How we create value
As a vertically integrated company, it’s important that the different parts of the business work together to achieve our overall goals
Wholesale market price variation
Wholesale market prices can vary significantly in New Zealand depending on what technologies are able to generate electricity at any point in time. Prices can be significantly affected by rainfall, as well as gas availability. In the short to medium term, we manage this risk for our physical supply customers by offering fixed pricing. We also offer financial contracts to businesses that buy directly from the spot electricity market to limit their exposure to price variations. These contracts, plus a range of other financial instruments and forward contracts, also help control our commercial risks around price volatility and they smooth out our earnings across the year.
Dynamics of supply and demand
The wholesale market price is affected by the dynamics of supply and demand. If there is too much electricity available, the wholesale price goes down. If the over supply persists, older, less economic generation plant may shut down in response. Alternatively, if demand for electricity is rising over time, the wholesale price will generally track up. If there is not enough generation to meet rising demand, the price for the available electricity goes up, improving the business case for investment in new power stations. The additional generation made possible by the investment in new plant restores the supply-demand balance and the price stabilises again.
There are a number of other factors that can affect the supply-demand balance. NZAS closing the Tīwai Point aluminium smelter, for example, would reduce demand. Climate change also has the potential to increase or reduce supply, and to increase demand, because climate action regulations could increase electricity consumption through electric vehicles and electric boilers. Equally, the transition required to respond to climate change could lead to disruption of emissions-intensive industries, decreasing demand.
The electricity market
The ways in which we can sell our electricity and determine a price are controlled by the electricity market, and by the Government and regulators. As the main regulator in New Zealand, the Electricity Authority can also decide if our behaviour has been fair to our competitors and to our customers. We contribute to conversations on public policy to help ensure the markets we operate in are open, fair and efficient. We believe markets with these characteristics benefit consumers and enable our long-term success.
Great customer experience
Our customers are businesses, households and other electricity companies. We have three retail brands: Meridian and Powershop in New Zealand, and Powershop in Australia. Because there are so many retailers, we need to differentiate ourselves from our competitors with strong brands and by marketing through traditional media and digital channels. Meridian and Powershop Australia are attractive to customers because of our positioning as a leader in sustainability. This is demonstrated by our Group commitment to renewable electricity and climate action. Powershop New Zealand is attractive because it offers customers control over their energy usage and cost in a fun, irreverent and engaging way.
Short supply chains
All our energy retailing brands have very short supply chains because the physical assets used to distribute electricity and meter its use are managed by national and local lines and metering companies. Our retail operations’ requirements are similar to those of many corporate offices. They include physical facilities and ICT, sales and marketing, billing and governance functions.
In order for us to operate our brands profitably in Australia and New Zealand we need to keep earning our customers’ loyalty by providing excellent experiences through our frontline service teams. Those teams and our customers rely on platforms like Flux to ensure they can interact smoothly and effectively. Flux also markets its software platform and the Powershop brand under licence in the UK.
Quality of our assets
Our ability to generate electricity safely and reliably is dependent on the quality of our assets and ICT systems, supported by highly skilled employees, suppliers and contractors. Our assets are maintained by Meridian staff (with some of our wind farms also maintained by third parties) who contract with a range of local and global suppliers to provide us with the parts and components needed to build and maintain our generation assets, as well as a mix of general engineering consumable and specialist parts suppliers, and service providers including ICT and facilities’ management providers.
Because there are environmental implications around how we use our assets to generate renewable energy, we are dependent on securing and maintaining resource consents. To do this we need to win and maintain the trust of stakeholders, ranging from Ngāi Tahu and other iwi to water users, local government and communities. We achieve this by making a long-term and deep commitment to the communities and areas in which we operate through engagement, employment and consultation on important issues such as water, biodiversity, environmental impact, local prosperity and long-term planning and environmental management. Without the buy-in of our people, stakeholder groups, communities and local government, we could not operate our assets the way we do, which would materially affect our profitability and reduce the amount of renewable electricity available for Aotearoa’s power needs.
Retain the right staff
Our ability to attract and retain the right staff is central to our competitiveness in all our business activities, and is supported by a strong employer brand grounded in our purpose, values and behaviours, and how successful we are in creating a great place to work.
Finally, as a publicly listed company we are dependent on our investors having continued faith in our performance.
The wholesale market
The money we make from the electricity we generate on the wholesale market, plus the margin we receive from our business and residential customers, combined with our skill in managing trading conditions, determines how much revenue we make in a year. A portion of that is then reinvested into our business to support our ongoing programme of work. The value of our shares is what the market perceives our company to be worth at any given point in time.
Our shareholders, including the Government (which holds a 51% share), earn money from their investments in us in two ways: from the dividend payments we make every year; and from the changes in our share price, which allow them to sell our shares when they are more valuable and potentially buy more shares when prices dip. No guarantee of our current or future share price is given or implied. We also have other investors in long-term funding arrangements with us.
All our investors decide to invest based on their own knowledge, the information we share with them, and their own understanding of the markets. And investors want us to be able to tell them a strong and compelling story around our management of all the components that make up how we create value – our financial reserves, physical assets, technology platforms, our people, the relationships we have with a variety of stakeholders, and natural resources (particularly water) – hence this integrated report.