Debate on Crown Entities, Public Organisations, and State Enterprises — Mighty River Power Ltd

I am thrilled to be able to stand and speak on Mighty River Power during this debate on State-owned enterprises. Mighty River Power is a significant organisation in the Taupō electorate. It is an integrated energy generation, trading, retailing, and metering business, and a successful one at that.

I start by coming back to a point that the Hon Trevor Mallard made in his address on Meridian Energy. He talked about the fact that power generation is a particularly complex issue. He conceded that in the 9 years of the Labour Government it did not get it right. That explains a lot. It explains the 70 percent increase in power prices, which is four times the rate of inflation.

Mighty River Power’s generation capacity is significant as it is the hydroelectricity generator on the Waikato River. It has nine dams located along the Waikato River, as well as geothermal plants—one of which I want to speak about in more detail—in Taupō and the Bay of Plenty regions, the Southdown cogeneration station, and also bioenergy production. It is also looking at developing a wind generation programme.

New Zealanders want their State-owned enterprises to do well, and we are fortunate to have as Minister for State Owned Enterprises Simon Power, who is demanding that they do better than they have done. They are doing well, they are providing dividends to the Crown, and the Minister gave as an example what Mighty River Power has delivered to the Crown in terms of a dividend. But there is always the opportunity to do better. We are an aspirational Government. We are aspirational for our State-owned enterprises, and we are aspirational for all New Zealanders. The opportunity to do better is always there.

More than 90 percent of Mighty River Power’s generation now is renewable, which is very much in line with where we are heading as a country against a background of issues around climate change. If we look at Mercury Energy’s performance against that of its competitors, we see that it has been making gains in its market share, which is fantastic news. It is great for the organisation, great for New Zealanders, and great for the Crown.

I want to look at the exciting year that Mighty River Power has had, and I want to talk specifically about the Nga Awa Purua geothermal power station. I was fortunate to be at the opening of that station with the Prime Minister recently. The Nga Awa Purua power station is a joint venture with the Tauhara North No. 2 Trust. It is a great example of a partnership with the local iwi. It was launched only a matter of weeks ago. It generates 140 megawatts and powers 140,000 homes—the equivalent of Taupō, Rotorua, Hamilton, and Tauranga—which is pretty impressive for a power station that uses renewable energy. Its total budget was $430 million. Of course, it was opened under this Government, and I am proud of the achievements of this National-led Government. One of the highlights of this power station is that it has the largest single-shaft geothermal turbine in the world, with a total of 9 kilometres of pipeline. New Zealand is leading the world in geothermal electricity generation, and I am proud of that. The other thing that is important to note in terms of Mighty River Power is that the construction carried out during this period played an important part in buffering the Taupō community through the recession, because of the number of employees that Mighty River Power has managed to keep throughout this time. It does not end there. In terms of geothermal development, the next power station off the blocks is Ngatamariki Geothermal Power Station, and the resource consents are under way for that. We are looking forward to yet another geothermal power station opening in the Taupō electorate.

I want to talk about some of the challenges that Mighty River Power faces. One of them is the fact that the recent drought has had a significant impact on the ability of its nine hydroelectricity power stations and dams along the Waikato River to generate electricity. Might River Power has done a lot in terms of giving information to the public about the lake levels and their impact on it. Thank you.

It gives me pleasure to stand and speak in this debate, and in particular to talk about Mighty River Power. Before I do I will make a few general comments, then come on to talk about Mighty River Power and about some of the work it is doing in my electorate and the wider Bay of Plenty. We have heard from the very hard-working member of Parliament for Taupō, Louise Upston, about the work that Mighty River Power has been doing in the Waikato and in her electorate.

Stakeholding Ministers are custodians of $25 billion worth of investments by taxpayers in State-owned enterprises, which represents slightly more than 20 percent of the net worth of the Crown. Additionally, State-owned enterprises hold about $47 billion in assets, and paid just over $647 million in dividends in the 2009 financial year, which included $150 million in special dividends from both Meridian Energy and Mighty River Power. The responsibility of stakeholder Ministers is to ensure that this investment delivers an appropriate return, and we have heard from the Minister that to date the returns have been unsatisfactory although improving.

For the whole State-owned enterprise portfolio there are annualised returns of 1.5 percent for the 6 months ended 31 December 2008. We have had record low interest rates under this Government, but if some of that money had been just put in the bank during that time, there might have been a higher return. That rate of return increased to 4.4 percent for the 6 months ended 31 December 2009. However, stakeholder Ministers consider that there is still plenty of scope for improvement in this area, and Ministers and officials will continue to work with individual State-owned enterprises during the current business planning round to develop appropriate performance expectations. I believe that the New Zealand taxpayer would encourage Ministers and officials to do just that.

I come now to Mighty River Power. I was doing a bit of research before my speech today, and I found that in the 2008-09 period Mighty River Power generated revenue of $1.1 billion and made a post-tax profit of $160 million. Its subsidiary companies contributed $43 million but incurred some losses, and in its annual return Mighty River Power indicated that it would pay an ordinary dividend of almost $80 million, representing 50 percent of the net profit after tax.

I will come to my electorate of Rotorua and talk about some of the work that Mighty River Power is doing there, particularly in the geothermal electricity generation field. In the 2008-09 financial year Mighty River Power’s renewable generation rate increased by 36 percent, and its geothermal production increased from 9.5 percent to 20 percent. The geothermal power station at Kawerau was opened at the end of November 2008, which was a very good month for my electorate, and at the time that station represented the largest geothermal development in New Zealand for 20 years. I notice that that power plant in Kawerau was revalued on 30 June last year at $500 million, which is an increase in value of $240 million. I recognise and congratulate Mighty River Power on completing that project well ahead of schedule, and certainly under budget.

💬 Hon Trevor Mallard: What a good Minister.

Absolutely. That very good Minister is sitting in front of me now. Last year the geothermal power station at Kawerau received a top national award for the work that it did, and Mighty River Power won the electricity supply industry Engineering Excellence Award during that year. Of course, a lot of local people had come together to make sure that that could happen, such as local iwi, owners of land, the two pulp and paper plants, and the industry, and it is good to see a local community joining together. There is 100 megawatts of baseload electricity produced in that small plant—100 megawatts of baseload.

💬 Dr Rajen Prasad: How much is that?

That is more than the electricity in the batteries the member uses in his radio when he listens to Parliament at home.

That plant was only the first of the new plants to be opened. Louise Upston mentioned earlier an investment in Nga Awa Purua Geothermal Power Station, north-east of Taupō, and I notice from my notes that the electricity generated in this power station—

I predict that the coming year will be a record year for electricity generators owned by the State—a record year. I say that because I believe that Government-owned electricity generators Mighty River Power, Genesis, and Meridian Energy will make more money than they have ever made before. In 2 days’ time we will have the emissions trading scheme, which will contribute substantial extra profits to the Government-owned generators—windfall profits, not just to the Government-owned generators but to the privately owned Contact Energy and TrustPower. Why is that? In essence, the emissions trading scheme makes electricity produced by burning coal and gas more expensive.

Genesis, with its Huntly power station, will have to pay for the cost of the emissions given off from burning coal and gas in the production of electricity. The way the electricity market works is that the wholesale price is established approximately 80 percent of the time by Genesis. Genesis is usually the most expensive generator, and when it is called on to produce electricity for the New Zealand market it sets the price.

From 1 July Genesis will be able to increase, quite reasonably, the price of electricity. We have already seen electricity companies move to take advantage of that. The first of those was Mercury Energy. How interesting it was to hear Louise Upston—

The CHAIRPERSON (Eric Roy): The subject under debate is the estimates for Mighty River Power. If the member is bringing in other material, he must relate it to Mighty River Power.

I am certainly bringing in things that are relevant to Mighty River Power. The emissions trading scheme will enable Mighty River Power to increase the price of its electricity and make super profits. We need look no further than the letter Mercury Energy sent to its customers at the end of May. Mercury Energy is a 100 percent - owned subsidiary of Mighty River Power. What does the letter say? It starts by saying that the Government’s emissions trading scheme will take effect from 1 July 2010. It goes on to state: “The ETS is a government imposed cost on all electricity production that emits greenhouse gases, reflecting the volume of greenhouse gases produced by the electricity industry as a whole.” Later on the letter states: “This will result in an increase to the wholesale price of electricity and gas which will in turn increase the retail price of electricity and gas.”

The critical words—for all New Zealanders—in that letter are the words “the electricity industry as a whole”. We heard Louise Upston say very proudly a few minutes ago that 90 percent of what Mighty River Power produces comes from renewable sources. It comes from the Waikato River, and it comes from geothermal stations. What will Mighty River Power pay for the emissions given off by electricity produced from the Waikato River and the geothermal stations? Absolutely zero; nothing. The emissions trading scheme enables Mighty River Power to justify an increase of 3.3 percent when it incurs minimal extra costs. One might ask how that relates to Mighty River Power. Well, it enables Mighty River Power to charge more for its electricity and make extra profits.

As I said, I believe that the electricity generators owned by the State will make more money in the coming 12 months than they have ever made before. Who will pay for that? The people of New Zealand will. How do I know that? Because the Prime Minister of New Zealand himself has said so. A headline in this morning’s New Zealand Herald states: “PM admits public face hefty ETS bill”. He acknowledges in the article that the people who purchase electricity from Mercury Energy—which is 100 percent - owned by Mighty River Power; 100 percent - owned by the taxpayers—will be paying more for their electricity.

The Government has tried to argue that although a 5 percent increase in electricity prices was forecast by Treasury, Mercury is actually increasing the price by less. We ain’t seen nothing yet. What will drive those increases will be Genesis and Contact Energy, and particularly Genesis because it burns coal and gas. Genesis is sitting on a 1 million tonne stockpile of coal in Huntly right now—it is sitting there in reserve—and it will not have to pay for emissions on it.

I am very happy to speak on Mighty River Power. We have heard some excellent information about this State-owned enterprise, and about its success particularly during times of drought. Just recently I visited Lake Karapiro and drove over the dam that I used to walk over many times as a young boy. I swam in the lake, went down the slide, and watched people water-ski. The Rowing World Championships will be held on Lake Karapiro in the not too distant future, and those rowers will have a lake full of water. We would not believe it now, but we have come through a tremendous drought, which has affected Mighty River Power’s dividends.

This is a Government that believes in improvement; it really does. It is a Government that is focused on improvement in the return to the taxpayer of value for money. The Minister for State Owned Enterprises mentioned that towards the end of December 2008 the annualised return on equity was 1.5 percent, but that has increased for the 6 months to the end of 31 December 2009 to 4.4 percent. We have to acknowledge that that is three times the rate of return. This is during a time when power costs, in terms of inflation, have been dramatically less than in the era of the previous Government, when between 2000 and 2008 we saw an increase of four times the rate of inflation, at 66 percent. We are achieving this improved rate of return on equity because we are expecting and driving for greater efficiency.

In Mighty River Power’s statement of corporate intent, one of its key objectives is to be as profitable and efficient as comparable businesses that are not owned by the Crown. It is good to see that we are seeing that sort of rate of return. We know that in 2008-09 Mighty River Power generated revenues of $1.1 billion, and that came through not only its generation but also an increase of 1.7 percent growth in its customer base during that financial year, which has continued to increase. By the end of 2009 there was a an increase of 50,000 customers, so the total customer base was 400,000. Indeed, this is a State-owned enterprise that is not only generating electricity from 90 percent renewable sources but also has increasing support from the people of New Zealand. We are happy to see that. It has shifted a number of its premises to Rotorua, and the member for Rotorua, Todd McClay, forgot to mention and asked me to pass on that 60 jobs have come to his city because of that. He is very, very pleased about that.

The shareholding Ministers continue to look for a range of measures in terms of performance. To this end, shareholding Ministers asked officials to establish a range of financial performance indicators to be used across the portfolio, covering shareholder returns, profitability, efficiency, leverage, and solvency. There are many market forces and disciplines brought to bear in our State-owned enterprises. We have to congratulate Mighty River Power on its great financial result during a time when the water source and supply was severely depleted. In fact, it had the highest capital return for the 2008-09 financial year out of all the Government-owned generators. It credits this to its focus on energy trading, a large hydroelectrical component in its portfolio, and a strategic move into geothermal generation. We heard the member for Taupō, Louise Upston, speak about that and how it brought a great increase. Thank you.

Report noted.

New Zealand Post Ltd