Stronger power sector faces gas-shortage problems

By Nick Stride

Friday 21st February 2003

The power utilities sector has put its house in order after an abysmal 2001 but the looming shortage of gas is the next big challenge, according to a report by Fitch Ratings.

Financial results for listed energy sector companies have confirmed Fitch's assessment that power firms have rectified the supply-demand mismatches that led to losses of hundreds of millions of dollars in 2001.

Since the sky-high wholesale market prices caused by 2001's cold, dry winter, companies have swapped customer bases and generation capacity and aligned generation with customers geographically.

Contact Energy, for instance, is now a modest net seller, having bought smaller retail businesses.

NGC Holdings conversely sold its retail customer base and its generation capacity, exiting the power industry altogether and allowing other players to improve matches.

The agency says the industry's creditworthiness is now improving. But it notes the downward revision of the gas remaining in the Maui field and uncertainty about the size of the new Pohokura field are delaying decisions on whether to go ahead building new generation capacity, "a key issue for the market in view of the tightening supply-demand balance."

Fitch noted competition for retail customers had subsided after suppliers facing demand they couldn't supply from their own generation during the 2001 dry winter improved the matching of their retail and generation portfolios. But one downside to this vertical integration was the lack of liquidity in the wholesale hedging market, which becomes particularly important in a dry year.

Industry restructuring during 2002 had led to a number of benefits.

Matching customers with demand both in terms of volumes and regionally reduced customer servicing costs and led to a greater understanding of the operating margins of individual customers. There was now much less unhedged exposure to higher wholesale prices or to prices at different "regional nodes."

Risk management now took fewer resources. In some cases, lower power transport costs and losses might come from geographically better-aligned supply and demand. However, Fitch said, the industry would be faced with funding new generation in extremely tough conditions for utilities around the world. Local utilities would also have to refinance existing debt.

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