Rising Gas Costs Challenge Contact Energy’s Peaking Power Strategy

Securing Fuel for Flexibility

Contact Energy has taken a decisive step to underpin its gas-fired peaking power generation by signing a long-term natural gas supply contract with OMV. The agreement covers supply from the Pohokura gas field starting January 2026 through to December 2032, a critical move as existing contracts from Maui and Pohokura fields expire by the end of 2024 and 2025 respectively.

This contract, while conditional on ministerial approval under section 41B of the Crown Minerals Act 1991, signals Contact’s commitment to maintaining flexible generation capacity. The initial forecast volume for the first year stands at approximately 3.5 petajoules, with a planned decline in annual volumes over the contract’s duration, reflecting both market conditions and operational strategy.

Rising Costs and Market Realities

Contact’s announcement highlights a significant shift in the New Zealand gas market landscape. Wholesale gas prices have surged by more than 50% since Contact’s last long-term contracting process, driving the implied short-run marginal cost of electricity generation from its Stratford gas peakers to over $200 per megawatt-hour. This figure includes both gas and carbon costs, with the latter priced at $80 per unit as per Contact’s FY25 guidance.

In addition to fuel costs, Contact faces approximately $50 million annually in fixed operating expenses to keep the peaking units operational. These costs encompass electricity and gas transmission, storage contracts, and other direct and indirect operating expenses. The elevated cost base underscores the challenges of relying on gas-fired generation in a market increasingly dominated by renewables.

Balancing Energy Transition and Reliability

CEO Mike Fuge contextualised the contract within New Zealand’s broader energy transition, noting the decline in domestic gas production and the growing role of intermittent renewable energy sources. "Flexible gas generation remains an important part of the system, keeping the lights on when the sun isn't shining and wind isn't blowing," he said, emphasising the strategic importance of securing gas supply for Contact’s peaking assets.

Contact is simultaneously advancing initiatives to reduce reliance on gas peakers. The company is constructing a 100MW grid-scale battery at Glenbrook, with two additional battery projects in the planning stages. Alongside these, Contact is deploying commercial and industrial demand management mechanisms and retail products designed to smooth peak electricity demand, aligning with its decarbonisation leadership ambitions.

Looking Ahead

While the contract provides a degree of certainty for Contact’s gas supply, the conditional nature of ministerial consent introduces an element of regulatory risk. In addition, the evolving cost dynamics of gas and carbon pricing will continue to influence the economics of gas-fired generation. Investors and market watchers will be keen to see how Contact balances these pressures while progressing its battery storage and demand management strategies.