Good morning, and welcome to Contact Energy's Annual Results for FY 2023. Today, we're joined by Mike Fuge, our CEO, and Dorian Devers, our CFO. Thank you, Mike.
Good, Tato, welcome everyone to FY 2023 results. First, the usual disclaimer on information that we pass over here. Moving on to the actual results. The agenda, we'll give a overview of the highlights for the last financial year. Dorian will then take you through the details of the financial results and the outlook, and then we'll update you on the progress on strategy. Look, FY 2023, solid performance, very much focused on delivering on the promises we've made in prior years. The underlying EBITDA of NZD 573, given where we were sitting at the half year, we're delighted with.
That's in the face of some very interesting conditions, with North Island rainfall, the highest on record, leading to lower wholesale spot prices, lower thermal generation, and higher price separation. In a way, it's possibly a precursor to what we can expect in the future with higher volatility. We were able to respond to it. When we thought we were short of fuel, we did secure additional gas in Q2 FY 2023. We did run short to take advantage of the market conditions. You'll see that we did not start TCC up until after the end of financial year, which led to our best carbon emissions on record, below our FY 2026 target indeed.
What we expect over the medium term is increased volatility in the market, but we see ourselves as well placed both with the fleet we have, with the generation coming on, and the gas storage and gas seekers we have in place to sail through that, sail through that well. You'll see, Dorian will talk later to the dividend that we're declaring today, which is in line. There are a few preconditions that we need to satisfy for that to progress, but no surprises there. In fact, what we hope with all of this is that there are no surprises. All the results have been well signaled, and the results that we see in the execution of our project pipeline has also been well signaled.
To remind you of our strategy, very much the same, to support New Zealand's growing demand, to get to enable electricity to become the fuel of choice in this country, and in doing so, to get rid of coal and hydrocarbons from the New Zealand energy supply as a whole. To grow the renewable development, you'll have seen we've gone on that to decarbonize our own portfolio, and with the closure of Te Rapa this year, we're putting our money where our mouth is. To continue to create outstanding customer experiences, in terms of both our base electricity company customers, but growing the products we provide to those customers in terms of broadband and potentially, and mobile. We ease, you know, the complexity in their lives in ordinary Kiwi households. All this underpinned ESG.
You'll have seen some great progress this year with our entry into the DJSI. Operational excellence, the teams continue to do a fantastic job in both the retail and operational arms of the business, and transforming the way we work in this new age. Look, this is a very busy slide. It's been a very busy year. I just-- in terms of what we have achieved in terms of growing demand, we continue to work with Rio on the NZAS extension. Obviously, there are other parties involved in that. We did sign that 10-year renewable attribute deal with Microsoft, which is underpinning the growth of data centers, renewable energy-based data centers in this country. Tauhara, we continue to expect that to come online quarter four.
If you go to the plant today, you'll see steam everywhere, as we are well into hot commissioning, which we're delighted about. If you go half a kilometer down the road, you'll see there's a Te Huka 3 plant, where structures have already started to emerge, just over a year out from first commissioning, which we're delighted about. You'll have seen our commitment to Geofutures with getting underway with the drilling program early, with that NZD 140 million pre-FID expenditure. Kōwhai Park, the solar farm at Christchurch Airport, continues to progress well, we have other opportunities there with the solar farm north of Auckland and Southland Wind. The battery feasibility we continue to work on. What you see on the right there is the ambition, just to get really clear on where we're taking investors.
The 100 MW of new demand, the 100 MW of demand flex, and the new green chemical channel, whether that's food grade CO2 or something else, we see real opportunity there. Renewable development, 10.3 TWh by FY 2027, all of which should make economic and commercial sense, and the batteries, up and running. We set out earlier in the year our ambition around Scope one and two emissions, net zero by 2035, and what we expect is that our run rate, by the end of 2027, will be down below 300,000 tons per year of CO2. With real opportunity, particularly in the geothermal space, to capture or just simply not emit the CO2 emissions from geothermal and with the retirement of TCC.
In terms of the customers, we expect to continue to grow. As we sit today, we're just a touch shy of 600,000 total connections. We expect that to grow over the coming three to four years to something closer to 700,000. We continue to hold on to our position and with a leading cost to serve per connection, which remains at a global benchmark level. We continue to grow both our brand and our reputation metrics. Just an update on the geothermal investment program. Tauhara, you can see the steam there, that is real. We are in the middle of Hot commissioning. It is a process that we step through very carefully, but we're delighted to be at this stage, and that signals a strong intent.
Project process, progress at the end of June, 96%, but probably closer to 98% as of today. You've seen that in the operating stats, it really is just some minor odds and sods in terms of the EPC power station. We have signaled before what we, we expect the capital to land at the end. There is nothing to suggest that we're going to blow that in any way, form, or fashion. As I alluded to, Te Huka 3 making excellent progress on site. You can see the coolers, fin fan coolers, in there going in place. They went up remarkably quickly. The project today is about 43%, which we again, are delighted with the progress on site.
A lot of the learnings that we got from Tauhara, a lot of the muscle fitness that we were able to build, that's being applied. Geofutures, one of the things we learned was the more mahi you do up front, the more it pays off. We committed to that early drilling program. We committed to getting the front-end design well advanced so that, when we take FID, we know exactly what we're dealing with. You can see the price expectation there. That in all, if you take that, we're talking 3.2 TWh, of which 1.8 to be up and running within the next 14, 15 months or so.
Geofutures will be a total capacity of about 1.4 net of 0.4 above the existing plant at Wairakei, which we'll retire. Demand, it has stayed flat over the year, that we actually take as a positive sign. It's been warm, it's been wet, we have seen some significant industrial closures. The fact that it has stayed relatively flat, is a good sign. We also see some signs, both in the signaled intent of the smelter to stay, and in some energy conversions. You saw the New Zealand Steel deal that we signed earlier in the year. You saw the announcement of the Fonterra tender for coal boiler conversion in the North and South Island, both of which we take to be very positive signs in the go forward.
We also hearteningly see a stabilization in the large-scale industrial base in this country, where most of them are signaling that they are perfectly happy to stick around and not to close. Hydrology. This has been an unusual year with North Island at an absolute record, South Island at exactly an average P50. Overall, that led to the market being very long on hydro generation. It has swung very quickly. July, I think, in the Clutha Catchment, was probably the third driest since the market began, and we've certainly seen a significant drying up across the overall market with us at or very close to mean storage levels across the market, which is a remarkable turnaround. It just shows how quickly in this country things can turn.
Obviously, that impacted wholesale prices, spot whole- wholesale prices. The trading team had got ahead of that. They had contracted significant volumes at a higher price, which led to the much stronger result. Also on the positive side, it also led to the much lower carbon emissions, which we're pretty delighted about. We'll talk about that a bit later. This graph, this view graph I've shown you for the past three years consistently. One, it speaks to the increased volatility in the market, and I don't think that's going anywhere soon, compared to, you know, the last five years compared to the previous 10. We have seen a lot of pricing come off in terms of aluminum and methanol, gas and carbon. We saw the disruption in the carbon market.
Fortunately, common sense has prevailed, and those settings have been restored. We expect the volatility to continue. We keep a very close eye on these six input factors and the way they affect, fuel costs overall. We expect them over time to continue, and they continue to support our view of the market at that 100-110 real terms, 2022 price, that we put out 1 year ago. We see nothing that would make us think otherwise. It's just gonna be a bit of a bouncy ride on the way. Retail, competition remains intense.
We're delighted with the performance of the retail arm of the business, both in terms of the retention of customers and growth in core electricity connections, but also in the adjacencies of broadband and about to be launched, mobile. We were able to put a at inflation price increase through, and the customer losses were much less than we anticipated, which we're delighted about, which says we're getting something right in terms of the convenience we're bringing to Kiwi homes, in terms of the strength of the brand and the brand trust. If we can find that sweet spot, we will continue to be there. We have protected Kiwi homes from the worst ravages of the rapid increase in wholesale prices.
The reality is, at some point we had to increase prices, and we think we've got that balance right. Look, this is a very busy slide. Just in terms of regulatory matters, I think there's a couple of things I do want to emphasize. The wholesale market is performing well. It remains one of the most robust and resilient markets in the world. That is because its settings are well understood, the market works well together, but it also competes hard, providing both that security, but also that intense competition that ensures consumers get the best value for money. We have got through a whole range of crises these last three years without having to alter market settings. Our plea and our advocacy is that that continues.
A well-working market is clearly attracting NZD billions of investment in renewable generation. In every other country in the world, governments are having to reach into their taxpayers' pockets to fund that, and they don't have to do it in New Zealand, and we think that is a great outcome. We've talked about the battery project, the battery project, Project Onslow. Look, we are glad to see that the team are looking at alternatives. I was in media recently when we talked about the 100% renewable energy target. I fundamentally believe that we, as New Zealanders, don't need to spend NZD billions chasing after a sticker. What is important is that the planet is boiling, and we have to work together to reduce carbon emissions.
Every... when we get to 97% renewable, every combustion engine that was retired will reduce its carbon emissions by 98%. Every filthy coal boiler which is retired will reduce its carbon emissions by 97%, and that is where we need to focus, and that it is not that I am against or for the 100%, it's just we have to make sure that our money, our efforts, and our talents are directed to where they make the biggest impact. We also see there the resource management reform. Look, we are happier with the way renewable energy projects are being carved out in the proposed reforms.
We are still deeply concerned about the bureaucracy and the unintended consequences, where a overcomplicated planning and regulatory framework has been found globally to be able to be used by people who don't particularly want renewable energy projects next door to them, to the detriment of the planet. I think the other one that we've all learned from this year is the carbon market. As with all these things, as I always advocate, once you form a market, keep your hands in your pocket, don't fiddle with it. We saw that, that risk that was bought into because people decide to press pause or introduce uncertainty. That sovereign risk, that propensity to interfere in well-functioning markets, just adds a cost to all Kiwi homes eventually. Dorian, over to you.
Mike, hello, everyone. Just to start off with, as I usually do, I wanted to high spot of some of the key themes that are going to come out as we go through the next few slides. Starting off with some accounting topics. We've adopted the proposal round nine, which means any of our trades that we enter into that aren't in effective hedge relationships, we no longer report the financial impact of those within EBITDA. A pretty simple change for us, because most of our trades are actually in effective hedge relationships and have all the accounting documentation to back that up.
For us, it really just means we take the market making and their losses in this instance, because they're not hedge effective by their nature, and we disclose them as a fair value of financial instruments outside of EBITDA. That pushes up our underlying FY 2023 EBITDA to NZD 573 million. By underlying, I mean, that's before the impact of the AGS Onerous Contract. The bigger topic here is, we had NZD 27 million in market making losses in the period, which is too high. What happened there is that's a function of the fact that we had some buy positions in the market when there was a lot of fuel risk at that time, but that turned very quickly. There was then very suddenly a lot of renewables available.
You could argue there's a natural hedge there, because with more renewables available, our fuel costs in our portfolio goes down. It's definitely fair to say there's some learnings for us around that, and we've already built that in. You can see our guidance in FY 2024 is for market making losses of between NZD 10 million and NZD 15 million. That's actually what the Electricity Authority pays a commercial market maker to do a similar amount of volumes to what we do. The other accounting topic is our AGS Onerous Contract provision. The impact on our EBITDA for the full year is NZD 113 million, down from the NZD 120 million that we talked about at the half year.
That's a function of that high pressure operating regime that AGS has been operated under, which has been pushing out some of that water that was previously ingressed in and creating more storage capacity there, which is good to see. Next topic, we had a very good second half of the year. If you look at our numbers on a consistent basis, so put the market-making losses back in, and before the AGS Onerous Contract provision, we almost met our original NZD 550 million EBITDA guidance, and we exceeded the more recent guidance of NZD 530 million. What's happened here is our CFD volumes in the second half of the year were 50% higher than the first half of the year.
The pricing was 40% higher in the second half of the year relative to the first. We were selling risk management products to Meridian, and we sold a lot of CFDs before the pricing came down. We were able to do that because we were a lot more comfortable in our gas position for the second half of the year. Third, third topic was around the repricing of our channels.
It was good to see that happen, in FY 2023, but the average price that we're selling electricity out when across all of our channels is NZD 121 a MWh, which is still quite a long way below where the ASX curve is, which is at, I don't know, well over NZD 150 for the next three years. That does talk about the opportunity. Just to put some details on that, we had three relatively large contracts expire quite recently. The collective load of that, was 276 gigs, and the pricing that we were getting on that, which are legacy, legacy contracts, was NZD 84 a MWh. You price that up to market, and that's NZD 18 million of EBITDA there.
That's one of the reasons why we've increased our guidance for lean hydro year, EBITDA for FY 2024, up to NZD 600 million from the NZD 550 that we guided to at the beginning of FY 2023. I should just say those numbers are like for likes, don't include any benefit from Tauhara coming online. The other thing to point out is we've seen a big increase of provisions on our balance sheet. The Onerous Contract provision is obviously part of that, but the provisions have gone up by NZD 100 million more than just that. Half of that is just the fact that we're using a lower discount now, rate to value future liabilities. That's the fun and games you have when you change auditors. They have a different way of looking at things.
The other half of that is actually a true future cash cost, and it reflects some updated costs that we have around decommissioning, as our portfolio changes into the future, and we shut thermal assets like TCC, and shut Wairakei A and B and replace it with Geofutures. The, those portfolio changes will provide benefits, so things like surplus land and topics like that, which we will look to optimize to offset the decommissioning costs. This just goes to show, this is why measures like Return on Invested Capital, which we've talked about a few times, are very important, because they ensure that we have the right capital discipline and focus on our balance sheet, as well as just driving earnings growth.
Fifth topic is around our operating free cash flow as a percentage of EBITDA, as we've signaled for this year, it was down from the sort of historic levels of 60% plus. It was just a little bit under 50%. You know, that is the highest staying business CapEx that we've guided to, our acceleration program, which is driving more resilience around our renewable assets and that SAP upgrade to S/4HANA in there. Also, we got impacted by lower thermal generation, but we still have to buy the carbon and the natural gas associated with that, so we see our inventory go go up. We'll get that back in future years, where we'll be able to operate operate thermal for free, to all intents and purposes, and leverage that inventory.
The sixth topic is just a bit of a longer-term awareness topic, which I know some of you are probably aware of anyway, but we do see future cost pressures from regulated asset base price changes coming up. They're not going to happen until about the first of April 2025, so no FY 2024 impact, but wanted to make you aware of it because of the potential magnitude of it.
When you consider electricity networks, the indications are that the WACC's going to go up by about 200 basis points, and when you couple that together with all of the other changes that get made when the price files, get updated, it's not inconceivable that a consumer could be paying double for, a networks, what they're currently paying at the moment, by the time it gets to 2030. In absolute terms, that's well over NZD 1 billion across the market that gets recovered, from consumers between, now and then. I wanted to make you aware of it, because that obviously has inflationary impacts across New Zealand, but it's also could be a little bit of a dampener on, decarbonization. onto the, profits.
The profit after tax, that came down from NZD 182 million in the prior corresponding period to NZD 127 million this period. However, that's impacted by that AGS Onerous Contract provision. When I talk to the numbers, I'll talk to them on an underlying basis, excluding that. And if you do that, our profit was up by NZD 29 million to NZD 211. Within that, our EBITDA was up by NZD 27 billion. The...
Whilst you've seen exceptional hydro inflows across, across New Zealand, the volatility of those and the constraints that we have at Contact around the amount of hydro storage we've got and generating capacity, has meant that we saw our hydro generation in line with mean, and roughly in line with the, with the prior year. We did see a lot of spill, though, I think about 1.6 TWh, but that's just the nature of our business, unfortunately, and our assets. We did see renewables drop though year on year by 119 gigs, and that reflects a few operational issues on geothermal, which I'll talk about later, and on a fuel replacement basis, that cost us $14 million.
Those exceptional hydro inflows depressed the wholesale price, we flexed down the amount we sell by just under a TWh in response, because any thermal backed sales were uneconomic. Because the margin that we were making on thermal backed sales in the prior year was quite slim, that only had a NZD 12 million impact on our EBITDA. We did see some quite strong pricing coming through, getting closer to the ASX, which was good to see. Our market channels, which is C&I, repriced up by NZD 24 billion, and our re- our long-term channels, which is largely retail, repriced by NZD 46 million. Actually, one of the key things there is we don't see ourselves taking a price leadership position here within the market.
That was generally us catching up with what other retailers are doing regarding price. Thermal fuel costs, the cost inflation, was NZD 9 million adverse for us. This is the cost of carbon within our portfolio. As Mike mentioned, there has been a bit of volatility in carbon prices due to the sort of regulatory uncertainty. We weren't impacted by that because we were hedged. You could say we had a, a lost opportunity there because prices did drop, but that's not the purpose of, of hedging. Other income was favorable by NZD 18 million. Within that, we had the Te Rapa site, has closed. Linked to that, we've sold the auxiliary boiler there to Fonterra and made a NZD 7 million profit. We're also seeing higher margins across retailing gas. Our fixed costs are up by NZD 27 million.
NZD 23 million of that is OpEx, which we'll talk about later. We had a NZD 4 million increase, which is basically higher electricity levies and higher costs for gas storage. That's, that's the EBITDA movements. Back to things that have driven our net profit. Depreciation was down by NZD 38 million. We had, if you remember, some accelerated depreciation in the prior corresponding periods. That was some components of SAP that wouldn't be required in the new S/4HANA environment. TCC this financial year has seen lower depreciation because there are components of that which get depreciated based on operating hours, and we've used it a lot less. Our interest costs were up by NZD 2 million, and that reflects the rising interest rate environment we're in and the fact that we've got some interest linked to floating.
Our debt levels are up quite a bit, linked to all of the growth CapEx that we've got. From an accounting basis, you don't see any of that come through the income statement at the moment, because that all gets capitalized against the projects whilst we're in a construction phase. Tax was higher by NZD 11 million on higher underlying profits, and the fair value of financial instruments in total was adverse NZD 23 million. We've split it out there between realized and unrealized losses, and that's where those market-making losses that I talked about earlier end up. Across our three business segments, the wholesale EBITDA was up by NZD 75 million. That's about fuel savings offset by lower volumes. The things that are actually driving the EBITDA up there is the repricing of the channels.
You can see the retail segment there is seeing its EBITDA drop by NZD 31 million. That's our arms length transfer price that we've got, which escalates with the wholesale prices, and there's a lag there in terms of wholesale prices have gone up faster than tariffs to consumers. The important thing there is it is sending the right commercial trigger to that part of our business, and they are, it is causing an escalation, as Mike said, in the, in the level of tariff increases. Corporate costs are up by NZD 16 million. That's a large part of that NZD 23 million of OpEx increases that we've seen across contacts, and I'll talk about that when I get to that part of the presentation. On to the wholesale business now. Generation costs are down by NZD 81 million.
The strong sort of national hydrology that we've seen and the lower wholesale prices have meant that we've needed less thermal and acquired generation for risk management. The volumes there are reduced by 849 gigs, which is a huge reduction. That's 56% reduction, and that reduces your cost of carbon, thermal fuel and risk management, generally by NZD 91 million. Offsetting that, we've seen NZD 10 million of increased fixed costs, transmission's actually flat year-on-year. I'll just explain it because there's a lot of things going on there.
We don't have ACOT benefits anymore, which we had in the prior corresponding periods, but we got increased loss and constraint rebates from Transpower just because of the amount of price separation that there was between the islands because of all of the all of the water. Electricity transmission, therefore, is flat. Gas transmission is flat, you've got a big 13% rate increase because the ComCom has signed off that accelerated recovery of capital costs for those asset owners. That was offset by the fact that there's a volume component in gas transmission, and our thermal generation was down a lot year-on-year.
It's the thing that's caused, our, the transmission and levies gap is the electricity, levy, which is up by NZD 2 million, which on a percentage basis for levies, is a very big percentage increase. Gas storage is up by NZD 2 million. That reflects the contracts and the escalation, which is linked to PPI, and then our, our other operating costs, our OpEx, is up by NZD 6 million. We've got a retention payment to staff at Te Rapa, which ensures a smooth closure of that site. We had about NZD 2 million of costs associated with repairs linked to Cyclone Gabriel, and as you know, we're in a high inflation environment at the moment, so the rest of it is just natural inflation flowing through there.
Just in terms of the performance across our generating assets, I mean, the important topic down at Clyde is the transformers. We've replaced two of the four. The first one got installed a little bit later than we hoped, so we were down a unit in July and August when inflows were quite high. That loss of capacity would have contributed a little bit to higher spill. Second unit went in fine, the third and fourth units are scheduled to be installed in 2025 and 2026. No asset issues expected for FY 2024, which is good. Geothermal was down by 98 GWh. What happened there is that when we had the statutory outage at Wairakei, some of the generators didn't come back online as quickly as we would have hoped.
That's a function of the age of the assets. You know, they're 65 years old, and coming up to end of life in 2026 when they were replaced by Geofutures. So it's likely you're gonna get a few teething problems around those assets between now and then, but you're talking a few gigs here and there. One of the other topics around ge, geothermal was that we lost a bit of capacity around our reinjection well, which meant we had to turn back production at Poihipi. There was a bit of a scaling issue on that well. We've done a chemical clean on that, and it's all good for FY 2024. Good.
Then in terms of thermal, TCC had its radax repaired, and assuming we get the extra 2,500 hours signed off by GE, which we're not envisaging any problems with, that'll mean we've got 7,500 hours left, it should be easily enough to get us through winter 2023 and winter 2024. In terms of our wholesale contracted revenue, it's up by NZD 43 million, in spite of volumes being down by 437 gigs, and this talks about the strong pricing movement we've seen across our channels. CFDs were down by NZD 101 million, with volumes being down by 660 gigs. This is all a function of what happened in the first half of the year.
We went into the year with far less contracted CFDs than we would do normally, because if you remember back then, we were a little bit worried about thermal asset availability, and we just had been told by OMV that we were gonna get less gas, so we were worried about the fuel. That all changed by the time we got to the second half of the year, which gave us the confidence to sell more CFDs, and importantly, before the pricing dropped, and we also sold those risk management products to Meridian. Offsetting the lower CFD revenue, we saw NZD 130 million increased revenue across C&I and sales into the retail business.
You've seen-- talked about, talked about earlier about the repricing of C&I with the net price up by NZD 22, a MWh. We expect that to continue into the future. The sales into the retail business is a bit of a left pocket, right pocket thing. As I said earlier, the good, good thing is it does trigger the right commercial behavior within that business, which is important. Other income is up by NZD 9 million. This is where that profit on the asset sale to Fonterra ends up. Wholesale trading and merchant revenue. This was a bit of an odd year, actually. You can see on the chart we had very little merchant length.
Normally, we have merchant length to offset our location losses, but because wholesale prices were so low, for most of the year, we were running almost a hundred percent renewable generation and trying to limit the amount of merchant length we had. Indeed, indeed, in some trading periods, we were even running short and acquiring, cheap, cheap electricity from the grid, allowing us to save money on fuel. Whilst there's a adverse NZD 49 million impact you can see on this slide, it did enable fuel savings in other parts of our portfolio, s- s- portfolio. For example, those generation savings of NZD 81 million that I talked about earlier.
The other thing to point out, if you look at the merchant length price in the prior corresponding period of NZD 138 a MWh, at that price, you can run thermal fuel into that and make a spread. We didn't have that as an opportunity in FY23 because the prices were so low. Retail business saw its EBITDA drop from NZD 17 million to a loss of NZD 14 million. However, that's not a surprise. It does reflect the long-term nature of this business. As we've said a number of times, pricing aligns to the CPI environment, but we've seen an escalation in wholesale prices, which drive the transfer price, which have been higher than that. Overall electricity performance was very good.
As Mike said, tariffs were up almost 7%, which aligns to the CPI environment we see ourselves in at the moment. Whilst it's a strong performance, as I said earlier, we don't see ourselves as leading from a price perspective here. We're actually just catching up with the other retailers, which is important regarding risk, because it shows that, you know, this magnitude of price increase should be able to stick. It would also be one of the reasons why, with such a, with a price increase of that magnitude, we only actually saw 1% of our electricity customers leave us. Actually, we've recouped all of those in the first few weeks of this financial year.
That's because, well, it'll be a number of reasons, but one, because we're catching up on price, and the second, reason I, I believe, is the fact that we've got quite good, products in the marketplace. Time-of-use products that allow customers to offset tariff increases, by shifting loads, to save money that way. This is like our Green Charge and Good Nights products that we've got, got in the marketplace. We do expect retail prices to continue, continue to rise. I mean, one of the drivers of that will be the largest, retailer, in the marketplace, has got a large PPA to acquire generation, which escalates every year, so they'll have to increase prices to recover that from the market. Gas margins for us were up by from NZD 3 million to NZD 9 million.
Very happy about that. We finally got our SME segment back into profit after a number of years of losing money on that. It did take quite a big tariff increase, one of the reasons why the tariffs had got so much again, was that regulated sign-off of the accelerated capital recovery of gas networks, where we're seeing the magnitude of the increase coming through there as being quite material. Broadband was the only part of the retail business that was disappointing. Connections went up from 71,000 to 86,000, we saw a lot of profit drop from NZD 7 million-NZD 6 million. We know exactly what's caused that. Local fiber companies increased their costs, we were slow to pass that on.
I mean, local fiber company costs were about 50% of the, of the revenue for that business. As you're probably aware, when you're a distributor of a low-margin product like broadband, recovering cost inflations in a timely manner is absolutely critical. We have learned from that. As Mike said, our cost to serve, leading industry cost to serve has continued to get better $120 per connection, and that's being driven by those fixed cost leverage as we've increased our customer numbers again. In terms of OpEx, a $23 million increase, it is a large increase, but very explainable. We've seen adverse impacts of one-timers of $7 million.
Remember, in the prior corresponding period, we had the Holiday Act change, which allowed us to release that NZD 6 million provision there. We've also seen some one-time costs in FY 2023. I talked about the retention payment to staff at Te Rapa, which helped facilitate, you know, the sale of that asset to Fonterra and the NZD 7 million profit there, so that's a good piece of business. We've also invested in transforming the way in which we prioritize and execute on initiatives, which is important because that helps de-risk our ambitious five-year plan. We've actually had NZD 2 million of costs associated with Cyclone Gabriel, but we've been able to offset by the retiming of some of our less critical OpEx spend into FY 2024.
Other big component here coming through is higher inflation, NZD 12 million of higher inflation, so wages and salaries up 5%, insurance 8%, CPI 7% across the period, which feeds into supplier discussions. We've seen some headwinds. The biggest is actually travel, up by NZD 2.4 million, 160%. This is the first full year out of COVID and COVID lockdown, so the level of activity has definitely gone up. As you're probably all aware, the prices of air travel and hotels has also gone up quite considerably, too. We've deliberately invested NZD 4 million into growth and sustainability, so the growth is helping cover the connection growth that we're seeing and contributing to that 6.5 TWh of renewable development pipeline we've got.
The sustainability element is all about safety, compliance, and training, and that's one of the reasons why we got into the Dow Jones Sustainability Index. The guide, this is a large increase in OpEx, and as a CFO, I, I sort of scrutinize this quite a bit, and you'll see when we get into FY 2024 guidance, we've got a similar sized increase in OpEx. The reason why I get comfortable with this is we've got a very ambitious strategy, which we are delivering at pace. You know, you think about it, we're building Tauhara, we're building Te Huka 3 . The board has just signed off a very large pre-FID scope of work on Geofutures, NZD 114 million, which will de-risk that investment for us when we get to a Final Investment Decision.
We're taking-- looking to take three major Final Investment Decisions in FY 2024: Grid-Scale Battery, New Zealand's Largest Solar Farm, and Geofutures. If you think back historically, we've probably taken two major FIDs in the last 15 years, so we are doing a lot, and we have to do a lot because the country needs it around decarbonizing itself. The- all our stakeholders will get a lot of benefits for us delivering on these things, but we need to deliver effectively, and also with the well being of our people in mind. Putting extra resource into this area makes absolutely absolute sense at the moment, and it's very considered in the way we're doing it. Cash flow, operating free cash flow, NZD 282 million.
As I said, cash conversion from EBITDA of 49% was lower than historic levels, but I've already explained the reasons for it. Inventory higher due to lower thermal generation and that higher stay in business CapEx that we're seeing at the moment. For FY 2024, we expect cash conversion to be about 60%. Then when you go into the future, it'll go back up to historic levels because the accelerated stay in business capital program comes to an end. This is a new slide we've added. I, I recognize it was a little bit of an oversight on our part. We're spending NZD 500 million on growth capital, but we won't give you any insight on what it was actually being spent on. We were just leaving it as one number.
We're now providing a breakdown of what we spent historically, what we spent in the financial year, and what has to be spent to finish the projects off. I'd encourage you to actually look at this, but also look at the capital work in progress on our balance sheet as well. We've got about NZD 1 billion sitting there, that's unproductive assets at the moment, but on the basis that these are all above WACC investment, that shows the potential in terms of the ex-EBITDA that you're going to be seeing in the future when those, when those assets come online. In terms of our balance sheet, it is strong. The debt is going up, though, the build of Tauhara and Tukituki, three in particular. We've been funding that.
We've done NZD 550 million of domestic bonds in the marketplace in FY 2023. Heavily oversubscribed, which was pleasing to see. To the extent we actually took NZD 100 million of oversubscriptions on the last one, because that was an efficient way of financing. We have seen our interest go up a little bit, 50 basis points to 5.8%. We're using a lot more commercial paper because that's the cheapest form of financing in the market, our margins are actually coming down. Because we've got a chunk of our portfolio which is exposed to floating rates, that is pushing our interest rates up. We've also got quite a lot of liquidity at the moment.
Some of that is just a timing topic, but the other part is quite deliberate. You know, when you're in a high growth phase of CapEx like we're in at the moment, where the burn rate is quite high, it's prudent to have liquidity to back that up. Also, there's a lot of volatility in wholesale electricity prices, as Mike mentioned. Your credential can go from 0 to NZD 200 million just very, very quickly. Again, you need liquidity to back that up. The other thing is, we're going to use more and more commercial paper going forward because the margins are so attractive for us. The issue with commercial paper, it's not a long-term financing solution, and it can disappear very, very quickly.
What we find is the combination of an undrawn bank facility and commercial paper, eliminates the financing risk, but it's also a lot cheaper than a drawn bank facility or another long-term financing arrangement. We need the liquidity in place to allow us to move and, and use more commercial paper into the future. In terms of funding our strategy, net debt to EBITDA of 2.2 x. We indicated at our capital markets day that FY 2027 EBITDA was going to be NZD 850 million. Those two things mean that we're very comfortable financing our geothermal pipeline up to and including Geofutures on balance sheet. We've already talked previously around our solar, is off balance sheet through the joint venture we've got with Lightsource BP.
The one thing that we're looking at actually, and it's going to be a few years away still, is wind, and how we finance that and what structure we use. Overall, very comfortable with our funding position regarding the delivery of our strategy. In terms of our dividend, we guided to NZD 0.35 for FY 2023, so it won't surprise you that we're declaring a final dividend of NZD 0.21 per share, which brings the dividend for the year up to NZD 0.35. Of that NZD 0.21, NZD 0.18 per share is imputed for qualifying shareholders. We're going to continue with our undiscounted DRP. It's an easy way for shareholders to invest back into Contact.
That leaves our dividend at 83% of the average operating free cash flow that we've had in the preceding four years, which is within that 80%-100% range. I'll update on the FY 2024 guidance in the next couple of slides. In terms of our EBITDA guidance for FY 2024, this is a mini micro review one. It's up to NZD 600 million from the NZD 550 million that we indicated for FY 2023. These are underlying numbers, as I said earlier, don't include any benefit from Tauhara. What we have done though, is we've increased our sales position to cover the expected Tauhara volumes. We're just assuming here that it's backed by thermal generation.
I think that goes to show our confidence in the project, but also in our fuel position and the flexibility we have around that. That's important because it then allows us to sell the expected Tauhara volumes and take that price risk out of the equation, which is good. This is what we plan to do then, is when Tauhara comes online, we'll just update this guidance to reflect that. It will be very simple, because within these numbers, you've got the fixed costs of Tauhara already. We've already sold the Tauhara volumes, so it will just be a fuel substitution. You'll take out thermal fuel at $120 a MWh and replace it with geothermal fuel at $5 a MWh, so $115 per MWh of fuel saving.
In terms of what's driving the underlying profit up by NZD 50 million. We shut Te Rapa, that's 200,000 tons of Scope One carbon emission savings, but it doesn't actually impact our financials. We're assuming the gas that was going through Te Rapa is going through peakers. If it goes through TCC, there's some upside to what we're talking about here because of the heat rate benefit of heat TCC. You can see price improvements coming through there across long term and market channels of NZD 86 million. Just to talk about the risk of that. Twenty-five million of that has already been delivered because our retail pricing in FY 2023 was better than the FY 2023 guidance.
We generally, when we talk about pricing, we consider the retail channel to already be contracted because there's less risk around it. When you consider that where we are at the moment, 95% of the sales for FY 2024 are already contracted. That, that helps you understand the delivery risk around that NZD 86 million. Other thing to call out, we're selling a lot more because as I said, we've, we're selling the expected Tauhara volume, it only drives up EBITDA by NZD 16 million, and that's because it's backed by thermal fuel. When that gets displaced by Tauhara coming on, that'll be quite a big number. Then you've got the higher OpEx. As I said earlier, it's NZD 24 million.
It does reflect the high inflation environment, which we're expecting to continue into FY 2024. You've got NZD 14 million there associated with inflation. You've got some on-costs for the new S/4HANA system, licenses and things like that, NZD 3 million. You've got NZD 7 million for investments in productivity and growth. We're standing up a procurement team that helps us from a compliance perspective, you know, deal with things like modern slavery and supplier code of conducts and stuff like that. It also helps from a productivity perspective, as we can deploy best practice around procurement into the business. We've also got some costs associated with launching adjacencies and supporting the marketing and the promotions around our mobile offering in there.
As I said earlier, it's, it's an area that we do focus on. These are big increases. I'd like to think this will be the last year of big OpEx increases. Certainly, the business is now resized for growth, assuming inflation comes back in FY 2025, which we all hope. That, coupled with the fact that we were getting productivity benefits coming through from procurement and digital investments that we've made, should mean that you start to see a more sort of steady state OpEx going forward. Last thing to highlight on this slide is on the left-hand side. We're pretty good at hitting our EBITDA guidance, which I'll just point out. Last, last bit of the guidance. So we, we've split out the standard business CapEx from the standard CapEx and accelerated programs.
You can see how much of the $150 million we've spent already and have still to go. Market making is split out there, as I said. The growth CapEx there only includes what the board have actually signed off. Then the last topic there is around dividends. FY 2024 is a very important year for us, so we're comfortable around the delivery of Tauhara. Whilst it makes sense for NZAS to recontract, and we fully support that, and we think that that will happen, isn't fully within our control. Therefore, we think it's prudent to update on the FY 2024 dividend when we have more information on the NZAS outcome. Until we get to that point, we're guiding that the dividend for FY 2024 will be a minimum of NZD 0.35.
Okay. Right. Just updating you on the strategy and just noting that's a photo of Tauhara that I suspect is already out of date. That's the wonderful thing about projects, particularly at this stage, is you can go there every single week and literally see a completely different plant. One of the things that we are lining up is that Grid-Scale Battery investment for 100 MW that we estimate in the order of NZD 170 million-NZD 190 million. We expect it to take the decision on that in the coming months. We've got two outstanding locations already consented at Stratford, which would just plug to an existing connection and transmission capacity that we have there with a fully consented site.
The other one at Glenbrook which is not yet consented but is gonna be built in zone industrial land, so don't expect any problems. Again, very close to outstanding transmission and connection. So what we see is that that will both support the retail growth in the Auckland configure. It will take care of some of the Northland location, some of the separation that we saw earlier in this year. It will reduce our reliance on gas peakers. We'll see how far that goes. Obviously, given its location close to Auckland, any potential constraints in central North Island transmission, Glenbrook remains the preferred site. It's what new, new wind and solar.
It certainly brings on the ability to make sure that that electricity is available at the times that consumers need it. We're excited by that prospect going forward. I talked about the development pipeline, and so this sort of gives you an outline of where we are going. Over the next, you know, in the coming months, we should see Tauhara online. By the end of next year, you'll see Te Huka 3 online. You can see the refurbishment of our existing plant in Roxburgh going on at the same time, with the battery up and running in 2025, and then Geofutures coming online after that. Below the line, you can see Kōwhai Park and Glorit planning to bring 0.6 TWh on before 2026 or within 2026.
We closed Wairakei, Southland Wind, between 0.9 and 1.2 TWh in 2027, and we're now talking about Tauhara stage two, remembering that that would consume the last 0.7 TWh, which is consented steam offtake. So we're starting to look beyond Contact 2026 now, what is in that next five-year period, and what in terms of investment, in terms of geothermal, wind, and solar. These projects are very real. They either have consent or have a relatively straightforward path through consenting, including the wind project, which obviously got approved for fast track. They're not MW, they are real MW, which can and will be built. We continue to maintain a very high level of capital discipline. We will do them if they make commercial and economic sense and are in the best interest of our shareholders.
But that being said, we're excited. When we started this journey in 2021, our development pipeline was not that full. The team have done a cracking job of getting some really exciting opportunities across the Motu, across all types of energy into the development pipeline. Introducing, at the same time, real competition for capital, which is important for any healthy company in the go forward. What you can expect in the near term, FY 2024, we expect to get absolute clarity on the NZAS extension, and we expect to further develop what we can do with green chemicals, in terms of Central North Island, reusing the CO2 to provide sustainable CO2 for the country, where that is needed.
We expect new demand to be facilitated with further deals with the retirement of coal boilers. In terms of growing renewable development, we expect Geofutures will take FID on that second half this year. We expect Kōwhai Park Solar to be taking FID on that. We expect to be working hard for the solar and wind projects that sit beyond that. Tauhara, up, yeah, operational calendar Q4 2023, and taking that Final Investment Decision on the battery in the coming months. Decarbonizing, look, we have delivered on this in the roadmap we set out five years ago. We'll continue to, to deliver.
We'll set out that roadmap to net zero for Scope one and two, which will have that investment program, both in the reuse of CO2 and in the making sure the CO2 doesn't exit our geothermal operations in particular. We're excited by that in the going forward. They will be economic projects. Retail. Look, I'm excited by what we've got in retail. We've got 50,000 customers on time of use plans now, which is absolutely awesome, which means that they are shifting their load away from those peak periods and extinguishing thermal generation, which is great. We expect to grow those product maps.
We expect to go out into mobile plans, but we also expect to be able to do more in that decarbonization space in ordinary Kiwi homes, whether it's supporting the likes of virtual power plants or the like. And we expect to continue to grow our, both our connections, but also the number of connections in each home, so that we can enable Kiwi homes, both to decarbonize their homes, but also to control their costs, their household costs, and the cost of living crisis. And we're proud of the role that our retail arm play in that. We're excited by what's ahead of us. It's great to be in the middle of execution. It's great that the team are delivering on their execution, and with that, very happy to take questions.
Thanks, Mike. We're going to go to the phone first for questions. We have online, Grant Swanepoel of Jarden. Do you want to unmute yourself, Grant, and fire away.
Good morning. can I ask my questions?
Sure thing, Grant. Morning, Grant.
Thanks. Morning, all. Can I just start with Tauhara? You've got a hot start already. When do you start accruing to EBITDA? Is that from now, or is it only once commissioned?
It's once commissioned. You're introducing hot steam to various parts of the plants. We've introduced it to the high-pressure system. In the next week, we'll probably introduce it to the intermediate pressure system. We'll then shoot it across to the EPC contractor to make sure they can flush their pipes, and then towards the end of the year, you'll see the electrons. Once we've got through the warranty run, then we'll introduce that to EBITDA.
It's essentially just on that, the warranty run is when you start, it starts going to EBITDA, which is the one month before commissioning, but the capacity factor on the warranty run will probably be quite low, which is quite normal.
Okay. If your guidance is four Q this calendar year, is that for us to assume that you get a ramp up to about mid-November, and that's where we should take our number from? Around about 870 gigs, we can assume at this stage until you guys update the market.
We're just saying, it's, it will be, based on what we know at the moment, fully commissioned by the end of the financial year.
Yeah.
Sorry, by the end of the calendar year.
End of the calendar year.
By the end of the calendar year.
You heard it here.
Yeah. Fourth Q.
Yeah.
Fourth Q.
Yeah.
Yeah.
Okay. Thanks. With Genesis' Unit 5 out, your 1.8 TWh x Tauhara, does that assume you carry a bit more burden for this year, or are you just assuming that Genesis uses their Rankines more aggressively?
Oh, say that again, Grant, sir? The question.
Unit 5's out.
Yeah.
It's out until just before winter next year.
Yeah.
Your 1.8 TWh that you've put in for thermal-
Yeah
... excluding Tauhara, do you assume that you have to carry some of the country's burden with TCC?
Well, the, this, this was actually pulled together before we knew about e3p being out, so it doesn't take that into consideration. I mean, what I can say is we'll be absolutely doing everything we can to support the security of the system, 'cause that's the, that's the sort of number one, number one priority. So, you know, we need to cover our own positions, and there's, there's quite a lot of sales that we've, we've already got contracted within there. We need to do that first and foremost and, and also cover the security of the system as well.
Thank you. My final question, just around NZAS. Are, are you, as a Contact Energy, still only committed to 100 MW contribution to that deal? Then chatting to the CEO of Australia, Rio Tinto, the other day, she mentioned that they want to get a deal done before the end of this calendar year. Do you feel there's a sense of urgency amongst them, or has it also gone quiet?
Oh, look, I don't want to comment in too detail on sensitive commercial negotiations. Yes, our volume commitments are absolutely in line with what we have done historically. We obviously would like a deal sooner rather than later. I think everyone else, everyone does. I think the good people of Southland would like to see that certainty brought to their futures. The sooner a deal is brought, we've been talking about it for over a year now. It's a complicated deal, but it's not that complicated. Without going into too much detail, you can probably hear a slight level of frustration there, but it's time for, I think, for all of us, that we just get on and get the deal done. Yeah.
Even though Rio has alluded to a volume shortfall that somebody hasn't stepped in to pick up yet?
Yeah. Well, if the volume shortfall is relative to existing contributions, then it's not coming from us. And we, as we said, we our contribution sort of aligns to our market share of renewables in both nationally and the South Island, so it makes a lot of sense. I mean, as Grant, you'll have done this analysis, it, it's interesting, when you if you work out the impact of a NZAS exit and who's impacted the most, it's actually some of the... It'll be the players that are exposed to fixed price, large PPAs, to acquired generation, and also anyone with upstream oil and gas, because that'll be the fuel that gets displaced with all the hydro.
Hopefully, you know, people understand that and, and, and the shortfall can be made up.
Thanks, team. That's all for me.
Thanks, Grant. We'll take questions from the room. Any questions? Andrew Harvey-Green.
Got two questions. First one, just around the dividends. Just to clarify, first of all, market making losses. I assume you're just going to adjust for that, even though it's now falling out of operating cash flows and your policy.
Yeah, adjust, adjust for it in, in line with guidance. We're confident that the measures we have in place now, and you can see that they were much higher on a rate basis at the half year. They've reduced in rate, and we expect that to continue. That's where we've arrived at the guidance so, yes.
They're not, they're not included in operating free cash flow anymore?
Yeah, that's right.
Yeah.
Yeah.
That effectively adjusts up your operating cash free, that you'll be using for calculating.
We've only adjusted the prior year and this year. We haven't gone back to adjust, you know, the, the fourth year previously, but the bit of the, the market making losses in those years was relatively small. It might have even been a gain in one of the years, so it's just not material.
Yeah. Okay. There, there might be the answer for the second part, but I'm assuming there's no change to your dividend policy here at all, 'cause historically you've said, I think, that the year FY 2024 dividend will be based on FY 2020 to FY 2023 earnings. So that's kind of already locked in.
Yeah.
You're only basing, so you're only basing it on, I guess, whether the SNL stays or goes in terms of where the.
If the NZAS stays or goes, I think then, obviously, that will merit an announcement in its own right.
Yeah.
You get that certainty, we can update the market. ...
Yeah. Next question I just had, was around, if you're able to give us a little bit more color, on the SAP situation, sort of an update on that. That was, I guess, the noticeable red dot on, on slide six.
Yeah.
An update from the half year.
Yeah, we're probably being a bit hard on ourself. S/4HANA, which is the SAP upgrade, we got into... We've, we've upgraded our financial systems, and we've upgraded our generation plant operating maintenance system, at a cost of about NZD 30 million. The implementation went remarkably smoothly and without a bump. We can see the opportunities going forward, particularly in the generation space, for the application of some smart operating maintenance data and digitization and mobile applications. That side of it, we're actually quite delighted with. Where it went off the rails a bit was on the proposed upgrade to the CRM system, where we recognized very early days that there were problems with it. We just pressed pause on that so that we could have a relook at the market.
In hindsight, that was actually a blessing, because what's clear is that internationally, the market in the energy CRM space with virtual power plants and interruptible mode, has really... And multi, multi, multi, multi products, has really evolved literally in the last four years. That opportunity of a pause just gives us the opportunity to relook at what we can do in that space and how we can make that quite special for the consumer.
Okay, thanks. Next question was just around, I guess, we're seeing the ETS, being reviewed at the moment, and, just any sort of comment on your exposure to, forestry credits, which I guess is the thing that, is most at risk.
We're reasonably comfortable with our exposure there. Obviously, Driving Carbon became Forestry Partners Limited has some exposure, but they were highly economic at prices much lower than the peak of the market. We continue to expect that common sense will prevail in terms of grandfathering of those, those credits. Certainly, we welcome the commitment to the Climate Change Commission's recommendations of late last year. That market certainty, I think, is absolutely key in the go forward. I think the other thing that's coming out of the Climate Change Commission is going beyond that net zero commitment to a commitment to gross zero. That's where our focus is. The more that we can reduce our own emissions, the less it becomes a important conversation. Obviously, yes, people did inadvertently fiddle with a functioning market.
It responded, and I think everyone takes their lessons from that.
In terms, terms of the units that we own, and we've got forward contracts in place to to buy units in as well, they're all non-forestry units. We've received a very small amount of units from Driving Carbon, which is a tiny fraction of our units we own. The rest of them are, are non-forestry units.
Great. Last question was, I'm just been interested in comments around flexible geothermal, which is just one of the two portfolio options that are being looked at alongside Project Onslow. Yeah, just feasibility from your perspective, presumably requires new geothermal into the country, which is also a challenge, I report.
Yeah. We have, we've had a trial of fixing our geothermal summer/winter. Moving some of the load, say, a small amount, 25, 30 MW from summer, just reducing the offtake in summer, and increasing the offtake in winter. We've got the luxury of spare capacity in some of our plants, in the Wairakei and Taupo plants at the moment. The challenge for geothermal is always because of its capital intensity, that once you get those assets in, you want to be utilizing them as much as possible. We can see some opportunity at a reasonably minor scale to flex between summer, winter, which is not insignificant. We see it as part of that broader range of innovation that will ultimately so, solve both the intra-seasonal flex that's needed in the country, but also the dry year risk.
Yeah, watch this space.
That's all from me. Thanks.
A few from me, just following on some of those latter themes. Just following on the CO2 price, sort of impacts with the separation of forestry. What do you think the future scope we see today, particularly in sort of the front couple of years, is priced in, in terms of CO2 and perhaps gas price? Obviously, we've seen quite a large dislocation in CO2. How much of that do you think is reflected in the future scope today?
The Climate Change Commission, I think, set a target price in excess of NZD 100.
Yeah.
Our expectation is that for high quality units, they will continue to track towards that and provide a strong incentive to industry to decarbonize, to retire those coal bullet lists. That's where we see it going. There is something to resolve on the forestry units. I think common sense will prevail there, but with that overarching commitment to the Climate Change Commission's targets, I think that's the, that's the pole that we should be holding to.
The price before all the regulatory uncertainty was around 88, 89, wasn't it? You sort of think that's probably where it's gonna go back up to relatively quickly. I think it has gone quite up there because there is obviously a little bit uncertainty around the forestry stuff, you've also got that September auction, which is still under the old sort of regime. You've got to get past that, then I expect prices will go up a bit after that.
Gas prices?
How long is a piece of string? We continue to see a reasonably solid floor on the gas price, which indicates that the contracts that we struck now three years ago, are fair and reasonable. The... You've seen a downgrade in the 2C reserves in particular for the nation, which will put upward pressure on the remaining gas reserves. These things come and go. You know, the next good well on Kapuni or Maui may see the situation turn again, but what's certain is that the contract that we signed up to on both Maui and Kapuni a few years ago, they, they seem a very fair and reasonable floor to the price.
We've also got the, you know, you talk about flat gas, which is normally what you've got. You're prepared to pay a bit more for your gas if they can build some shape and stuff into it as well, which is some of the stuff that we'll be looking to do. Obviously, with AGS having less capacity than we thought it was gonna have a few years ago, they're some of the things that we're looking at at the moment as well.
Well, it segues quite nicely into the second subset of questions around flexibility.
Mm-hmm.
I think you set a very clear path for us of what you're doing with renewables, demand response, flexibility there. I'm still wondering whether or not this is... Given you're already involved with gas storage, you've got peakers, what you expect to see with those potentially developing going forward? Obviously, Gas Transition Plan out for consultation at the moment, talking about the potential for new gas storage. Do you have any strategy or plans to sort of return to that topic yourselves, or is that something for the...
I think there's a couple of things. Number one, we see the retirement of baseline, gas generation, so TCC will run out of the fails. We expect towards the end of next year, calendar 2024, at this stage, we have no intention of doing that, and we've announced that we have no intention of doing, next refurbishment, the C6, I think. Then it's the gas peaking. We still see an important role for gas peaking. We had one or two operational issues with our gas peakers last year. We have resolved those. We flagged a issue with AGS. That issue appears to be resolving itself as the reservoir pressures up again, and we can see, increased volumes going into the reservoir.
The important thing for us was, before you start talking, high polluting strategy, is to make sure the assets are actually working. The assets are working, the AGS storage problem we are working through, and that appears to be going in a very positive direction. We've acquired some fantastic reservoir understanding of the dynamics, that was the first part of it. What happens in the future? We've made that commitment to keep the peakers and the storage. If something changes again, we could dust off the thermal coal again, but it's not our focus at the moment. We've made that commitment to net zero by 2035. We know that with the peakers running and with the credits coming out of Forestry Partners Limited, that we'd make that net zero.
The, the peakers would have meant about 200,000 tons a year. We'll be getting about 200,000 tons a year from Forestry Partners Limited. We think we can solve the geothermal emissions. We can see a pathway to net zero, and then it becomes a question of, one, we have an accountability and responsibility to ensure security of supply. We've got the gas storage, it has to be working, but a good amount of gas in it, gas peakers are working. At this stage, let's make sure we maintain that, that state. If there are further discussions, there probably are discussions that need to be had about the future of thermal plant in the country and providing that security for it to be there when we need it....
That requires a number of parties to come to the table.
Just on, on your point, the fuel cost is, is gonna be immaterial in, in, in the future 'cause, you know, we're, we're gonna have peaks, so maybe in a mean year, 200 gigs of-- so, you know, what's that? 2 PJs, 3 PJs of gas. The fuel cost is not really the relevant bit. There's still a lot of fixed costs associated with having those thermal assets in the portfolio, and equally, others will have a lot of fixed costs for having, those assets in their portfolio. That's, that's where the, the benefit is, optimizing those, which is why, you know, our-- what we propose, I think, is still the best, overall outcome, but it does require everyone to be, on board with that.
I'm thinking someone's going to have to invest capital, because if I was low, at a 97% or 98%, level of renewability, I mean, can you run the big, large, slow plant and still have it serve the kind of function it serves today?
Yes.
Yeah.
That's. It's a question for another day and for potentially others.
A very long question.
Yeah, correct. One last one from me, and that's just on the change in the consent regime. It does seem, you know, seven-10 years, I think, you flagged in the document, expecting for that to kind of resolve and to finally become a scheme that people knows, will know how it works. In the meantime, for the kind of projects you want to get consented, you're effectively going, I think, going that process over which you're hard, and so you're effectively asking a minister for approval. Do you think that's going to cause any problems for consenting?
No. I think there's a couple of things. One is, two of the sites, so the battery site, is zoned industrial, so you don't anticipate any majors there. The other site at Christchurch Airport, again, has a very special zoning as an airport, so we don't anticipate any major issues there. Part of it is us just, just being smart about the battles we pick. With the wind farm, Southland Wind, we put that into the fast track. You're seeing signals from both government with the Renewable Policy Statement, National Policy Statement on Renewables, also the opposition National Party have signaled that they want to see a very fast track on that.
I think the really important thing on that questioning is that on, on the, on the consenting then, is if, and hopefully it does swing back in our favor, is how we then take the communities with us, so there isn't a legacy of hurt and malai. That becomes our accountability and how we engage. I'm very confident that the teams we have, we can take the communities with us. Actually, that's the way it should be. You shouldn't have local government or government getting in the way of that relationship. That relationship is our responsibility. We're gonna be there for 30 years, if not 60 years, we need to make sure that even though we want to move at pace, that relationship is formed well, and that we're able to take community concerns. That's the really important thing about the consenting.
The more we can build that trust, then the more license to operate we'll get, and this bureaucracy that has built over the last three decades will be able to be swept away.
Thank you.
Thanks. One question from me. Just any comments on the kind of recent BlackRock Inf- Investment Infrastructure Fund? Was there much industry engagement with that, in terms of, is this gonna, you know, does this have potential to marginalize domestic New Zealand players with potentially the minister deciding which projects get fast-tracked-
Well-
Which projects, you know, who, where the investment comes from?
As, as I said, there's a couple of things there. You got me on a bit of a soapbox there. There's a couple of things. Number one is, we welcome capital investment into renewable development. And, you know, BlackRock are a savvy investor, and they've signaled what returns they expect, and if they can make those investments, they're one of our largest shareholders, they've clearly got good taste. And we, you know, we welcome their interest in New Zealand. I, I think as I started, we have a well-functioning, efficient market that has kept this country safe in very turbulent times over the last four years. And what you don't want is inadvertent screwing of the scrum, where subsidies are introduced for otherwise uneconomic renewable projects through soft PPAs or floors on prices.
We welcome capital investment, and we welcome competition. That sort of gives flavor to some of the comments I made around the net zero, is that we think that at the moment, that last 3% is gonna be very expensive. Don't worry about it for now. There is a whole range of innovations coming our way on the international scene, as you see in the U.S., which I think will solve it, and you will see the market solve it with demand flex, and summer weighted load, and all those good things. Don't overstress it. The actual NZD 2 billion, as long as it's capital, as long as they're turning up to the rugby field with 15 players, not 23, and three bureaucrats on the back, absolutely welcome the competition, absolutely welcome the capital.
It, it's very vague, actually, what, what is even going on. I mean, our interpretation of it is the government's not putting any money into it. BlackRock's not putting any money into it. They're just encouraging institutional investors to invest. There's already a platform set up for institutional investors to invest in renewables. It's the NZX. You can invest in Meridian, Contact, Mercury. You know, I agree with Mike. It's good to get more capital into the industry, but it's actually the one area which he's been quite successful. I think it'd be good if the area of focus was actually more around, you know, how are we gonna solve the problem around NZD 70 billion that's gonna be required around transmission and networks, as per the BCD report. That's, that's a problem.
Be good to get the attention onto that rather than things that I don't think there's a problem to be solved. Thanks.
We have a number online, so we'll go to Stephen Hudson from Macquarie. First is, how much of Tauhara is contracted currently, and what percentage of that is indexed? Further, how much of that volume is included in FY 2024?
I think it's 75 MW is contracted.
You want me to-
Yeah, 87.
87.
We're not, If you're talking, Andrew, about FY 2024, we don't sort of look at how much is Tauhara and how much isn't, it's part of the portfolio. None of Tauhara is actually contracted through PPAs in FY 2024. Overall, of our portfolio, we've only got about 400 gigs, which isn't contracted at this stage. By the time you get into FY 2025, though, we've got the Genesis one, which kicks in from the first of January, 2025, and then we've got the MEAG ones, which are a lot smaller, which kick in a little bit before that.
They are indexed.
Yeah.
The MEAG ones kick in just in, in April this year.
Yeah.
There's a little bit. Okie-doke. Next question from Stephen: lastly, what changes have you seen from S&P on the calculation of smoothed debt to EBITDA, and where do you see yourself peaking on that basis?
I, I can take this one. They-- because we're in growth, they're actually changing the way, they used to look at two years back and two years forward and the current year. For now, they just look current and, and forward, which means they're taking into account the EBITDA debt growth when they're considering that, so that's good. In terms of where we see ourselves peaking, we can go up to 3 now with the measure, and I think we're sort of just, just, just below that when we get into sort of max CapEx around Geofutures. As I said, Stephen, we're, we're pretty comfortable with where we are from a funding perspective and our pipeline.
Another here from Vignesh Nair at UBS. The first is, geothermal CapEx per megawatt seems to be falling with Geofutures compared to Te Huka 3. Is this a site-specific factor, or are you observing raw material CapEx pressures easing more broadly compared to 6-12 months ago, and applies to wind, solar, and batteries as well?
I think there's a number of aspects that need to be taken out, account of there. One is obviously, Geofuture is a much bigger plant.
Mm.
There is a scale efficiency there. I think number two is that it makes use of fairly significant infrastructure, existing wells, existing steam field design, and existing site. I think the third thing is, as you alluded to, is that, touch wood, that we have seen the worst of the construction cost increases. We certainly have a major project delivery team who are on, absolutely on the top of their game, which gave us an increased confidence about where we expect those costs to land.
On TCC, without any more maintenance CapEx, how much more can you run it? Obviously, you've flagged the decommissioning in June 2024, but given, A, the lack of use this year, and B, Genesis challenges with Unit 5, could we see that be extended another six-12 months without any additional maintenance CapEx?
Look, we provided to the market an estimate that we thought the hours would run out at the end of 2024, coming to 2024. We expect to get through this winter and next winter. We have the gas for that. We have the hours and the spare parts available for that. We might get, there is always, can we get extended hours, particularly with e3p hour, we're required to run it more in the intervening months. We might, we, we fully expect to be able to do that. We're committed to. We expect the hours to run out in 2024. We've got a bit of flexibility in the interim about how we deliver those hours.
Just, just to clear it up, we do still spend money on TCC, it's just we're not doing the big C6 overhaul. So we'll still have CapEx maintenance that, that's happening in FY 2023 and FY 2024 around it.
Last one from Vignesh is: can we on the 50 MW invitation for RFPs, can we get more color on this? Why de-risk even further, given where futures and wholesale prices are, especially when you have a bullish view on long-run wholesale price, is this related to what would have been the merchant strip from Tauhara, or is that still in place?
I think there's a couple of things in there. One, we're keen to test the market to see what market expectations are on the long-term price, by putting in our own longer-term deal. I think, if you look at where we were, when we awarded the PPA contracts to Genesis Energy and Oji Fibre Solutions, the capacity of Tauhara was 152.4 MW. The capacity of Tauhara is now 174. We've got the 50 MW that we've brought on Te Huka 3, where we've sold, you know, where Microsoft had the attributes. We're expecting a capacity increase of about 0.4 on Geofutures, and then we've got another 0.6 TWh of solar, and potentially by FY 2027, another 1 TWh, let's say, of wind.
There's no lack of opportunity to supply that 0.5 terawatt hours, and there's no lack of opportunity to supply it and also participate actively in the merchant market. In a way, we are having our cake and eating it, too, in the issuing of that tender.
There's one here from Cameron Parker at Craigs. Probably covered it, but I'll read it. With the potential for 7,500 hours runtime on TCC, which is about 300 days, are you still expected to retire this plant over the next couple of years, or do you plan to exhaust all those hours?
The plan is to exhaust it, all those hours, and to retire it by more. That's it.
Another one from Cam. Could you elaborate on the work you've recently committed to on Wairakei, which is NZD 114 million? Is there potential for gains on the 180 MW expectation?
Well, I think we've already gained on that one. I think we were sitting at a 150 megawatt expectation at one point. That's, as we've engaged with vendors, that's come up to a higher number.
He's gone straight to the high end of the range, and he's asking for more.
Yeah. what the work is, it's drilling the additional injection wells, it's drilling the additional production wells. it's advancing the front-end design, to a much further, level of detail than we would have done in the past. It's pre-committing to... We've got a shutdown, as you're aware, on Te Mihi, in November 2024. It's pre-committing to the long lead items to make sure that shutdown goes well. Yeah, that's the rough outline of what that NZD 114 million is for.
Okay. Lance, a shareholder, this is a, just a slightly different take on the BlackRock question from before. With BlackRock at the ready to put NZD billions into renewables we hear, would you consider selling minority stake positions in your new generation projects at, say, a mid-single digit EBITDA yield with an ongoing asset management fee to Contact?
It, it's not something we've considered at the moment, carbon off our, you know, geothermal business.
The, the geothermal business is, you know, one, it's not easy. You know, you have to work hard. You have to work hard on the drilling. You have to work hard on the, the complex plants you build. You have to work hard on your relationships with communities and iwi. We're proud of what, the way we can do that, and we have access to capital. You know, if we're going into a partnership with anyone, they have to bring something to the table. They have to bring either an expertise as Lightsource bp have done, or Roaring Forties have done, or they have to bring something special. Unless they're gonna bring something special, then.
Yeah, we've got access to capital, and I mean, it's a very good question.
Yeah.
We, we are always looking at sort of structural topics around that sort of thing. You would have seen on our capital markets day, we sort of split out the geothermal business, and we were talking about the different characteristics of it, and it was more akin to a infrastructure type of type of investment. We are always thinking, Lance, about, about those types of things. At the moment, it's not something that we're looking at. As Mike says, you know, one of the drivers for that would be, you know, to the extent that we need more capital to support these projects, and at the moment, we don't. We're, we're comfortable. We've got capital from existing sources.
One here from Tim Hunter: Do you think offshore wind is likely to be built?
One day. The economics, and this is where it's important that people don't get distracted. At the moment, we, in New Zealand, have a tremendous development pipeline of reasonably highly competitive, low-cost renewable development options onshore, whether it's geothermal, wind, and solar. We know, and this was confirmed by the directors on the executive visit to Europe and the States, is that offshore wind remains a order of magnitude higher cost, and it's only getting away with significant government support where there are, there are, like in Europe, security of supply issues, and a lack, lack of other options. One day, when we've exhausted the current development pipeline, it might indeed come on.
Unless there is a dramatic government intervention, which again, I've spoken about, then I can't see it getting away in certainly the next five-10 years.
Okay. Thank you. There's no further questions online. We'll draw that to an end. Thank you for joining.
Thanks, everyone.