Proposed Waitaha Hydro Scheme: Assessment of Reasons, Financial Viability, and Alternative Locations This report has been prepared for the Minister of Conservation under section 17S(4) of the Conservation Act 1987 to address certain matters relevant to an application dated July 2014 by Westpower Limited under Part B of the Act for concessions relating to a proposed hydro electric generation scheme on and around the Waitaha River. By Tony Baldwin Law and Economics Consultant Wellington 1 May 2015 © Tony Baldwin Financial viability of Waitaha hydro proposal, April 2015 Baldwin Consulting About the author Tony Baldwin is a consultant specialising in law and economic issues, corporate strategy, and public policy. From 2011 to 2014, Tony was project manager and strategy adviser for Genesis Energy in relation to the Crown’s sale of 49% of its shares in the company. Tony has a long involvement in the electricity sector. Among other things, he led the Government's team of officials, advisers and consultants responsible for negotiating the restructuring of ECNZ to form Contact Energy, Meridian Energy, Mighty River Power and Genesis Energy between 1995 and 1998. Over the last 20 years, Tony has worked on a range of electricity industry issues, including transmission investment upgrade processes, security of supply issues, and hedge market development. Tony trained as a commercial and company lawyer at Chapman Tripp in Wellington. More details are at www.tonybaldwin.co.nz Disclaimer The author makes no representations or warranties as to the accuracy or completeness of this document. To the fullest extent permitted by law, no liability or responsibility is accepted for any loss or damage arising out of the use of or reliance on any information in this report. This document is subject to checking calculations and proofing Page 2 of 216 Draft Financial viability of Waitaha hydro proposal, April 2015 Baldwin Consulting Contents 1. Executive summary .................................................................. 13 1.1 Purpose of report .................................................................................................13 1.2 Key conclusions ...................................................................................................13 1.3 Structure of report ...............................................................................................15 1.4 Approach ............................................................................................................15 1.5 Statutory framework ............................................................................................15 1.5.1 Part 3B of Conservation Act ........................................................................15 1.5.2 “Appropriate” test .....................................................................................16 1.5.3 “Activity” to be authorised ..........................................................................16 1.5.4 Legal relevance of financial viability .............................................................17 1.5.5 Legal relevance of electricity need and other reasons .....................................17 1.5.6 Alternative locations for activity ..................................................................17 1.5.7 Application not complete ............................................................................18 1.5.8 Amethyst precedent ..................................................................................18 1.6 About Westpower ................................................................................................18 1.7 Waitaha scheme ..................................................................................................19 1.8 Test of financial viability .......................................................................................20 1.9 Supply and demand in Westpower’s region – 2001 to 2014 .......................................21 1.9 Supply and demand in New Zealand – 2001 to 2014 ................................................24 1.10 Supply and demand outlook for New Zealand .........................................................25 1.11 New generation options for New Zealand ...............................................................25 1.12 Supply and demand outlook for Westpower’s region ................................................26 1.13 Economics of Waitaha scheme ..............................................................................29 1.13.1 Test of financial viability ............................................................................29 1.13.2 Generation-weighted price .........................................................................29 1.13.3 Estimated unit cost of Waitaha scheme .......................................................31 1.13.4 Caveat ....................................................................................................33 1.13.5 Would the Waitaha scheme be financially viable? ..........................................34 1.14 Westpower’s reasons for Waitaha scheme ..............................................................36 1.15 Alternative locations for activity ............................................................................36 1.16 Conclusions ........................................................................................................37 Page 3 of 216 Draft Financial viability of Waitaha hydro proposal, April 2015 Baldwin Consulting 2. Statutory regime and purpose of report........................................ 38 2.1 Outline of this section ...........................................................................................38 2.2 Process to date ....................................................................................................38 2.3 Statutory regime ................................................................................................39 2.3.1 Relationship with the Resource Management Act 1991 ...................................39 2.3.2 Overview of statutory regime ......................................................................39 2.3.3 Effects of activity ......................................................................................41 2.3.4 Statutory purpose .....................................................................................41 2.3.5 “Appropriate” test .....................................................................................42 2.4 What is the “activity” in relation to the proposed Waitaha scheme? ............................42 2.5 Legal relevance of financial viability and electricity need ...........................................43 2.5.1 Financial viability .......................................................................................43 2.5.2 Electricity need .........................................................................................44 2.6 Alternative locations for activity .............................................................................45 2.7 Relevance of Amethyst precedent ..........................................................................45 2.8 Is Westpower’s application ‘complete’? ...................................................................46 2.9 Purpose of this report ...........................................................................................46 2.10 Approach in this report ........................................................................................47 2.11 Diagrams of statutory process ..............................................................................47 3. Westpower and its network ......................................................... 53 3.1 Outline of this section ...........................................................................................53 3.2 Key points ..........................................................................................................53 3.3 Historical ownership of generation and electricity retailing ........................................54 3.4 Westpower’s strategy ...........................................................................................55 3.5 Westpower’s key financials....................................................................................57 3.5.1 Sources of revenue.....................................................................................57 3.5.2 Profit and other revenue markers ................................................................58 3.5.3 Other key financials ...................................................................................59 3.6 Westpower’s current structure and activities ...........................................................62 3.6.1 West Coast Electric Power Trust ...................................................................62 3.6.2 Electronet ................................................................................................62 3.6.3 Mitton and ABB businesses ..........................................................................62 3.6.4 Amethyst hydro – Westpower does not retail .................................................62 3.7 Westpower’s relative size ......................................................................................63 3.8 Consumers on Westpower’s network ......................................................................63 3.7 Westpower’s network ...........................................................................................65 Page 4 of 216 Draft Financial viability of Waitaha