Mercury in a good position

Mercury says its portfolio position is strong as it approaches a low inflow quarter coinciding with transmission and thermal fuel cuts.

This is expected to bode well for EV charging costs.

In its operational update for the three months ended December 31, 2019, Mercury says it maintained a prudent approach to risk management in Q2-FY2020.

That included decreasing hydro generation by 74GWh compared to the same quarter last year, resulting in a strong hydro storage position in the approach to the third quarter; historically the lowest inflow quarter for the Waikato catchment.

Forecast low inflows in Q3-FY2020 were also expected to coincide with an increased likelihood of high spot prices, indicated by a $158/MWh Otahuhu futures price for Q3-FY2020 as at October 1, 2019, impacted by planned transmission and thermal fuel supply outages.

Lower hydro generation during the quarter lifted hydro storage in Lake Taupo to 85GWh above average by the end of the quarter.

Low spill and high efficiency offset below-average inflows leading to Mercury’s full-year hydro generation forecast being materially unchanged at 4070GWh.

Mercury’s geothermal generation also decreased by 84GWh compared to Q2-FY2019 due to two-yearly maintenance outages at Nga Awa Purua, Kawerau and Ngatamariki stations.

Wholesale market prices were dampened by high South Island hydro inflows, but remain historically high, the electricity generating and retailing company says.

Spot prices in the most recent quarter started strongly but declined following very high South Island hydro inflows. The average spot price for the quarter decreased from $206/MWh at Otahuhu and $175/MWh at Benmore in the prior comparable period, when dry hydrological conditions and thermal fuel supply outages led to record prices, to $102/MWh and $87/MWh respectively but remained elevated at the 95th percentile.

High South Island inflows also coincided with the low demand holiday period leading to national hydro storage increasing across the quarter from 354GWh below average to 1060GWh above average.

“This surfeit of hydro storage has lowered spot price expectations for FY2020 with futures prices easing from $139/MWh to $123/MWh at Otahuhu and from $121/MWh to $96/MWh at Benmore across the quarter.”

The commercial and industrial average sales yield (from both physical and financial sales) increased by 6.7% from $74/MWh to $79/MWh due to the impact of contract renewals at current wholesale market levels.

Mercury’s focus on loyalty and higher-value customers resulted in the average yield received for mass market sales increasing by 2.3% from $127/MWh in Q2-FY2019 to $129/MWh in the current quarter.

Customer numbers were 356,000 at the end of Q2-FY2020, a net decrease of 5000 over the quarter and of 25,000 from the end of Q2-FY2019.

This includes a reduction of around 8000 connections from Mercury’s exit of lower-yielding farm source contracts as part of its portfolio management strategy.

Temperature adjusted demand increased by 1.7% (2.1% on an unadjusted basis) primarily due to increased irrigation demand (+1.2%) as heavy South Island rainfall was limited to hydro catchment regions.

The urban (+0.5%), rural (+0.1%) and dairy (+0.2%) sectors also made positive contributions to total demand.

Industrial demand remains subdued, contributing -0.3% of the change in total demand as large consumers responded to high spot prices; demonstrated by Tiwai holding its consumption below peak load at an average 593MW across the quarter.