Mercury boss Stew Hamilton on its billion dollar renewabl…

Mercury’s boss says gentailers are now building new plants faster than ‘Think Big’.

Mercury New Zealand chief executive Stew Hamilton says the billions being spent on new power generation will go a long way towards restoring confidence in the electricity grid after the big price spike of winter 2024. Sharply declining gas supply and unusually dry and calm conditions in 2024 drove wholesale electricity prices up to $820 a megawatt hour (MWh) from a winter average of around $160/MWh, highlighting deficiencies in the national grid.

A string of reports – among them being a Government-commissioned assessment from Frontier Economics – looked at what went wrong in 2024. Frontier, among other things, said insufficient back-up fuel and generation capacity – especially gas – was a key driver of price volatility. “I absolutely understand the desire from New Zealand to have an electricity system that’s reliable and affordable, because it is the engine that gets New Zealand going,” Hamilton told the Herald.

“I think there’s been a fair bit of loss of trust or confidence over the last couple of years,” Hamilton, who was appointed CEO late in 2024, said. “So I’m super excited to be in the role I’m in now with the team, because I think we can now play a really key role in making the brighter future that New Zealand deserves.” Heading into this winter, Hamilton said the system was well set up thanks to full hydro lakes.

The big power companies – Mercury included – are spending up large on renewable energy projects. The 51% Government-owned company already has a couple of new geothermal plants that are soon to go online. “When you combine that with some of the work that’s going on with wind and wind construction in New Zealand, we’re actually set up in a really strong position.” Post-2024, there had been market and political commentary about the state of the electricity system and energy in general.

“Over the last 18 months, there’s been a significant amount of focus from the gentailers [generator-retailers] and from other independent, generators in terms of investing into the grid. “The rate of construction of new power plants is higher than even during the Think Big period of the 1970s and 80s. “We’re currently spending about a billion dollars in building two new wind farms, one in the deep south and one in the Far North, as well as a geothermal station.” Mercury and its peers are spending up large on new generation projects after a period of relative under-investment going back a decade or so.

Hamilton said he is broadly supportive of the Government’s plan to establish a liquefied natural gas (LNG) facility at Port Taranaki, saying it will provide insurance for a hydro-dominated national power grid. “It’s a little bit early to tell the specific details, but you can absolutely see where the Government is coming from,” he said. “In New Zealand, we’re blessed with renewable energy options and that sets us up to be really positive from a New Zealand perspective.

“The issue with our strong hydro dominance is that when we have these dry years, we are short of energy and we need to seek different options to help us fill those dry-year periods like we had in 2024.” The industry has already gone a long way towards increasing the resilience of the system after the shock of 2024. Last year, the big four – Meridian, Genesis, Mercury and Contact – teamed up to back an enlarged coal stockpile at the Huntly Power Station to reinforce the station’s role as a dry-year back-up generator.

Demand response deals are also in place, which means the country’s biggest power users, such as the NZAS (New Zealand Aluminium Smelters) smelter at Tiwai Point, can be called on to dial back production when the system is stretched. “This [LNG plan] is really a bit like insurance for the electricity industry sector, so that in those years of lower rainfall when it’s dry, we’ve got these options to make sure we’ve got a resilient system,” Hamilton said.

He is also upbeat about geothermal and its ability to offer continuous, or baseload, power to the grid. About 25-30% of Mercury’s production comes from geothermal and about 20% of national production comes from underground. “At Mercury, we think we have potential – over the next 10 to 15 years – for another five terawatt hours [TWh – New Zealand’s total consumption is about 40TWh],” he said.

“The first phase is really taking what we’ve got – conventional geothermal that we know really well on sites we know well – and expanding them out: brownfields expansion. “Then there is greenfields geothermal – exploring places where currently geothermal stations do not exist, and then building new power stations there. “Beyond that, it’s about exploring these non-conventional or enhanced geothermal systems such as supercritical geothermal, which is going very, very deep.” Conventional geothermal draws steam from between 2-3km underground while “supercritical” geothermal involves going 5km, 6km or 7km underground.

“There are other forms of enhanced geothermal systems as well, so you can get very low-temperature forms of geothermal, which we’re also keen to explore,” Hamilton said. “Those three phases, for us, are something that we will progress over the next five, 10 and 15 years.” New Zealand has a world-leading position in geothermal off the back of exploration work done in the 1950s, 1960s and 1970s, mostly by New Zealand governmental agencies.

That work had created a lot of data to illustrate what the geothermal reservoirs look like, Hamilton said. “That data gave confidence for organisations like Mercury and Contact and others to actually do this drilling because drilling can be quite challenging. “You can spend up to $20 million to drill a hole and if you miss the reservoir, you’ve just lost $20 million.” Over the 1990s and early 2000s, Mercury was heavily involved in a growth phase for geothermal.

“Because there wasn’t a lot of growth, there were not a lot of signals being seen to keep investing in new power plants. “Therefore, there was a bit of a lull, not just in geothermal, but in a lot of energy and electricity plant that are being built.” But now, with fossil fuel-powered plants like Contact’s Taranaki Combined Cycle station being retired, growth in renewables generation had taken off.

Over the last three or four years, New Zealand has built another 10% additional capacity. “At the moment, all the companies in New Zealand are building another 10% and geothermal will be a part of that phased rollout, especially as we start to retire some of the fossil-fuelled thermal power stations,” Hamilton said. “Second is building out wind – because New Zealand has fantastic wind resource – and the third is enhancing the hydro schemes that we have.” The company has spent around $100m over the last few years upgrading its Karāpiro hydro station.

Over the next 10 years, Mercury will spend about half a billion dollars on other power stations along the river. Other hydro station operators will likely do something similar with their assets, as most stations were built in the 1960s, 1970s and 1980s. Station upgrades will involve turbines and generators, which can be expected to wring another 10-20% efficiency out of the system for the same amount of water being used.

Mercury “stacks” its different fuels types, attaching high value to wind and higher value to geothermal, but with hydro at the top, because of its flexible nature and its ability to be used at short notice. Hamilton says if you go back 10-20 years, hydro was more about providing base load, but now it is moving to more of a peaking role – able to be called on almost instantly. Mercury’s stations along the Waikato River can be cranked up to 1100MW from just 100MW in a matter of minutes.

That gives the company a lot of flexibility to deal with sudden rises and falls in demand. The boom in artificial intelligence (AI), and the number of power-hungry data centres required to serve it, has proven challenging overseas. In Ireland, data centres have created problems with electricity demand and grid capacity. “With AI and the corresponding requirement for ‘compute’ data centres [which provide large-scale processing power rather than storage or networking] – and their need for electricity can be very valuable because of what it can create in terms of construction and jobs.

“Secondly, it actually enables us to have the confidence to invest in the grid, which will create a more resilient grid and options to actually support it. “Having those loads in place that are predictable, that are reasonable, that actually enable us to build the grid, does result in a better system for all consumers, including households. “There is potential that you can go overboard, just like you do see in some locations like Ireland for example, and so we do have to manage that desire to have affordable electricity for other commercial industrial users and for retail households as well.” Operationally, Mercury has been using AI for what it calls its “digital river” for a couple of years.

Hamilton says the system knows which stations are the most efficient, and how to run them. “It’s looking at the power price, the demand for power and the incoming weather, predicting what’s going to happen with the rainfall. “It takes all that information – hundreds, even thousands, of variables – and on that basis, predicts and gives feedback or guidance on the best way we should run all 39 turbines in the river to maximise the electricity we get out of every drop of water.

“That’s in place at the moment and it’s getting better and better as it continues to learn.” After all the reports arising from the 2024 price spike, Hamilton says he is happy with the current industry set-up and says power prices stack up well compared with other parts of the world. As it stands, all the big four power generators each have large power retail operations attached. “Our belief is that some of the solutions that are being bandied about don’t necessarily give the outcome that’s been sought because one of the best ways for us to head towards having more affordable power and more reliable power is to build power stations and then firm them.

“And if we go about splitting up the generator-retailers or making drastic market changes, I just don’t see how that’s actually going to lead to more power plants and electrons being constructed. “It’s just that often the solutions that are being talked about don’t address the problem that we have.” ASX futures market pricing suggests the wholesale price of power will come down over the next few years, reflecting the wave of increased generation capacity coming on stream.

The market puts wholesale prices at around $160 per megawatt hour but a risk premium of $20-$30/MWh has gone on top of that to cover the possibility of dry years. Data out this week said household electricity prices went up 11.5% in the year to January, but most of that can be put down to distribution costs. “If you look at the household prices, less than 40% of our household electricity bill comes from the actual production of electricity,” Hamilton said.

“The other 60% is made up of lines charges, transmissions charges, retail charges, GST and other levies. “So over the last few years, there’s quite a bit of investment that has started to go into our lines companies, to our transmission, and they are making up a fairly significant portion of the household price increases at the moment.” Last year, about 80% of Mercury’s price increase came from increased lines and transmission charges.

Even on a good day, power companies deal with extreme volatility in wholesale power prices, so they use derivative financial instruments to smooth out the spikes and troughs. In January this year, the average spot price was less than $5/MWh – the lowest monthly price on record – because of heavier-than-normal rainfall. On average, going back five or 10 years, the average length of Mercury’s contracts with commercial entities would have been about three years.

Now, Hamilton says it’s moved to about five years but with some contracts in place for 10, 15 and 20 years. Long-term contracts can give Mercury confidence to build power projects because of the certainty it affords. Mercury NZ is currently executing a major investment strategy focused on expanding its renewable generation portfolio, with over $1 billion committed to new wind and geothermal projects.

About 35% of its 3.5TWh plan will be realised through projects currently under construction and Mercury’s hydro refurbishment programme. It is also in the early stages of planning a battery energy storage system near Whakamaru Hydro Power Station on the Waikato River. Hamilton says new projects can take time and there is no quick fix, but that new capacity is now quickly coming on stream. “I believe over the next couple of years that New Zealand will see the benefit of that,” he said.

Brokers Forsyth Barr expects the company to report earnings before interest, tax, depreciation, amortisation and financial instruments (ebitdaf) of $527 million, up from $418m in the first half of 2025. Mercury’s own guidance for the 2026 year is for ebitdaf of $1b, reflecting significant reinvestment of capital, up from $786m in 2025. Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy.

He joined the Herald in 2011.

Summary

This report covers the latest developments in artificial intelligence. The information presented highlights key changes and updates that are relevant to those following this topic.

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