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Low hydro lakes could help Contact Energy

NZ Newswire logoNZ Newswire 24/05/2017 Pattrick Smellie

Low inflows of water into the South Island's hydro-electricity storage lakes are expected to knock Contact Energy's earnings in the second half of the current financial year but should boost prices for electricity to residential, commercial and industrial users next year, an analysis says.

"South Island hydrology has shifted gear from flood to trickle," First New Zealand Capital analyst Nevill Gluyas said in a research note.

"Storage in southern lakes has fallen to now reach the 1 per cent risk level, ie, one previously observed extreme hydro sequence could result in future shortfall."

New Zealand has experienced periodic winter electricity savings campaigns in the 1990s and 2000s, caused by so-called 'dry winters' in the eastern South Island catchments, which account for around 80 per cent of the country's relatively limited hydro storage capacity.

In recent years inflows have been normal or above average while the combination of falling electricity demand and major investments in new wind and geothermal power stations have seen wholesale electricity prices sag and kept pressure off prices to consumers.

Mr Gluyas said the current low inflow sequence had restored tension in 2018 financial year forward prices, lifting FY18 earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments by 1.5 per cent to $533 million.

FNZC's detailed forecasts show Contact earning an average $49.40 per Megwatt hour for wholesale electricity in the current financial year, down on last year's actual average of $59.60 per MWh. In the next financial year, it forecasts a jump to an average of $75.30 per MWh.

The shares last traded above $6 apiece in June 2015, were at $5.46 a year ago and fell as low as $4.35 in November before recovering to current levels.

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