Contact considers new lease of life for Wairakei geothermal station

Friday 14th August 2009

The 50 year-old Wairakei geothermal power station looks set for an extended life after Contact Energy today signalled its retention and a preference to build new plant in the Tauhara geothermal steamfield ahead of its replacement.

Wairakei was slated for closure and replacement by a larger plant, to be called Te Mihi, which would employ state-of-the-art techniques for reinjecting geothermal water reinjection underground instead of pumping millions of litres of wastewater into the Waikato River from Wairakei.

Geothermal wastewater is high in pollutants including arsenic, mercury and boron, although those elements are already present in the Waikato at low levels because they occur naturally in the central North Island volcanic plateau.

Contact's managing director David Baldwin told a media briefing in Wellington that the Wairakei plant continued to function cost-effectively, despite its age, and the company was finding itself "challenged as to why we would take it off-line".

Under resource consents renewed for the Wairakei station in 2007, Contact faces clean-up obligations on its river discharges, and these would need to be met if the decision is to continue operating the plant, Baldwin said.

The company has a resource consent already for Te Mihi, but is still in the application phase for a large plant at Tauhara. A 23MW binary plant is under construction at Tauhara and should be functioning by mid-2010.

Baldwin also signalled some optimism that a procurement committee working with Transpower would succeed in bringing forward the installation of a new "pole" for the Cook Strait cable. This would remove constraints that have distorted prices and energy flows between the North and South Island, which were a significant part of the reason for Contact's 50% cut in tax-paid profit, announced this morning, for the year to June 30. The new so-called "Pole 3" is due to be commissioned in mid-2012, but even a six month shortening of that timetable would be welcome.

Grid constraints cut across Contact's long-standing strategy of a balanced portfolio of generation and retail revenues, which have previously tended to offset one another and produce stable earnings, irrespective of market conditions. That did not work last year when Contact was trapped behind constraints that forced it to buy high-priced South Island power to meet demand for southern customers.

Baldwin faced sustained questioning on the company's blunder last year in raising tariffs and directors' fees at the same time, precipitating the departure of a little over 50,000 electricity customers from its previous peak of almost 530,000 customers.

"The honest perspective is that we could have taken a different course of action, probably should have," said Baldwin of what he described as "the worst period in Contact's brand life".

However, the cost of customer losses was "not material" at around $2 million, especially compared with the capacity for volatile wholesale prices and system constraints to wipe more than $100 million off earnings last year.

Contact was now gaining more customers than it was losing week by week, and would continue to restore its customer base. However, some SOE competitors are offering "hundreds of dollars" of inducements to attract and keep customers, and Contact "would struggle to match that level" because it was not commercially logical, especially as retail margins remained slender.

Retail electricity tariffs were still too low, reflecting long run marginal cost prices of around $70 per Megawatt hour, when the next tranches of new generation after geothermal required prices above $100 to $120 per MWh to justify investment in new plant, Baldwin said.

He also announced Contact's decision no longer to pursue construction of a Liquefied Natural Gas terminal at New Plymouth, even though gas imports look likely to be needed by around 2015 unless there are substantial new local discoveries. New on-board systems allowed LNG tankers to gasify their cargoes, and Contact's gas storage facility at Ahuroa meant unloading and storage facilities at New Plymouth were no longer necessary.

The Contact share price had slipped 0.6% to $6.25, having fallen 14.7% over the course of this year.

Businesswire.co.nz

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