nbsp;wants price relief now) and the prudent discount policy provides no certainty. That said, it is a step in the right direction and we doubt that it will have a material impact on Rio&nbsp;Tinto's&nbsp;decision on the future of&nbsp;NZAS.


Over to&nbsp;Transpower&nbsp;to implement the&nbsp;EA's&nbsp;guidelines


There is no consultation on this paper as it is a&nbsp;decision paper.&nbsp;Transpower&nbsp;is now required to implement the guidelines, turning them&nbsp;into formal code. It has until 30 June 2021 to do this. The EA will then assess whether&nbsp;Transpower&nbsp;has implemented the guidelines appropriately and will consult on the proposed Electricity Industry Participation Code amendments.&nbsp;
The aim is to implement the new TPM by 1 April 2023, which requires Transpower to formally notify its customers of the price changes by the end of November 2022.



Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Electricity Sector: The Beginning of the End — TPM Decision Made