24 Apr 2013

Lower power price effect will be short - fund manager says

7:05 am on 24 April 2013

A fund manager says the Labour/Green proposal to form a single buyer of wholesale electricity will lead to lower power prices in the short term but not in the longer term.

Both the Labour and Green parties have announced that, if elected to government, they intend to set up a single purchaser of electricity, saying it will result in savings to consumers of up to $750 million a year.

AMP Capital head of equities Guy Elliffe said there is a risk with this approach of over-investment, which could lead to excess capacity. If that happens, he says, taxpayers and consumers will end up bearing the costs.

Currently New Zealand has an excess supply of electricity but Mr Eliffe is doubtful if the Labour/Green policy, if implemented, would send the right signals as to when power companies should invest in new generation.

And he said the sharp increase in retail electricity prices in recent years does not necessarily mean the existing market is inefficient. He cites a rise in oil prices as one of the factors behind the price rises and says, for many years, cheap oil subsidised New Zealand electricity generation.

Mr Eliffe also took issue with claims that the current electricity market setup has seen a transfer of wealth from consumers to the listed power companies. He said there is little evidence of excessive profitmaking in the performance of Contact Energy and Trustpower shares over the past few years.

Election picks

Meanwhile, an equity analyst says potential investors should decide whether or not to buy shares in Mighty River Power based on who they think will win the next election.

Morningstar Research senior analyst Nachi Moghe said the Labour/Green policy could slash Mighty River's operating income by $100 million and that is why there is a high uncertainty rating on the stock.

"If you think that Labour is going to come to power you would be reluctant to buy shares in Mighty River Power but if you think National was going to continue then you would probably subscribe to the shares."

Mr Moghe expects the Government to set a price for the shares at the lower end of the indicative price range of $2.35 - $2.80.