The Fitch credit rating agency says electricity retailers will experience pressure on their profit margins in 2010, thanks to higher wholesale electricity prices, transmission system upgrade costs, and investment in new generation capacity. Over the longer term, Fitch expects wholesale electricity price changes to be driven by underlying increases in the capital cost of new generation and fuel costs, particularly with the depletion of the Maui gas field, “offset by the downward pressure of a more efficient market as the transmission network is upgraded.”

Fitch keeps its ratings outlook for local power companies “broadly negative” in the short term, especially for South Island generators such as Meridian Energy, Contact Energy and TrustPower, which are constrained because of weaknesses in the Cook Strait cable connecting the grid between the two islands. New generation proposals also remain “a key issue”, especially for wind and hydro projects, although Fitch believes RMA reforms should help to address the issue. The greatest single impact for the sector is the Electricity Amendment Bill, which is due for enactment before year’s end. As previously indicated, Fitch believes the reforms will have both positive and negative impacts for electricity producers, but that these cannot be fully judged before the reforms are in place.

The absence of clear domestic replacement sources of natural gas also represent a medium term credit risk for the sector, with known gas supplies forecast to be unable to meet demand by around 2015. However, Fitch expects gas to remain an important generation fuel, and speculates on either LNG or CNG imports to meet demand if no new reservoirs are found. It notes the Taranaki basin remains under-explored, despite its status as NZ’s most successfully exploited hydrocarbon zone.

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