Good morning, everyone, and welcome to Contact's interim results for financial year 2021. I'm appropriately social distanced around the corner following the events of yesterday, but obviously looking forward to speaking to you today about this transformative day for Contact. The agenda for today will be a presentation of the half year results, followed by the COAG and capital management plan, after which we'll take questions from the phone line and those that have pre-registered in the room as well. Welcome to Mike Fuge, our CEO, and Dorian Devers, our CFO.
Thanks, Matt. Let's get underway. Just the usual disclaimer around this, please note with the appropriate caution. If we look at the agenda, I'll do the H21 highlights, then Dorian will take you through the detail, and then we'll take any questions after that. Guys, how's it going? Just a moment of reflection. Isn't it remarkable that one year on, we find ourselves again in this position? I think the difference is we're all quite used to it, and the fact is that we can make an announcement of the magnitude we're making today, without missing a beat. I think that's a tribute to where the company's come from in the last 12 months and the changes they've made in terms of becoming agile and adaptable to these circumstances. Moving on to the performance highlights. All a good story.
EBITDAF, NZD 246 million, which gets us tracking back to the magical NZD 480 million, which we talked to the market. We've done that with a significantly less gas portfolio. We've reshaped the book to get there. Profit's up, net profit's up. Operating free cash flow is up. Operating free cash flow per share is up. The other one there is, as well as the active channel management that we've undertaken with some incredible asset availability, we have executed very quietly, a very substantial shutdown campaign on our geothermal assets. That's a credit to the operations and engineering teams. They've done that. They've brought the plant back early. It's running well. That's part of being a good asset manager or an outstanding asset manager, and it's good to have come through that period and come through it well. If we proceed to the next slide.
At the top there. Look, the way we have changed in the last year has, quite frankly, been remarkable. We've put in place a transformative ways of working program to redesign all aspects of this work. We're sitting here in an office, a virtual office, where the intent is that we release three of the four floors we have here in Brandon Street. We've moved to a more flexible office space in Auckland, and across the company, we are all moving in a more agile way. We've converted our second bilateral bank facility into a sustainability-linked loan. The simple message is we intend to continue on this path towards a far more flexible, adaptable workforce which, given the announcements we've got today, is almost a prerequisite to the growth ambition we have. We can't afford to have growth at any cost.
Our intention is to have growth, with a degree of prudence and cost control around that. In terms of our customers, digital self-service interactions are up 45%, which is great. It's great for our customers. It's great for our cost to serve. We've got the fully integrated chat service channel, which is great. It means we can interact with customers, Messenger, Facebook, WhatsApp. The NPS growth has gone from +17 to +30 over the last six months, and we have over 500,000 energy and broadband connections with a year-on-year increase of 2.2%. I think last time we looked, we were looking at about 515,000, with broadband going past the 40,000 mark. The major outages have gone well, as I alluded to.
It's a great credit to the team, particularly around the geothermal plant, which in particular rely on a high-quality asset management. Fuel is being managed tightly in line with market. The country is short of gas at the moment, but we are well covered, and that's just not about securing gas contracts, it's managing the demand side of your portfolio. Safety continues to be outstanding, even with the high level of outages. We're incredibly proud of that. In terms of sustainability and ESG targets, this is becoming a theme. Contact, prior to me arriving, had taken a leadership position in this, and I do want to pay credit to that. The reality is that we continue on that journey. We're aiming for a 22% reduction year- on- year in our scope one, two emissions. We've converted 53% of our electric vehicle fleet.
We're aiming for 100% in that. We are looking to reduce our impact on the Waikato River. We've already talked about the progress we've made on that. We plan to plant over 100,000 trees. We've reached 25. We continue to invest in our communities, and with this growth phase, that will only expand. Energy hardship, we put a lot of effort in, where we're planning to spend NZD 250,000 and asking ourselves how we can do more. Diversity, this company, quite frankly, is a leader in New Zealand, and I'll come to those stats, where we aim between 40% and 60%, and across all levels, from board right through the company. We're broadly in line with that, and that is a fantastic achievement. Sustainable finance, you've seen the news has broken. We've got the bank facilities on the sustainable link loan, and we were 62% on the DJSI.
The answer on that is we want to do more as we go forward. Climate change, addressing climate change, the Tauhara project itself that we announced today will reduce our emissions by 500,000 tons per annum as a fuel substitution. If we look on the next slide, just giving some sense to those what we've achieved to date. You see the reduction in generation emissions intensity due to increased hydro. Also it reflects a much better run we had last year on the combined cycle TCC, which is far more efficient compared to our peakers, and we look to that continue. Renewable generation was down a bit last year, just with the shortage in hydro. You see that from a standing start two years ago, we can now accept 42% of customers with impaired credit with the broader suite of products that we've developed to meet their needs.
You can see on the far right there, those diversity stats where across the board, apart from one area, we are in the range we need to be. You can see the improvement in each area from diamond where we've moved up to a balance. Now remember, diversity is not just about male or female. It is about diversity of thought. It is about diversity of culture. It is about diversity of location. It is about diversity of age. That broadness is what gives this company incredible Cstrength as we move forward across both Generation and Customer. If we go to demand. Look, it's been flat. You see at the bottom there, NZAS has come off a bit. That's for Spotlight. With a drier South Island, irrigation demand has been up, and North Island demand has been remarkably steady.
This is one of the most unusual years, I think we'll all agree, that New Zealand's had, and given what we thought could happen, this is a very pleasing result, and it's nice to have that platform as we look, and it gives us confidence for the future. If I move to the next slide. You can see the generation type. It has turned slightly dry as we go forward. You can see coal has played an increasing role over the last year. I think there's an opportunity for that to be subbed out with gas. Hydro, obviously, the hydrology hasn't helped. Geothermal, well, we're doing something about that over the coming years, and we're very excited by that opportunity. It's not just about hydrology, though.
There's a whole range of factors, and it's nice to report that if we look at those factors that affect our electricity price, that they are underpinning it. [audio distortion] prices are strong. Coal prices are strong. The demand impact from COVID has been limited, and we see the announcements from the CCC that will only support demand growth, which we're excited about, and we've actually put resources and money towards. We've put some of our most capable people on how we can help this country grow demand. I have a personal fundamental belief it's not necessarily just about throwing money at it's about the talent that you throw at it, and James has assembled a fantastic team which, quite frankly, is market leading. Gas and carbon. Obviously, gas has had its challenges. We expect that to continue. Carbon prices have increased and methanol pricing.
All those things point to, on the right there, the very strong prices we're seeing. We don't necessarily see very high prices as a good thing because remember, the CCC's proposition is that electricity will lead the conversion not just of the electricity sector, but of the energy sector. One of the fundamentals to make sure that happens is a fair and reasonable price. That's why high prices, sustained high prices for long term are not good for the industry because they will make people either hesitate and go slower, where we would like them to have the confidence to move forward. That, again, sets the context for the Tauhara announcement. If we look at the next slide. Retail. Look, this is the unsung story of Contact. I'm incredibly proud of what this team have achieved.
When all the other major gentailers, Meridian excepted, are experiencing losses to Tier 2s, we have grown. They do have a market leading cost to serve. The digital app is the most rated in the market, and the competition is intense. They've produced a flat to slightly increased profit, and that sounds slightly underwhelming, but you've got to remember that the way we do our transfer price is that they experience that increase in wholesale price. They have absorbed a hell of a lot of an increase in the additional cost, NZD 8 a MWh in that period. That performance year-over-year masks an incredible performance underpinning it, and we're incredibly proud of the team and what they've achieved there. On that note, I'll hand over to Dorian.
Thanks, Mike. Before I get into the operational and financial performance, I just wanted to high spot some of the key themes that are going to come out as we go through it. The first, and very encouragingly, we've been able to reprice and optimize our sales channels faster than we expected to recover those higher thermal fuel costs that we've been talking about for the last couple of years. As Mike's mentioned, that means that the EBITDA performance in the first half of the year is back in line on a run rate basis with that NZD 480 million number that we talk about a lot. That's in spite of the fact that we've had less geothermal generation because some planned statutory outages. A good example of that repricing in our channels, as Mike said, is actually our Retail business, flat EBITDA year-on-year.
The higher thermal fuel costs that get passed through to that business based on our arm's length transfer price are being recovered through a combination of tariff increases, but also very importantly, being able to leverage that regulated network cost reduction to buffer consumers from those higher fuel costs. That's important to see and very good to see. I should also say on gas deliverability, we expect that to continue to be a problem in the medium- term, and we expect electricity prices to remain high in the medium- term. One of the things that we're thinking about at the moment is our C&I book. You can see in these numbers our net that we make on C&I is NZD 75 a MWh
It's quite a long way below market pricing at the moment, and it's easy to say this with hindsight, but unfortunately we did contract most of that book prior to October 2018 when fuel risk became an issue for the entire market, and it hasn't gone away when we had those unplanned Pohokura gas field outages. That does mean we now have options. It's always good to have options. Do we reprice it as it rolls off and recontract it? If we're comfortable with our fuel risk, yes, we do. If we're not comfortable with our fuel risk, we double down on that risk management. That's a spectrum. We'll be somewhere on it. Just talking about gas and fuel risk, we got notified by OMV in December that we would only get 10.5 PJs of gas for 2021.
That's less than the 14.3 PJs that we were expecting to get. Everyone on the field was prorated down accordingly. I guess what I would say is we've got a strong track record over the last two years of dealing with gas issues and fuel risk. You can see that we've got the lowest contracted sales book that I think we've ever had. As I just mentioned, w e do have ability to take that further if we feel we need to around C&I. We've got the usual mitigations in place such as gas storage, Whanganui and the swaption. Whilst it's a topic that we talk a lot about as a leadership team and indeed with the board, it's not one that we are overly worried about at the moment from our perspective, although we do recognize it's a very important market topic.
Just on those higher electricity prices I talked about into the medium-t erm, we do expect new renewables to be built as a result of that. It's only natural, but we do feel the demand outlook has improved. You've seen the Climate Change Commission report that came out last week or the week before last, and it talks about the electricity being a solution to the decarbonization problem New Zealand is facing and leveraging electricity to grow and squeeze out those other forms of energy which come from more carbon-intensive sources. That's very positive, and you've also seen an announcement from both Fortescue and Meridian recently around hydrogen and looking at options to ensure, importantly, that there's supply and demand continuity post 2024, and I say if Tiwai does actually leave. Last point before I get into things, just a few disclosure topics.
We acquired the rest of Simply on the 1st of September 2020. We went from 49.9%- 100% ownership. That means we've been fully consolidating Simply into our numbers from that point. We have not provided anything for the UTS. I think that tells you something. It's a very unique UTS, the so-called confluence of events. We don't know any mechanism that can come up with a financial remedy for that. The last point I'd say is we've stopped disclosing significant items in our accounts, which is more in line with best reporting practices. You can trust that if there is anything significant, the continuous disclosure rules mean that we will tell you about it and that me and Mike will be able to high spot it in forums like this. Onto the numbers.
The profit of NZD 78 million is up by NZD 19 million. The key driver of that is EBITDA, which is up by NZD 25 million. We've got also a neat waterfall that we normally show. I'll just take you through that. Pricing net of network cost changes is up by NZD 24 million. This is recovering those high thermal fuel costs, but also selling into that fuel risk. What I m ean by that is there's been a lot of fuel risk inherent in the market for the last six months. You've had a very dry sequence in the North Island. You've had hydro storage levels at quite low levels. You've also had this continued issue around the deliverability of the Pohokura gas field. That's an issue that the market is facing. On a relative basis, we actually think we're in a better situation.
We had okay inflows in our catchments in the first few months. As I said, we do have a very low contracted sales book now, and we do have contracted gas. We do the risk return analysis on that, and we were comfortable taking a bit more fuel risk and supplying the market and therefore getting some additional sales into that higher pricing. That's what's driving that NZD 24 million. In terms of renewables, they're down just a tad, but we've replaced that by running our thermal assets a bit higher, so that's why there's NZD 2 million adverse there. Gas availability, it's less of a topic for us now in terms of volume because we have reduced our sales mix so much. We actually just need less gas.
You still see the impact of it manifest itself in our numbers because we're having to pay more for gas and indeed for carbon as well, which is that adverse NZD 6 million there. Other income is favorable. That's market making, which is a favorable movement year on year. Fixed costs are lower. That's around transmission costs generally. We've seen the benefit of the lower regulated WACC flowing through here in terms of the price path. Remember, HVDC Pole 1, I think it is now fully recovered, so we don't get charged for that anymore.
Also, if you cast your mind back to the prior corresponding period, both us and Meridian chipped in a couple of million dollars each to try and chivvy Transpower along to kick off that Lower South Island upgrade project, which is clearly a very good mitigation for Tiwai going, not just for us, for the whole of New Zealand, because it gets the electricity out of the Lower South Island. That's a non-recurring cost. Our costs go back to normal this year. That gives you a bit of a rundown on the EBITDAF. The other topics there, you've got depreciation's a bit higher, NZD 4 million. NZD 3 million of that is accelerated depreciation on some Ohaaki assets. That's only a six-month topic. It then reverts back to normal. Interest continues to fall, and that's because interest rates continue to drop.
Tax is obviously proportional to the profit we're making, so that's gone up a little bit and a small movement in financial instruments there. Across our three businesses, the EBITDAF, you've got NZD 25 million up for Wholesale, Customer flat at NZD 30 million, then our Corporate costs are flat at NZD 13 million. Good to see some productivity there offsetting cost inflation. Now just to run through our Wholesale business. As I said, EBITDAF's up NZD 25 million. The Generation costs are up by NZD 2 million. There's three components within this. Acquired generation which is down NZD 1 million year-on-year. We acquire generation, it's a risk mitigation tool. If you remember in the prior corresponding period, we were acquiring generation because we were worried about fuel risk. We were worried we didn't have enough contracted and stored natural gas.
That has abated somewhat, but it's been replaced by the need to acquire generation to offset the lost generation because of those planned statutory outages at the geothermal. We've only seen a NZD 1 million drop year-over-year. Thermal costs are up NZD 10 million. That's 15%. 5% of that is volume and 10% of that is the cost of natural gas and carbon increasing that we talked about. Transmission costs are down by NZD 7 million that we've already run through. If you just reflect on our actual generation types, hydro, we've seen quite varied inflows. It actually started off quite wet and then got quite dry towards the summer. Complete reversal of what we saw in the prior corresponding period, if you remember. Overall generation for hydro is up 98 GWh , which is more in line with a mean year performance.
We have been constrained though. We've been constrained about 100 MW because of the Lower South Island upgrade process that's been going on. That 100 MW is about equivalent to a Clyde unit. We see our opportunities and we take them. We couldn't dispatch all of our Clyde units, so we were happy to take one down and actually kick off the process around replacing our transformers and our bushings, associated bushings with that. That's very good operational management as far as I'm concerned. We'll get back to a full complement of Clyde units by the 28th of May, which is when the Lower South Island becomes unconstrained again because Transpower's got their work for the winter. In terms of geothermal, that's down by 124 GWh, and that reflects those outages. As Mike said, everything went really well.
No health and safety topics, which is always important, but in particular when you're dealing with such a large outage program. They finished early. We got 8 GWh more generation away than we were actually expecting. The other thing I like about this is the reason why we have such a large program this financial year is because we deferred some because we were worried about fuel risk in FY 2020, we wanted to keep the geothermal going. It's great that we actually have the flexibility to be able to do that and then pull it off, which is what we've done this year. Thermal is up by 43 GWh. Mike's mentioned the story around this is just asset availability. TCC was available 96% of the time, which has got to be a record.
When you've got a market which is facing fuel risk, which we are at the moment, actually having an asset like that that's available and ready to dispatch electricity is so important to the market. As I said, we did use it. We decided to take some fuel risk and dispatch electricity, and that drove some of that NZD 24 million price improvement that I talked about. We are prudent with how we use our fuel. We ended the calendar year 2020 with five PJ s of gas, exactly the same as we had at the end of 2019. Because our contracted sales base has reduced so much, our risk profile has reduced considerably. Contracted Wholesale revenue. That's up by NZD 27 million, even though we sold 30 GWh less. This is all about pricing across our channels.
You can see the CFD pricing is up by NZD 13 a MWh . Little bit of mix in there. We had the fourth potline in the prior corresponding period and not in this one, but it's largely around short-term CFDs moving with the ASX curve, which is good to see. This is the sales to our Customer business, up by NZD 8 a MWh . As Mike said, the great news here is the Customer business, you'll see it in a couple of slides, flat EBITDAF year-on-year. It is recovering that from the market. That hasn't been the case in the last couple of years. It's great to actually see that happening now. You can see that low netback of NZD 78 on C&I that I mentioned earlier on the slide.
You can also see the fuel risk mitigation that's happening where you've got roughly 200 GWh coming out of C&I as we're not recontracting it, and we're moving it into short-term CFD. We're keeping that tenor of our contracted customer base as short as possible at the moment to manage that fuel risk. Our C&I load at the beginning of the financial year was about 2 TWh. We're expecting about 600 of that to roll off this year with the remainder next year. That talks to those options that I mentioned. I've mentioned fuel risk a few times. Just another way of actually thinking about this. We sell, on an annualized basis, if you take out the cogeneration now, about 7.6 TWh of electricity. Remember, in a mean hydro year, we generate 7.2 TWh of renewable generation.
We only have 0.4 TWh of thermal that we need, which on a gas basis is under four PJs. You add that to the four PJs for cogeneration and the three PJs for retail gas. That's under 11 PJs of gas, which is what we've got contracted in 2021 from OMV. I've already outlined we have other mitigations if it is a bit drier. That's why I say we do have genuine options around what we do with that C&I load as it rolls off. We see ourselves as being in a fortunate position. There is a feeling out there that some in the marketplace have over-contracted and probably taken on a bit more risk than they used to, and maybe they were doing that because they were looking to mitigate a Tiwai exit.
In terms of our trading, EBITDA's flat year-over-year. This just reflects the fact that we've got a bit more length. The price on the length is higher, but we have had the higher location losses. It's exactly what you'd expect because with the lower South Island being constrained, you've seen some spread between islands. Also the fact that we've had less North Island generation because we've had those planned statutory outages of geothermal would feed into that as well. In terms of our Customer business, as I said already, EBITDA's flat year-over-year, which we're very happy with. The gross margin that we're making on electricity is up by NZD 1 million. It has been able to leverage that regulated network cost reduction to buffer consumers from those higher fuel costs. That's good to see. We have got a tariff increase.
You can see it there on what we call our net revenue brackets cash. It's up by NZD 4 a MWh. The tariff, which is about 2%. I've signaled a couple of times as we've been presenting previously, that this is a long-term channel for us, and we want to buffer consumers from the ups and downs of the electricity price and just get steady long-term CPI-type price increases every year to give our customers certainty, which is what they want. It's actually good to see that now playing out in the numbers. There's a couple of offsetting topics going on here. The value of prompt payment discounts not taken has reduced by NZD 3 million. Again, this is as per our stated intention. We agreed with the electricity pricing review that we would take customers off PPD plans onto non-PPD plans. That's good. Reduces regulatory risk.
Going the other way, though, you can see the favorable impact that incentives paid are about NZD 2 million less. That's good. I read this as customers are actually looking at us and buying electricity for us, not because we're going to give them free stuff, but because actually they like our product service offers, they like our digital offerings, they like our services. I think that's a far more sustainable way of doing business. Gas margins are flat year-on-year. If you go through the appendices, which I know a lot of you do, you'll see our SME gas margin or net back is below the market rate, and we've taken an action as a leadership team to sort that out because that's something that's not appropriate, and we'll fix that.
In terms of our broadband margin, it's dropped by NZD 2 million a year, but this is basically a function of our accounting and how successful we have been in growing the number of ICPs there. From an accounting perspective, we have to expense the one-time cost of a modem and the connection cost. If you back that out and actually amortize that over the expected life of the customer, our gross margin would be flat. We've now hit one of those volume breaks that I think I mentioned six months ago with our fulfillment provider, which means our costs come down going forward, which is good. You can see OpEx has continued to drop for our Customer business, which is great to see. This is around if you look at the channels that we use to acquire customers, we've looked at door-to-door knocking.
It's a pretty antiquated way of doing business in a digital age. It's also a very expensive way of acquiring customers. We've stopped that, and you can see the cost-to-serve benefit there on the slide. In terms of overall OpEx, at a headline level, we're up by NZD 2 million, but our underlying inflation-adjusted number is down by NZD 2.3 million. That's in spite of things like significantly higher insurance costs, which I know it's not just us. The entire industry is facing higher insurance costs. The reason why our headline number is up, though, we've acquired OpEx when we acquired Simply. That just naturally your OpEx goes up as associated with that. The financial performance is a bit better. We have been accruing more for incentives. We've actually done a bit of work and invested in refreshing our strategy.
We don't have an investor date in the diary yet, but we're looking forward to putting one in so we can then take everyone here through that refreshed strategy. This slide, hopefully everyone is very familiar with. Our famous NZD 480 million slide. This is based on our asset portfolio, the sales channels that we expect to sell through, and the net price that we make on it. We expect to make NZD 480 million in a mean year, which is equivalent of NZD 246 million at the first half of the year. We're bang in line with that. That's good because over the last 18 months we've been below it because we've been rejigging our business for fuel risk. We've now got the business set up to deal with the fuel risk, and hence we've been able to get that to that number. Shape's a little bit different.
Lower renewable, and that's because of the statutory outages at geothermal. There's an adverse NZD 13 million there. We've clearly got less gas than we were assuming we would have a couple of years ago when these assumptions were put in place. We haven't been able to offset those lower renewables by higher thermal generation. We've had more acquired generation and had to step down the sales book. That's adverse NZD 15 million. We've offset both those two negatives by repricing and optimizing our sales channels and seeing lower fixed costs, and a lot of that's linked to the price path of Transpower. If you roll that forward for the second half of the year, we're not going to have that adverse on renewables because we're assuming lean hydros, we always do, and we don't have any statutory outages at our geothermal.
Offsetting that will be the fact that we will have the new Tiwai contract, and obviously, we support that through Meridian. We think those two things will offset each other to leave us, as I said, sort of roughly back in line with that NZD 480 million. Cash flow. Another strong performance. As a business, we always talk about our ability to translate EBITDA into operating free cash flow. That's our cash conversion, 64%. If you look back across the industry historically, that is a leading performance. As I always say, it's operating free cash flow that drives dividends and valuations. It's good that we are a leading performer in that. That's what's driving up our operating free cash up NZD 37 million- NZD 157 million. High EBITDA and positive trade working capital movements.
On our balance sheet and our interest, I mentioned our interest costs have come down. Our average interest rates come down by 29 basis points. Around 30% of our interest book is variable and linked to the three-month BKBM. If you look at this period versus the prior corresponding period, there's been a 100-basis point reduction in that, which is huge. We see the benefit of that. Just a bit about our maturities. They look very high in FY 2022. Remember, we took out a NZD 200 million syndicated bank facility as a insurance cover, if you like, for some very extreme liquidity downsides associated with COVID. That hasn't played out. That's not a facility that we actually need to refinance. If you strip that out, our average tenor of our debt's about three years.
Would be nice to actually get that a little bit higher, and that's something we're working on. Balance sheet, you can see there FY 2020 net debt to EBITDA, 2.4x. We normally give you a forecast for the rest of the year, but in light of the next part of the presentation, we thought we'd cover that then. Mike's mentioned our sustainability linked loans. Within finance, this is one of the things we're doing to support ESG. I'd like to thank firstly Westpac, who were the first, and MUFG, who now just entered into a sustainability linked loan with us. We'll be approaching our other five banks. We think it's a win-win because clearly the banks are also very focused on ESG, and this is putting your money where your mouth is.
This means our interest goes up and down based on our score from the RobecoSAM survey, which is the survey that feeds the Dow Jones Sustainability Index. Last, guidance. No change there. We've added, you can see the half year performance relative to those FY 2021 targets, and you can see that we're pretty much on track with everything. I'll hand back to Mike.
Okay. This relates as a nice segue into what we're going to talk about a bit later. You can see climate change and regulation, the announcements from the Climate Change Commission last week, where electricity or renewable electricity was put front, left, and center of the transition of the New Zealand economy away from fossil fuels. You see the commitment to net zero carbon by 2050. I think the important part of last week's announcement was the government announcing net zero by 2025, which is a commitment which is going to mean they have teeth. Transport policies they've come out with. The Tiwai contract, obviously from a demand side, getting security around that is important.
From our own analysis, it puts the smelter well above the halfway mark in terms of competitiveness globally, and it remains some of the highest quality and certainly the greenest aluminum produced in the world. There's opportunity there. The ban on new gas connections from 2025, which have been floated. There's a whole range there. The phaseout of coal by 2030 was probably something that hasn't been talked about. If you think of the context of today, where we are still very dependent on coal generation to back us for dry year risk, but that going by 2030, that's a significant commitment. The ban on offshore oil and gas exploration means that there will be no replacement. All this creates an environment for sustained growth in renewable investment, renewable electricity investment over the next decade.
The key thing to that, let's just be very clear, the regulatory framework has come into place, and the support from the CCC is very welcome. To play into that, you need a number of things. You need to actually have a development pipeline, and with the work that's been done over the last decade, Contact has a fantastic development pipeline, which goes over not just to the 1.3 announced today, but to 3 TWh. You've got to have the capability to develop that pipeline, and we have made an extraordinary effort to retain and grow our capability throughout the company in terms of renewable energy development. The last thing is you've got to have a balance sheet, and I think that's a topic for the next conversation.
Agreed.
At that point, we'll stop, and we'll take any questions.
Should we take questions now, Mike? Or should we wait till the end of the full presentation?
Oh, wait.
Yeah.
Okay. Yep. Okay.
I think most of the questions might be on the next topic anyway.
Tauhara. Investment and capital management. If we go to the disclaimer, this one's two pages. Please read it in detail and note the caution around it. Let's get into this. It is a strategic opportunity for Contact. It's been a long way in the making. We're in the start of a journey of transformation in this economy, from reliance on fossil fuels to renewable electricity. As was indicated last week, electricity is going to play front, left, and center in that transition. We have a long history of renewable energy development in this company. Te Mihi, Te Huka, to name just a few. We have a world-class renewable energy resources. Why? This now enables us to increase our geothermal fuel, and to enable us to think about how we phase out thermal. We have a core experienced team, which we've retained since Te Mihi.
The subsurface team is absolutely one of the best. We believe this is the most economic scale generation opportunity for renewable electricity in this country, and we'll talk about that later. It delivers for our stakeholders. It delivers for New Zealand. It delivers economic profit. It helps us build a better New Zealand and supports our aims. It supports the country in driving towards that 2050 ambition. It's supported by that NZD 400 million equity raise and the new distribution policy, which enables us not just to talk about Tauhara, but what is beyond Tauhara. This is a cracking resource and we are uniquely placed to exploit it. If we look at the summary of key announcements. Look, number one is we had to get through the turbulence or the hangover the market had with NZAS, and that announcement of the four-year deal with Meridian just removes that uncertainty.
We've committed to around supplying 100 MW of that. It's competitive pricing, but it does give us certainty in that we know when this contract ends and the choice about how it's renewed is very much with us and Meridian. In the meantime, that turbulence has thrown up an opportunity which we didn't really expect, is the interest in that electricity at prices at or above the smelter price has been intense. Whether it's for process heat, hydrogen, data centers, renewable ammonia, renewable urea, all these are possibilities. General demand growth across the country, which was signaled last week with electric car conversions or the retirement of coal in our schools and hospitals. All those things have come to the surface, and I think what that gives us looking forward is a far more diversified demand off-take picture, which is incredibly important from investment certainty.
Number two, second announcement we're announcing today, that geothermal investment's approved. We're committing to 152.5 MW of low carbon renewable project, NZD 580 million go forward. We expect commissioning Q2 2023, and it will uplift value of EBI DAF. We expect around NZD 85 million per annum at a conservative price of NZD 80 per MWh. There's other things in the investment pipeline. The battery. We signal today the Wairakei, what we call the GeoFutures project, the renewal and expansion of that project, it remains a cracking resource. It remains a cracking low carbon resource. We're also signaling we're going to upgrade the 60-year-old runners at Roxburgh. That is a great example of us getting more from what we have already and the decarbonization investment via Drylandcarbon and Simply Energy. We are also announcing the strategic review of how we play in thermal.
That doesn't necessarily mean that we're exiting, but it does mean we're going to have a good think about how we play appropriately over the next decade, given the criticality of thermal to support renewable generation in the short to medium- term, but also the signals we're receiving with high carbon prices and the fact that gas supply is extremely tight. The third thing is the offer forms part of the funding program, which will support the investment program. Equity raising, NZD 325 million placement, which we talked about this morning, and a NZD 75 million retail offer. The new dividend policy so we give certainty to investors. We're targeting between 80%-100% of the average pre-operating cash flow.
We are targeting this year NZD 0.35 per share. We're launching a dividend reinvestment plan to provide a cost-effective way for our shareholders to participate in what we think is an incredibly exciting future in renewable energy investment. Some of them, yeah, very high quality. In terms of the market. Look, we're where we want to be. NZAS has been retained for four years. We're seeing us entering a growth and build phase. Quite frankly, the cost of firming is only expected to go up whichever way you do it. Having baseload electricity generation to develop, in fact, 1.3 first, but up to three terawatt hours of baseload generation to develop, which is renewable and low carbon, is an incredible asset to have on your books. We have the capital structure to support that growth.
We do have an incredibly renewable asset development pipeline in front of us, which we're very proud of, and we do have to support that a very resilient and flexible asset base, which very nicely our announcement today around our results, our H1 results, have very much supported.
Yeah. Now handing on to Dorian.
I was going to give an update.
Yeah, sorry.
Actually, Mike. I'll just expand on what Mike said actually around the market because when you're making a big announcement like we are today, NZD 580 million to go for a CapEx we're making statements around Wairakei as well. There's a huge amount of work that we put in and take all through, as you'd expect, around actually understanding the market context. We do see this market as being favorable for investing in renewable generation investment hence our decision today. If you look at it from a demand side perspective, we've got more certainty around that Rio contract than we've had for a long, long time. Four-year contract. We've had previously a one-year termination clause hanging over us, so that's good.
That whole process that Rio has put us through over the last 12 months or so has identified other options for our renewable electricity down there in the Lower South Island at a Tiwai price, which we're working through at the moment, and Jameson's team are well into that. I don't think it's by any means certain that Rio will leave in 2024. If you look at what's going on in the world, you've got a recovery from an unprecedented pandemic as the vaccinations start to kick in. Normally when you have a recovery, commodity prices go up. Equally, you've got a world which is doubling down, and rightly so, on its efforts to combat climate change. That will be, I suspect, turbocharged by Trump going and Biden coming in.
If you reflect on that and you go, well, actually a high quality, high purity green aluminum smelter might start to have a bigger value within the Rio portfolio over the next few years. We'll wait and see. As Mike said as well, we've got the Climate Change Commission report that's come out, which is very favorable around the role that electricity plays. There's demand obviously associated with that as the electricity market grows and squeezes out more carbon intensive energy sources. The impact in New Zealand of COVID on industrial and commercial demand has been far less than anyone expected. All of that stuff sort of packages together and go right, the demand outlook looks reasonably good. From a supply side say, you've still got that fuel risk uncertainty. We don't think that's going to go away, as I said earlier, around natural gas.
You put the supply and the demand together, and that tells you wholesale electricity prices, at least in the medium term, are going to remain high. They're certainly going to remain higher, we believe, than the firmed long- run marginal cost of new renewables. We've entered a build phase. You can see there's been stuff built already with YPP. What that's going to mean, though, is you're going to see thermal generation pared back as those renewables come online. You're still going to need the thermal generation for firming. It means that those fixed costs of the thermal generation are just going to be spread over less volume, and therefore you're going to see the cost of firming go up. That's going to get magnified because you've got higher costs of carbon, higher costs of natural gas coming through.
If you've got intermittent renewables, wind, solar, you're going to see your firming costs going up every year. We see batteries will play a role in firming. There'll be a point where there's an economic substitution of batteries replacing traditional firming, but we see that as being some time away. All this means is if you've got access to renewable development opportunities which don't require firming, which is where geothermal comes in because it's base load, then that's incredibly attractive. That's why we are very happy today, as Mike's already said, to talk about Tauhara and the role that will play. That's a 96% availability, that 152.5 MW, as opposed to wind which would be 40%-50% if you're lucky, and solar at maybe 10%-20%. Also Wairakei.
Wairakei, we're talking about and providing some clarity to the capital markets around that. Our base case is now that we will invest, replace and expand Wairakei up to 170 MW plant, which gives an extra 600 GWh of generation. The beauty of Wairakei is the optionality of it. We don't have to make a final investment decision on Wairakei until 2023, and at which point we'll see if Tiwai's staying. Are they going? What's going on with hydrogen in the Lower South Island? All this process heat conversion linked to the climate change reports. How's that going? Are we seeing the demand coming through? Are EVs taking off and we're seeing significant amount of EV growth? We'll have a very informed view by that point as to what's happening with the market.
Then in terms of how we actually replace Wairakei, we've got so many different options. On the one hand, we could just apply to reconsent to expand, sorry, extend the existing life to 2031. Five years. That would be a low capital option. We would need approval for that. On the other hand, we've got what is our base case, which is the go big to meet the demand. But we can do binary plants in the middle. So we have New Zealand, what we believe is New Zealand's best quality renewable development resource that we can right size to meet the market demand. That's why today we're actually talking not just about Tauhara, but actually talking about Wairakei as well. Because we want to firstly give the capital markets clarity on Wairakei, which hasn't happened historically.
Also we want to send a message to all of our stakeholders out there that we've got the best quality resource in terms of renewable development in New Zealand. We can fund it and we will build it to meet the market.
Okay. Thanks, Dorian. This will very much reiterate or build on what Dorian outlined in terms of market conditions.
Why now? Why geothermal? Why Contact? Why Tauhara? Let's get underway. Number one, why now? When I came into this role, I made clear I had a passionate belief that demand growth, after a decade of promise, was finally going to occur, and that the signals we have is that it is now very much our time. It's not about one company, it's not about one smelter. It's about a wide variety of users who are looking for growth in renewable electricity, whether it's hydrogen, process heat, data centers. They've all come out of the woodwork in the last week, and we look forward to this developing as we go forward. It allows time with the NZAS except four years is a good time. It's a good time in terms of giving us time. It's also a good time in terms of keeping the pressure on. We can't be idle.
This can't stay in the university of thinking about it. Like today, by the end of four years, we want to have actually done something about it, and we believe that we are the company to do it. We do see the potential for domestic demand, schools, hospitals, EVs, for that to grow. With the Lower South upgrade in place by May 2022, that opens the opportunity for the market to be able to exploit that. Number two, geothermal resources. This is a graph I love. To the far left, you can see the red is basically Tauhara. It is a world-class renewable resource. Quite frankly, to build the equivalent in wind, you'd have to build Tauhara is 152.5 MW. You'd have to build 300 MW-400 MW of wind and put a battery in of a commensurate size to get anything equivalent. It is a cracking resource.
What it mitigates is firming is going to become more and more expensive as we go forward, whether it's batteries, whether it's coal with a carbon price, whether it's gas, whether it's a number of other options being explored around the industry at the moment. It is going to be expensive. We have, and this is the thing I'm incredibly proud of, Contact has world-class geothermal capability. The company has taken the care to preserve that capability, to retain that capability. We have a fantastic team of scientists and engineers who have been working on this for a long time. Their understanding of what goes on in geothermal reservoirs is unparalleled. They are a cracking set of individuals, and they are a cracking team. They haven't just thought about it. They've actually done something about it.
Te Huka, the bioreactor, Te Mihi, a large number of the team from those times have been here, as well as them working on this resource for an extended period. The generation mix, you can see there, increasing the geothermal part of our mix. Contact started out as basically a thermal company with a little bit of hydro, and geothermal as an experiment. Over the last 25 years, we had our 25th birthday in November. We have made that transition away from thermal to a hydro geothermal base, we will continue that journey. It's a journey we're very proud of, having made the transition without some of the disruption that international players in thermal have experienced. If we go to the next slide. Look, key facts, NZD 580 million go forward, 0.05 tons of CO2 per megawatt hour.
I prefer to say 50 g per kWh .
Kgs.
Kg per MWh. It rolls off a bit easier. Basically, coal is 1,000, combined cycle is about 500, Tauhara is 50.
Yeah.
Let's be clear on that. 152.5 MW . That's what it is. It's above what we previously signaled to market, 140 MW. Plant capacity factor of 96%. Go forward cash cost generation, about NZD 15 a MWh. Which still compares very well with both hydro and wind, what drives the economics. 65% of the capital for the project will be spent in this country. It has, when you look at it, an incredible multiplier effect, not just in Taupō, but the broader Taupō, Rotorua region and across the country. By the time you get to a country, there's almost a four-time multiplier on the investment and the benefit. We've secured 60% of the production already. I come from an oil and gas background.
To have 60% of your revenue already developed, we've got 90 MW already developed, that's a great place to be, and that's what gives us confidence going forward. The steam really is waiting to come out of the ground. NZD 678 million of total construction cost for this phase of development. A large chunk has been spent
Again, that gives us the confidence going forward. We know what we're getting into. We have drilled the wells. We have done the detailed design. We have a cracking EPC contract with some fantastic partners ready to go. Tauhara, we have the project well ready. We've already produced from the field from Te Huka. They have a good understanding of the field. We have that 90 MW. We have the core experienced team. We have the EPC contract signed with a great counterpart party in Sumitomo. We have the variable contracting structure which allows us to align the drilling field facilities to what extracts the most value for us. We're engaging in discussions around a baseload PPA, to both secure the economics of the project, but give us the flexibility and foundation to potentially go further.
That's when we're talking about the 3 TWh . Look, COVID-19, a year ago, if we'd had last night's announcement and the turbulence in our share price that we've had over the last three months, we probably would have made a different decision. The fact is we're confident, we have the team to do it, we're sitting here today, we're announcing it, and we're pushing on. COVID-19, we're well used to it. We have the mitigation facts. We have a workforce fully capable of working from the office, working from home, working from Wairakei, working internationally. We're very proud of that. Most importantly, that gives us the confidence going forward. Okay, Dorian.
Just on the wider investment pipeline that we're sort of talking about feeding into this NZD 1.4 billion of investments over the next five to six years over and above our stay in business CapEx. You've got Tauhara we've talked about. Actually, we talked a bit about Wairakei as well, which is on there, NZD 0-NZD 700 million, and that talks to the optionality that we have around that. Our intention is still to do a battery. The [audio distortion] platform for doing one, though, has reduced because with the Tiwai extension, remember, the biggest benefit of the battery is the reserves it gives you on the North Island, which allows you to run the HVDC harder and make sure that all of the Tiwai volumes or as much of the Tiwai volume as possible gets across the Cook Strait.
It is still a Tiwai mitigation. We will do it at some point. By delaying it, there's a rapid technology curve reduction for batteries. The economics are getting better every second that we delay it. The fact that we can leverage a Tiwai mitigation to get build, own, and operation experience for the first grid-scale battery in New Zealand is something that we're quite excited about. We've talked about the Roxburgh turbine runners a few times. It's in there. It's a very good returning project in terms of long- run marginal costs. We continue to work and put capital into Drylandcarbon to support carbon credits for the business going forward. This one just gives a bit more information around the Wairakei and the re-consenting process.
On the left-hand side, I won't talk to that because we've talked a bit about it already, but read it at your leisure. On the right-hand side, it's an interesting slide, quite technical, but the key point here is there are so many different income streams you get associated with having a battery. It's worth having a look through that. Obviously, batteries are becoming a bigger thing. You've seen a lot of them being implemented in Australia in particular.
Wairakei. This is one of the new things for today that we're signaling. We're looking hard at the Wairakei, and what we call a GeoFuture project. It's an opportunity. The consents expire in 2026. It's still a cracking resource. The base case that we've got there, given there are a lot of options around it, is 167 MW power station, which both replaces the Wairakei Power Station, but also increases the output from the field, which it's well capable of taking. It will extend the life of the field considerably. It feels like a NZD 1.3 billion investment, the base case at the moment. As it just further growing, as you can see, our output of around 3 TWh of geothermal today to 4.5 TWh heading towards 5 TWh per annum of geothermal. It will still need to compete for scarce capital.
It's not a slam dunk, and that's why we're maintaining the options around it. It's still a highly economic project from everything we can see at the moment. Given we've been working the field for 60 years, we do understand the field. It is also another very low carbon geothermal resource. Just as Tauhara is going to take out half a million tons of CO2 from the atmosphere, this would take about another 250,000 tons out.
Yep.
All good. You can see that. In that development pipeline is an ambition to reduce New Zealand's carbon emissions from between 500,000 tons-1 million tons per annum, which is a fantastic outcome for the country if you think of our total carbon emissions around 75 million-80 million tons a year. We're doing our bit. Dorian.
Just how do we fund all of this? Just to sort of talk you through this. When we were thinking about our investment pipeline, and how we fund it, there were four things that we wanted to consider or did consider. The first is we wanted to send a message to our stakeholders that we've got what we believe are the best renewable development resources and that we can fund them. That's one of the reasons why we're talking about an equity raise today is because that gives the balance sheet flexibility, which then demonstrates to everyone that we can fund these great investments going forward, which should be built. As I said, with Wairakei, it will be built to meet the market demand as required, be that demand growth or thermal substitution. That was the first topic.
We know how important the dividend yield is for our investors. We wanted to also be able to have an attractive dividend, and we've announced that today as well. I'll get onto that on the next slide. We also wanted to be able to demonstrate to our investors sustainability of that dividend through a cycle, which could include Tiwai leaving in 2024. We've done a lot of stress testing on that and scenarios, recognizing we are in a competitive market, so you can't take any outcome for certain. Lastly, we obviously want to maintain our investment-grade credit rating with S&P.
We put all of those things into the mix. The funding plan that we came up with was do a modest equity raise, NZD 400 million, gives us that flexibility that we talked about, sends the messages to stakeholders that we can build these high-quality projects. We will use some hybrids. We will use conventional debts as well. Hybrids, you obviously leverage that implicit low cost of equity within them and the conventional debt, which is obviously very cheap at the moment. We'll leverage both those things. That ties with our new distribution policy. As Mike said earlier, the first point around it is we're talking about having a NZD 0.35 dividend targeting that for FY 2021. We continue with our 40%-60% split between interim and final. That would be a NZD 0.14 interim dividend.
You can see there on the slide the yield based on the current share price of 5%. One of the things, as I said, we were looking to do when we came out with our funding plan was ensure we had a quality yield. You can see that on the slide. The actual policy itself is that our dividend will remain within 80%-1 00% of operating free cash flow. That's measured over a four-year period on average. The reason why we did the four years on average is because recognizing that there is hydrology, and also staying business CapEx that can fluctuate. By looking at a four-year period, you can normalize those things out. We wanted to keep that clear linkage between our dividend and our operating free cash flow.
There's a link between dividend and performance, which is particularly important when you're investing NZD 1.4 billion into growth projects that you maintain that linkage. That's the overall policy. Mike mentioned we are going to launch a dividend reinvestment plan. We're launching it today because we thought it would be odd to delay it. We wanted to launch it all together, but we won't implement it until the final dividend for the year. The reason for doing that is we're recognizing that with the equity launch, there's a lot of documentation that goes out with that. We didn't want to be sending out further documentation around the dividend reinvestment plan off that at the same time. It could cause confusion, but it's also a lot of reading for people to do.
Far better to actually just delay the launch, send out the documentation probably with the note around the interim dividend and give our investors a few months to sort of digest it, and then make a call before the final dividend. The reason why we're looking at a DRP is not to try and get more capital into the company at this stage. It's more around this is a signal for a shift to growth. Shareholders that want to participate in that, this gives them an extra way in which they can invest into it in a seamless way without any transactional cost. If we do keep a 0% discount on that, at least in the short to medium term, I can't guarantee that into perpetuity though, obviously. It means that there's no dilution effects for shareholders that just decide they want to take the cash dividend.
What that means for our interim dividend that we're declaring today. As I said, NZD 0.14 a share. It's imputed roughly the same as we've been imputing all of our dividends over the last few years, around 2/3. A NZD 0.09 IC credits associated with that. The record date is the 15th of March. There's a bit of extra information on the slide which I encourage you to read. A bit about the equity raise. I'm not going to dwell on the details on this. This is an offer document. I encourage all of our shareholders who are listening to this to read it thoroughly. I should just point out on the split, the NZD 325 million, which is underwritten placement versus the non-underwritten NZD 75 million retail. The reason why that split has been chosen is for fairness.
That reflects the split of the non-brokered retail shareholders versus our total shareholder base. We wanted to ensure to the maximum extent possible, that if people want to participate, that they won't be diluted, which is why we've ended up there. In terms of the timings, you can see them laid out there. The key thing I'd point out is the shares get allotted. The placement gets allotted on the 19th of fifth, and the retail offer on the 12th of March. The dividend record date is the 15th of March. After that. With that, I'll hand back to Mike who will just sum it up.
Okay. We believe we've got the best projects, with the lowest firmed long run marginal cost of generation. It is time to bring these projects to market. Now is the time. It's the best interest of the Company and its shareholders and the best interest of New Zealand, and I think we'll encounter a strong degree of support for it. Our high-quality projects are expected to enhance and support shareholder return throughout the cycle. New Zealand, and Contact specifically, has a long history in developing resources, and the team within Contact has a phenomenal amount of experience, which we look forward to developing and growing forward into the future. Wairakei, where we have total flexibility, we can shut, replace, grow it, we have options in between, is a great opportunity for us, and further Ahuroa development provides further opportunity.
One of the terms we've used is growth with off-ramps. If things turn against us, we can always pick another option. We can always put things on hold with respect to Wairakei, just as we could with TCC. We do have confidence in the ability to attract new electricity demand. There's a globe out there that's got serious with the new Biden administration, with Japan's commitment to carbon zero by 2050, about industrial hydrogen, about decarbonizing the world economy. We understand our existing market. We've been in it for 25 years. We are well-placed to work with both local and international partners. Sumitomo is a cracking partner to have on board. We have a funding strategy as of today, which we're delighted to have and gives us a platform for growth, not just for Tauhara but beyond Tauhara.
To continue to provide a steady and reliable dividend to those that choose to invest in us. On that note, set to take questions.
Thank you.
Thank you.
Thank you, Mike. We'll now go to questions. Just to remind everyone, we will be taking questions via the Q&A chat segment online. First of all, we'll go to calls online. The first question comes from Grant Swanepoel from Jarden. Grant, if you're on the line, press star six to unmute yourself.
Mute button.
Morning, team. First question is on Tauhara. You referred to 152.5 MW . I think you had this thing consented to 250 MW. Do you still see a 400 MW resource there, or has that changed?
Yes, we do with time. I think what we're doing is classic. We're going down the fairway. We will take the lowest cost, marginal cost electricity now, and that enables us to build further understanding. Yes, we still see the total resource there.
Grant, do you want me to.
That's perfect.
Grant, on that, I'm just going to say, because the actual consenting is on a fluid basis. We've got 213,000 tons consented. We use about 30 already for Te Huka and direct heat. This is likely to use about 73. Actually, it means the balance left over, if my math is right, is about 110. Don't get carried away that that means that we can make a considerably bigger plant than Tauhara that we've announced today, because what normally happens is the highest entropy quality steam goes to the first plant. It does give you a feel that there's a lot of extra left for a second stage.
Sorry, now it's just confused me a little bit, in that you're saying 110, that only takes you to 350 resource, not to the 400 MW. Are you now downgrading that 400 MW?
No.
No.
No. Grant, we've got consented. That's what's consented. The fields-
Perfect. Thank you.
It's a lot larger. The quality is better than we thought. If you think about Wairakei when we started Wairakei, we only had 120,000 tons of extraction. We're up to 245 now. How consenting works is you need to prove the phases. You need to prove the sustainability of the resource. We will obviously be able to do that over time. You know.
To use a very trendy phrase, you've got to follow the science.
Fantastic. Next question just on extending that resource for another five years. What are the hurdles to overcome to get that resource reconsented for another five years? If You can do that, why not just continue rolling those five-year reconsents instead of going and building another NZD 700 million worth of investment?
The simple answer is yes, we have to go through a reconsenting process, which is well signaled. That will be a science-based process, which will be based on the facts. It depends. The reality is the choice we make will be dependent not just on the resource consent we get, but also what the demand picture is looking like. If demand looks as though it is going to take off, if we have this cracking resource in front of us, at some point, we're going to have to make the decision to build a bigger, better plant and to play into that and make sure that New Zealand gets access to these high-quality resources before other individuals try and build lower quality resources.
Okay. Thank you. Next question on the dividend. You're trading full year cash flows, about NZD 0.43. You're paying out NZD 0.35 this year. That's at the bottom end of your range. How do we think about when you move up that range? 81% for NZD 0.35. How do I get back to 90% payout range?
Sorry, Grant, say that again.
How does it get back to 90% of payout?
Yeah. It will move up. That's the point. It's linked to performance. We were very clear that we wanted to make sure that was in because we want shareholders to be able to see that.
Okay. Do we take that you're only paying out 81%, that you expect a poor performance this year?
It's a part of riding four-year average.
It's measured over a four-year average to reflect the fact that you've got hydrology and CapEx. It will be somewhere between 80% and 100%.
Okay, thanks. You mentioned in your formal presentation on the results that the trust retail assets are something you would look at. How are you thinking about the TECT premium that's sitting in there, and why didn't you put any of that into your potential capital program in your second presentation?
We're looking at it very notionally. As you said, there's been no announcement about TECT, we can't waste our time making guesses and judgments about something which isn't in our gift. When they make an announcement about what they're going to do with TECT, we'll look at it. We're not going to put something in our capital program which is very much in the control of others.
Grant, as you all know from the due diligence process you have to go through and the cleansing, you have to disclose every potential thought bubble that could lead to something that could be material into the future. There is a strategic review going on on that, which means that we are assessing options and what that means to us. It is basically at that point. We're not saying one way or another whether we're interested.
Yeah. Thought bubbles don't get into your capital program, even with me.
Thank you. My final question before I hand over to other people. How does the Onslow pump hydro affect your NPV calculations?
Look, again, Onslow, the pre-conceptual study hasn't even started. It is a development. It is a study of interest. It is a study of the New Zealand battery. At this stage, given the other technical opportunities there, whether it's for overbuild of wind, which is then used to export hydrogen, whether it's batteries, we look forward to that study being completed with interest. Again, we don't see it as a major hangover on the market.
Grant, if Onslow was actually going to happen, so by the time they get through the whole process and then build the thing, and then remember based on historic builds of major infrastructure type things like this in New Zealand, they tend to overrun quite considerably, and then you've got to fill the thing up. By the time you get to the end of that point, I suspect we've probably actually got a return and a payback on the project anyway in terms of Tauhara.
Yeah. Thank you very much for answering my questions.
Yes.
Thank you, Grant. We'll go to any questions in the room.
A couple of questions. First question from me is just around, I guess, dividend policy and the full process around it. I guess why it is so backward looking. Just the way I look at it, you've got NZD 85 million EBITDA coming in from Tauhara, which will take four years to cut through into the dividend, but equally, if you take Smelter closing has a negative impact from that, it will take four years before you actually adjust your dividend down and you'll be effectively raising debt during that process. I thought it was quite an interesting way to go for so long. Happy to look and talk through that a bit more.
We did a lot of analysis on this, projecting lots of different scenarios into the future. Some quite negative ones versus the market cycle ones. When you link the dividend, which is lower than our operating free cash flow, as you can see, and therefore is a contributor towards the growth capital, plus the equity and the other sources that are available to us. That was the one that actually enabled us to look at it and go, right, we're comfortable that this is a sustainable dividend through a cycle, as I said, which could include a lot of other scenarios. That's one of the differences, I think, between this dividend and maybe the previous policy, which was because it was set at the 100% mark. You've got nowhere for that to go.
Hopefully, this one will give our investors more comfort that at this level, it is sustainable into the future. Through that linkage to performance, it gives them comfort that as the business does improve and deliver on these investments, they'll get to sharing the value of that.
Yeah. Okay. Next question for me was just around Ohaaki units. I mean, this is one of the high carbon geothermal plants. Obviously, Smelter not to have high carbon thermal plants today, geothermal plants in the future. What is your thinking around that?
The nice thing about geothermal is that unlike conventional thermal i s that carbon capture looks like it's a lot more technically feasible. You have a very hot water stream that's being reinjected at pressure, and that gives an opportunity for carbon capture and the inert gases which come off, particularly in a binary plant, aren't mixed with oxygen. We see technical opportunity for carbon capture. We're going to investigate that actively. If we can pull it off, Ohaaki has got a great future in front of it. We're actually quite optimistic. All that CCC did was lay down a challenge, and it's up to us to pick up that challenge. We're optimistic, and you'll see some announcements around trials around carbon capture and how we take that forward. We're quite excited by that opportunity.
Next question for me is just actually to confirm, I think at the June announcement around Tauhara, we talked about NZD 7 million, and now it is NZD 580. I am assuming you spent NZD 20 million between now and June.
Ten.
Eight.
Eight.
Yeah.
You said eight. Okay. It's a NZD 12 million cost reduction.
The team have not wasted their time, and we're squeezing every last dollar out.
Yeah. The megawatts are 12.5 MW as well.
Yeah.
It was a very productive time period that for us.
Very good. Next question is just around the NZD 480 million normalized hydrology EBITDA.
Yeah
that you've done in the previous half. I guess the question is, can you do that going forward? We've got a new smelter contract price. On the other flip side, I guess there's been pricing CNI is going a little better than expected. Do you have any sort of a sense on where that might be tracking?
We're hopeful it will continue to track towards that. The effort that we've put into transformation and rebalancing the book, I think has gone to truly taking care of the smelter and the rebalancing of the channels going forward with the pricing that you can see, gives us some confidence around that.
You'll see, I'd make the point, Andrew, in the second half of the year, we will revert back to mean renewable generation, and that revision from the first half of the year will offset the impact of the Tiwai deal coming in. That's us saying that at the moment, we've been able to reprice optimize our sale channels, and that has been sufficient to cover the new deal with Tiwai. As Mike says, we are looking at transformation as well going forward. There's none of that in our numbers at the moment, but that will support as well.
Yeah. Okay. A very last question from me was, obviously we are looking at hydrology slightly below average at the moment. Your gas book is a little bit tighter than you'd like. If it does go dry, what is your contingency plan? I might presume you've got to be slightly looking at some sort of.
Yeah, we've got the swaption. We've got our right, I think it was.
It's got our 5.4 or something.
5.4.
Yep.
We'll be calling the swaption around that and then managing C&I book as the contracts roll off.
Yeah.
It's sufficient.
Well, the other thing is to remember, because we are pretty unique within the marketplace that we actually have gas storage. When there are sellers, and there are often people who are forced sellers, they just need to sell their gas. We just pick it up and we stick it in storage. That's another mitigation. That does happen. That will happen, and wea will get some more gas. It always happens, which we'll stick into the ground.
Okay. Thank you.
Are you targeting a particular percentage of offtake from PPAs for Tauhara before completion?
Well, no, but we're working with the wholesale market around PPAs, looking, because it obviously reduces price risk and other things for us going forward, and that's happening at the moment. You can see one of the other gentailers is running a bit of a process at the moment.
New.
Yeah. It's new. We're involved with that. We're pretty confident that with our project being the best one in our view, with the lowest long-run marginal cost, that it'll be pretty competitive as part of that process.
For the moment, TCC stays in the fleet right the way to completion?
Well, there's pressure on TCC too. It's on gas contracts, which are through to 2024.
Yes.
Second is the next major refurbishment, which is sort of around 2024 as well. Then we've got a decision point.
We've got the strategic review happening. We'll see what comes out of that.
Okay. Ned. Yeah. Just some from me. First one, obviously, Tauhara, you're thinking that looks like that'll stay. That's probably a good indicator of where future looks like until we have this renewable build-.
Yeah.
under development. Does this mean we should expect to see that both C&I and base market pricing will continue to increase? Does that moving average continue?
It feels like that. I'm never one to predict tomorrow's price, otherwise I wouldn't be doing this job. I'd be sitting at home.
Yes.
You're not going to pull the brakes on early to sort of more or less track market and just let the market dictate?
Yeah. No, we'll be aligning that. Like I say, the only thing is, depending on where we see our own fuel position, we might sort of pull back a little bit and keep our sales shorter. Relative, I think to the market, I think we see ourselves in being in a pretty good position at the moment.
Thank you. Next question, just what is your timetable for the review, the general asset review?
Well, we're working through that at the moment, actually trying to understand. We've got a high-level view of sort of the different things that we're looking to see from it. Obviously, it involves other parties as well. One of the key things around this is recognizing that New Zealand does need thermal generation in the short to medium- term to firm renewables. Across the industry, there would be a more optimal way of doing that. I suspect a way that doesn't involve burning coal, which isn't good for in terms of the industry. There will be a way, and this is one of the things we probably look at, is a way where we can put stuff together which is going to be more efficient, but also lead to less carbon emissions around firming.
I think the important thing is we keep you guys updated. We'll update you at H1. Remember, I was involved in the 2014 review of the Rankine units that we're going to close them by 2021. Genesis have just announced they're going to start three again. We'll keep you updated on how that progresses. What I think the most important thing in that as we do the review is that we get the key drivers of what's pushing our thinking and what's underpinning our thinking. That will be gas supply, the regulatory framework, carbon pricing, international context, the own quality of our fleet, and what other thermal players are doing.
Getting those sort of four or five factors all lined up is going to be a challenge, but we're bent to start on the journey sooner rather than later, and that's what we're signaling today.
Absolutely. We're receiving a lot of feedback from shareholders about that going on and what they would like to see in the contract portfolio. We'll take that into consideration going forward.
There's clearly a premium in the marketplace from an investor perspective for being under 70. You see that in multiples, not just New Zealand, across the world. That's another thing that we'll be looking at as well.
Last questions then. The provision of firming and flexibility is becoming the crux issue. As you said, there's no lack of review investment around-
Yep.
renewable power hours. There are conflicting views out of the Climate Change Commission, all the advice to the government, which is 100% renewable. The question view is two parts. One, are you happy for a contracted provision? For example, you sold the thermal, but you bought [audio distortion].
That is one option.
That's it.
You will be accountable to us with that answer.
Yeah.
The wider question is the sector question, which is what do you think the natural provision of firm will be in the middle of this decade by the end of the decade?
We probably don't want to get into at this early stage sort of signaling what we think the best outcome will be. Like I say, if this strategic review is going to be done properly, it does need interaction from other thermal players. Ultimately, it does reflect that in our view and aligned to the Climate Change Commission's view, is that New Zealand does still need thermals, that batteries aren't there yet in terms of the cost of those to offset it. Therefore, we want to make sure that we've got an optimized solution which is low carbon as possible, and as cheap as possible, because there are going to be other pressures pushing firming costs up.
I think in terms of firming, in the medium to long- term, what we don't want to get into is the tribalism that's perhaps characterized the industry in the past at arguing passionately for one solution. The answer will be not A, B, or C, it'll be D, all of the above. It will be about batteries, which we're actively investigating. It will be about demand-side industry, like hydrogen or ammonia or green urea being able to switch on and off, which we're actively investigating. It will be about the broader market, having demand flex, which we already have 11 MW. It could be about some form of pumped hydro, whether that is increased levels on existing hydro developments or further.
We're not going to preempt those outcomes, but what you can see from what I've just said is that we can see all those options, and we're actively investigating and looking to participate, if not having already launched some of those options. It's all of the above.
We'll now go to the Q&A online. We've got a few questions from Cam Parker from Craigs Investment Partners. The first question asks, what is the level of PPAs against Tauhara that you are considering, and what are the length of those PPAs?
If we wanted to, we could contract all of Tauhara. In fact, we could probably contract two of Tauharas, given the interest we've received. We'll do what's right for shareholders, given the right risk reward and what we see the development pipeline beyond Tauhara bringing.
The second question, also from Cam, is to what level within your CapEx program does retail feature or further retail acquisitions to be considered?
Always. Where we see retail is helping New Zealanders, ordinary New Zealanders, decarbonize their homes. Winning the hearts and minds of Kiwis and going on the journey with them. Tauhara is part of it. It may seem a little remote and hard to relate to, but we see retail as helping bring ordinary Kiwis on that journey. That means we may look at some capital investment in retail. It means continuing to broaden the products in the home that help Kiwis decarbonize. In that regard, and when I talk about those solutions are on the demand side, demand flex, you can't do that without having an internet connection into people's homes, which very much plays with that broadband play. It's about the smart. It's about smart technology and Kiwis doing things smarter. It's just not about the crude solutions of the past.
On the M&A stuff, as we said, we're always interested in looking at topics that might be value accretive to us. Industry consolidation, across retail has been talked about for a long, long time because there's a lot of duplication and a lot of fixed costs relative to the profitability of the business. That will be something that we look at, but that's not saying we're going to do it or not.
The next questions are around the thermal strategic review, talking about timing or the possibilities of plants before the 2025 expectedly Tiwai exit date and how those priority risks are going to be covered long term.
We will give an update to the market at full year results. That's how long it takes to do. I'm not going to pretend that we're going to have the full answer by then, but we will have some good insight that we'll be able to give you. 2025 TCC is obviously a critical decision that's looming as it runs out of hours, and that will be a first signal to the market about what we intend to do.
We've talked about TCC. Peakers, Whirinaki, incredibly valuable assets in the marketplace around firming. Also, the gas storage facility, which is unique, and that has to play a role as well.
We have a question from Jason Familton at ACC. You touched on it briefly, but how have you factored in border restrictions due to COVID into time frames and costs in relation to Tauhara? Is there anything in the contractual relationships that we should be aware of?
I think those are fully disclosed. We believe we've got the COVID restrictions. The guys have already got over the last 12 months, have got a lot of experience in managing getting critical expertise through the border.
Okay. Are there any further questions in the room?