VECTOR : //
for new zealand’s energy consumer revolution.
POWERFUL TODAY FORCES ARE SHAPING NEW ENERGY TECHNOLOGIES ARE IMPROVING. CONSUMERS ARE EXPECTING MORE AND MORE CHOICE AND CONTROL. THE ECONOMY IS PROGRESSIVELY ELECTRIFYING – STARTING WITH TRANSPORT. USE OF SOLAR, WIND, AND BATTERY IS ON THE WAY UP. CLIMATE CHANGE IS INCREASINGLY BEING FELT. VECTOR IS EMBRACING ALL THESE FORCES – TO PUT MORE POWER IN YOUR HANDS. ENERGYUSE.
VECTOR.CO.NZ EMPOWERING YOU.
WE BELIEVE IT’S ABOUT SHOWING LEADERSHIP, TECHNOLOG- ICALLY, CONNECTIVELY AND SUSTAINABLY. LEADERSHIP ON ENERGISING YOUR LIFE, HOME, AND BUSINESS. LEADERSHIP ON DIVERSIFYING INTO NEW BUSINESSES AND NEW ENERGY TECHNOLOGIES TO CREATE FRESH CUSTOMER SOLUTIONS. LEADERSHIP ON CREATING CHANGE TO BENEFIT CONSUMERS. LEADERSHIP ON ADDRESSING CLIMATE CHANGE AND EXTREME WEATHER EVENTS. LEADERSHIP ON SAFETY, DIVERSITY, AND THE THINGS THAT MATTER MOST. STAYINGAHEAD OFTHE CURVE.
Vector://AR 17 8
CHANGE WILL ONLY ACCELERATE. VECTOR HAS COME A LONG WAY OVER THE YEARS. WE’VE STRENGTHENED OUR CONNECTION TO AUCKLAND, AND REPOSITIONED FOR THE FUTURE. WE’RE THINKING BEYOND TODAY, AND LEARNING FAST ASWE GO. NEW ZEALAND’S ENERGY FUTURE WILL BE EVEN MORE DISRUPTIVE, MORE CONSUMER ORIENTED, MORE TECHNOLOGY-ENABLED, MORE RESILIENT, MORE DEMOCRATIC, MORE SUSTAINABLE AND, ULTIMATELY, MORE ABOUT CHOICE. YOUR CHOICE.
COMMITTED TO THE LONG GAME. ACCELERATING CHANGE MAKES OUR VISION MORE VITAL THAN EVER. WE HAVE TO KEEP MOVING AND STAY COMMITTED TO PLAYING THE LONG GAME, BEING RESILIENT AND BEING RESPONSIVE TO THE POWERFUL FORCES THAT ARE SHAPING ENERGY USE. WE ARE UNDERPINNING NEW ZEALAND’S ENERGY CONSUMER REVOLUTION FOR HOWEVER YOU CHOOSE TO POWER YOUR LIFE.
BECAUSE IT’STHERIGHTTHINGTODO. TOEMPOWERYOU. WHY?
TAKING VECTOR HASALWAYS LOOKEDTOTHE FUTURE,TO STAY READY FOR ENERGY CHANGE. THELEAD.
-- A lines company 100% owned by Auckland Energy Consumer Trust (AECT) -- Michael Stiassny appointed to Vector’s Board -- Acquired UnitedNetworks (including Northern Auckland and Wellington electricity networks, plus gas distribution in Auckland and broadband in Wellington and Auckland)
-- Supported the introduction of one of the first bottle swap programmes in New Zealand
-- Joined the ’25% group’ of corporates having at least 25% female representation on its board -- Acquired Arc Innovations from Meridian Energy, further expanding advanced metering
-- Invested in E-Co Products Group and PowerSmart to help enable distributed generation, energy democracy and more consumer choice -- mPrest machine learning introduced to help identify failure risks before they happen. Vector acquired stake in mPrest -- Committed to the United Nations Sustainable Development Goals, initially decarbonisation and climate action and social inequalities -- New state-of-the-art bottle swap plant in Papakura commissioned, with first accepted Major Hazard Facility Safety Case in New Zealand -- Commenced a digital transformation by establishing a strategy to drive new levels of efficiencies -- First large New Zealand corporate to be Living Wage accredited -- Vector committed to be Net Zero Carbon by 2030 focusing on seven that specifically support our strategic focus on
-- Partnered to trial New Zealand’s largest installation of solar panels -- Acquired Siemens’ 50% shareholding in Advanced Metering Services Limited (AMS) to become 100% owner
-- Announced a new vision for the company: ‘Creating a New Energy Future’ -- Switched on our first electric vehicle charging station, the first of many across Auckland -- Advanced metering business continued to grow, now supplying more than one million meters -- Implemented a new policy requiring lines work to be undertaken in a de-energised state wherever possible, putting the health and safety of its people first -- Switched on New Zealand’s first Tesla Powerwall battery -- Installed a state-of-the-art grid-sized battery in Glen Innes substation to strengthen network resilience -- Collaborated with Ngāti Whātua Ōrākei to demonstrate future community energy solutions -- Sold national gas transmission and non-Auckland distribution businesses to focus on Auckland -- Awarded ‘Rainbow Tick’ for efforts to create an open and inclusive workplace -- First Australian advanced meters went live in Sydney -- Major shareholder, AECT, rebranded to become Entrust
-- Acquired majority stake in NGC Holdings Ltd to continue diversifying
-- Bought Kwik-Swap (that then became Bottle Swap)
-- AECT floated 25% of Vector on NZX to raise capital for further diversification into new energy solutions and to complete full takeover of NGC Holdings Ltd
-- Deployed solar and battery arrays for Department of Conservation on Hauraki Gulf islands -- First photovoltaic solar and battery storage system installed at Quay Street substation
-- Began trialling micro wind turbine technology -- Invested in advanced metering technology to better manage infrastructure and give more transparency over power bills
-- In partnership with Auckland Council, ‘Vector Lights’ illuminated Auckland’s Harbour Bridge with 90,000 LED bulbs, showcasing the potential of solar and battery technology to light New Zealand’s energy future. -- Founding member of Climate Leaders Coalition Group
-- Connected first residential customer to solar power and battery technology -- Completed the acquisition of Contact Energy’s gas metering business -- Outage Manager app launched
-- Divested Wellington electricity network to focus on Auckland
About this report://
The report has drawn from a wide range of information sources. These include: our stakeholders, our customers, our communities, our sustainability framework, our value drivers, our risk register, our Board reports, our asset management plan, our financial accounts, and our operational reports. Throughout the report, we have focused on what matters most to our stakeholders and our business. Care has been taken to ensure all information in this report is accurate, including internal assurance and verification processes and Board approval. Forward-looking statements in this report are based on best available information and assumptions regarding Vector’s businesses and performance, the economy and other future conditions, circumstances and results. As with any forecast, forward-looking statements are subject to uncertainty. Vector’s actual results may vary from those expressed or implied in these forward-looking statements.
This report, dated 23 August 2018, is a review of Vector’s economic, social, and environmental performance for the financial year ended 30 June 2018. The financial information has been prepared in accordance with appropriate accounting standards, and has been independently audited by KPMG. The social, economic and sustainability information has been compiled in line with NZX rules and recommendations for investor reporting, as well as Vector’s commitments to the United Nations Sustainable Development Goals. Our greenhouse gas (GHG) emissions as reported on page 51 were also independently assured by KPMG in accordance with ISAE3410. The approach is also consistent with GHG protocol.
New Zealand’s energy consumer revolution:// 01.
Vector today:// 02.
We’ve been playing the long game, to help empower you for the energy consumer revolution that is coming.
A more integrated look at how Vector strives to create long-term value.
14 ————— Chairman’s Statement 16 ————— Board tribute to the Chairman 18 ————— Group Chief Executive’s Report 22 ————— Case study: Electrification of the economy 24 ————— Case study: Internet of Energy 26 ————— Case study: Vector Lights
30 ————— Performance snapshot 32 ————— About Vector: Our business model 34 ————— Creating long-term value
Operations, leadership and sustainable business:// 03.
Statutory report:// 04.
A closer look at the Vector Group and operations.
All the statutory numbers and information.
38 ————— Business Unit Reports 38 —————— Regulated networks
64 ————— Financial statements 108————— Independent auditors report 115 ————— Statutory information 125————— Risk management 128————— Corporate governance 132————— Remuneration and performance 134————— Financial calendar and directory
40 —————— Gas trading 42 —————— Technology 44 —————— People, safety and risk 52 ————— Our Board 54 ————— Our management team 56 ————— Entrust 57 ————— Joint ventures and investments 58 ————— Operating statistics 59 ————— Non-GAAP financial information 60 ————— Financial performance trends
POWERING THE EMPOWERING CONSUMERS. FUTURE ;
MICHAEL STIASSNY CHAIRMAN
Benjamin Franklin missed one vital point when he noted that nothing is certain in life except death and taxes – he should have added a third, change. When I joined the Board of Vector in 2002, the New Zealand electricity sector was in a state of flux on the back of the Bradford reforms and Commerce Commission intervention. Today, the electricity sector is once again transforming as new energy technology emerges, consumers take the driver’s seat and the regulatory environment struggles to keep pace with what are extraordinary changes and times. Change has been a constant. Increasingly, consumers have sought greater control and choice of the services they rely on to live their lives. Energy has not been immune. Vector’s response has been to determine how best to meet that desire for control and choice. Over the past 16 years, we have worked to transform our network from a traditional, one-way grid to an intelligent, connected, open and innovative platform. Vector is now at the centre of the ‘Internet of Energy’, the ultimate enabler for innovative retailers, both domestic and international, to create exciting new products and services to directly benefit consumers. What has set Vector apart has been our ability to identify those new trends, to pivot and to evolve to meet the future. We have chosen to lead, not to follow; to embrace change and to shake off the shackles of a traditional network business focused solely on electricity distribution. Today, Vector is a diversified, sustainable energy group; change has been hardwired into our DNA and as a result, we are well positioned to create and deliver a new energy future. Vector continues to play the long game for the best interests of consumers. We sold out of natural gas transmission in anticipation of the inevitable move away from fossil fuels; we have invested in intelligent network capabilities, advanced
metering, batteries and the ‘Internet of Energy’, fully aware that energy democratisation was on its way. We have stopped ‘live lines’ work wherever possible, in the knowledge that while it might affect our regulated operating performance measures, putting lives at risk is simply wrong. Over the past 12 months, we have also continued to accommodate Auckland’s relentless and rapid growth through smart investment in quality network infrastructure, adding more than 14,000 new electricity and gas connections to our network. This is our responsibility, but we do so with an eye on the future and what’s coming down the track to ensure that we avoid unnecessary expenditure on obsolete technologies or traditional assets that load unnecessary costs on consumers. There are newer and better ways to grow and improve the network to meet Auckland’s needs. And while we have a projected $2 billion investment spend to meet growth over the next 10 years, it can only be spent once. Vector can’t afford to get it wrong, so investment and technology decisions are not made lightly. Vector is committed to contributing to a decarbonising economy, and as New Zealand’s largest energy distributor we can, and will, lead by example. We are championing the adoption of clean
Increasingly, consumers have sought greater control and choice of the services they rely on to live their lives. Energy has not been immune.”
energy technology to not only improve the network, but also to reduce Auckland’s carbon footprint and ensure the region can grow sustainably. Swimming against the status quo tide is never easy, but it was and remains the right thing to do. Shareholders will receive a fully imputed final dividend of 8.0 cents, taking the full year dividend to 16.25 cents per share, up from 16.0 cents per share in 2017. Despite delivering 12 consecutive years of dividend growth, as signalled last year, Vector is a business operating in a challenging environment and responding to change therefore does come at a cost. Adjusted EBITDA of $470.1 million – slightly below last year’s result – underscores the need for Vector to continue to strategically diversify to ensure long-term profitability. Our ability to pay ongoing increasing dividends could also be significantly impacted by the reset of our electricity network revenues in 2020, which is largely a function of interest rates prevailing at the time, and expenditure allowances set by the Commerce Commission. Looking ahead, to the next decade and beyond, Vector will need to continue our transformation. Change within the sector and wider environment will continue unabated and while the business has increasingly taken a customer-focused path, there is much work still to do to be considered a market leader in this regard. It is certain that the industry will continue to be disrupted and Vector will need to not only stay ahead of the curve, but also to balance the needs of customers today with those of the next generation. From where I sit, it is clear that electrification of the economy will continue to accelerate, driven by the downward cost curves in technology, the convergence of transport and energy, and the need to respond to the imperative of climate change. There are significant risks and opportunities for Vector’s businesses as a consequence. In May I announced I would not be seeking re-election, and will be standing down at this year’s annual shareholders meeting. I leave Vector knowing that it is in the best possible position to mitigate the risks and capitalise on the opportunities that lie ahead. Earlier this year, Vector welcomed David Bartholomew and Sibylle Krieger to the Board, both of whom have significant industry and Australian experience. I am confident that as my tenure comes to an end, Vector has the necessary governance expertise in place to continue to successfully navigate energy sector disruption and the change that will always be a constant. It has been a pleasure to serve Vector’s shareholders and the people of Auckland. I will view Vector Lights on Auckland Harbour Bridge as a constant reminder of what the new energy future is capable of achieving.
Michael Stiassny Chairman
Board tribute To the Chairman
BOARD TRIBUTE TO THE CHAIRMAN
A TREE A LONG TIME AGO.” BECAUSE SOMEONE PLANTED IN THE SHADE TODAY “SOMEONE’S SITTING
AFTER 16 YEARS OF SERVICE TO VECTOR’S SHAREHOLDERS AND THE PEOPLE OF AUCKLAND, MICHAEL STIASSNY’S LEGACY IS HAVING SECURED A SUSTAINABLE FUTURE PATH FOR VECTOR. —————————————————————————————
Board tribute To the Chairman
Michael’s leadership has been instrumental in achieving a successful public listing on the NZX, ensuring Aucklanders retained ownership of their energy assets, and in making sure that Vector could both maintain and invest in our traditional network, while at the same time exploring solutions for very different future possibilities. Michael has been unafraid to challenge those around him to think laterally, to grasp the issues of today and navigate the technological solutions of the future. As a result, his influence has seen Vector lead innovation in the electricity sector through early adoption of disruptive technologies in production, storage, delivery and management, and in doing so, clearly empower consumers. On the global stage, Vector is acknowledged as being at the forefront of energy democratisation. Under Michael’s stewardship, the Vector Board and management team have delivered 12 consecutive years of dividend growth, 75% of which was delivered directly to the people of Auckland by way of the Entrust dividend. However, he has also been outspoken in his belief that Vector’s continued financial health requires further diversification, rejection of the industry status quo and a sharp eye on macro-trends. A genuine advocate for diversity both within the organisation and at the boardroom table, Michael has championed Vector’s diversity and Rainbow Tick initiatives, the Living Wage accreditation, our sustainability leadership and introduced the Future Directors’ programme. He has also been unequivocal in his support for Vector’s strong health and safety policies that has seen the company cease ‘live lines’ work wherever possible to protect maintenance crew’s lives. Never one to shy away from controversy or making tough calls, Michael Stiassny has led Vector with unswerving dedication to improve Auckland’s energy future by planning today for what will happen tomorrow.
Group Chief executive’s REPORT
A CLIMATEOF CHANGE. OPERATING IN
SIMON MACKENZIE GROUP CHIEF EXECUTIVE
RESULTS REFLECT THE CHANGING WORLD AROUND US.
Despite challenging circumstances, our FY18 financial results were broadly on-target, with adjusted EBITDA of $470.1 million slightly below last year’s result of $474.4 million. While revenue was up across all business areas, group net profit was down 11.3% to $149.8 million, primarily due to a significant increase in depreciation and amortisation in the period. Adjusted EBITDA (excluding capital contributions) in our Regulated Networks segment of Vector fell 0.7% to $358.6 million, with higher maintenance costs of $7.5 million required to address additional vegetation and tree management needs in Auckland and costs associated with the April 2018 storm. The ferocious wind-storm in April caused widespread damage across Auckland and caused significant inconvenience for many customers, as well as drove an additional $4 million in unexpected network repair costs. Climate change modelling indicates extreme weather will likely become more common. The impact on physical infrastructure may be felt in many ways, including increased erosion, flooding, and, as we saw in April, increased wind damage to trees. As well as the massive impact, the storm saw our outage app fail, resulting in a poor customer experience and causing other customer channels to be impacted. Following the storm, the Vector outage app was hacked, resulting in some users of the app having their contact details accessed by a third party. Vector took this matter extremely seriously and took immediate steps to contain the breach and protect the customers information to the full extent possible. Since the storm, Vector has reviewed its storm procedures and response, has undertaken extensive engagement with a wide range of industry and Government stakeholders, and a number of corrective actions based on lessons from the storm are well underway. These include an overhaul of outage management systems, processes and tools to improve the customer experience. The storm review also highlighted shortfalls in tree management regulation. The thousands of trees that damaged lines in April were not owned by Vector and under current regulations we have restricted abilities to manage them.
Vector’s financial and operational results for FY18 reflect the relentless and continual changes to our operating environment. These include ongoing changes to the sector, consumer preferences, technology, and even to New Zealand’s climate. The Vector team, across our entire group, continue to embrace change and lead responses to these forces on behalf of our customers and Auckland.
Group Chief executive’s REPORT
Undergrounding is not necessarily a panacea. While 55% of the electricity network is underground, the cost to underground the remaining 45% of the network with overhead lines in Auckland is enormous (we estimate over $5 billion), and we believe there is little consumer or political appetite for the large energy price increases that would be required to fund this. Gas Trading adjusted EBITDA fell 6.8% to $34.4 million from $36.9 million a year earlier. The prior year’s result included an insurance settlement of $5.3 million in relation to damage to the Liquigas facilities at Lyttelton during the 2012 earthquake. Excluding this one-off, underlying Gas Trading EBITDA was up 8.9% with strong volumes and higher production at the Kapuni Gas Treatment Plant being offset by lower natural gas margins. Adjusted EBITDA in the Technology business rose 6.5% to $130.5 million with further gains on smart metering following the Power of Choice reforms in Australia and continued meter deployment in New Zealand. That said, we are disappointed that growth in our Technology business area was not higher. This can largely be attributed to a lower than expected heat-pump business performance by E-Co Products Group, and by the investment in launching HRV Solar. The underlying E-Co Products Group business is well positioned to play a role supporting Government initiatives for energy efficient and healthy homes. Capital expenditure (capex) rose 3.8% to $381.2 million from $367.4 million in the prior period. This was driven by Auckland growth, higher network replacement capital expenditure and an increase in Australian meter deployments. This was partially offset by lower Gas Trading capex (the prior period included investment in the Bottle Swap processing plant) and a slow- down in meter deployment rates in New Zealand. Our balance sheet remains healthy, with gearing as at 30 June 2018 at 48.8%, up from 47.1% a year earlier, and 47.3% as at 31 December 2017. SOLID OPERATIONAL PROGRESS. Reflecting on the past 12 months, and indeed on the past decade, we’ve made solid progress on our mission to create a new energy future. We are continuing to take the lead on developing new energy technologies, customer-focused innovation and on the sustainability of our sector. We’ve continued to diversify into areas like metering, ‘Internet of Energy’, data analytics, solar and batteries. Central to Vector’s business is our responsibility to ensure we continue to deliver reliable energy to Auckland. Every year we spend significant amounts on vegetation management and network maintenance to pre-empt problems for customers before they occur. We invest in network upgrades to reflect the ways in which energy use is changing. The development, integration, and use of new energy technologies like solar panels, storage batteries, and electric vehicle (EV) chargers on our power network is trending upwards. Peer-to-peer capabilities are opening up multi-directional energy flows.
Group Chief executive’s REPORT
2018 DELOITTE ENERGY EXCELLENCE AWARDS Our OnGas Bottle Swap Plant in Papakura won the Health and Safety Initiative of the Year. Our project with Dominion Salt to design and build a new, innovative system integrating battery power with wind energy was a finalist in the Large Energy User Initiative of the Year. 2018 PUBLIC RELATIONS INSTITUTE OF NEW ZEALAND AWARDS Vector Lights won the Marketing Communication Award for Public Relations. 2018 RESPONSIBLE BUSINESS NETWORK AWARDS Finalist in the Communications Campaign of the year for Vector Lights.
The city we serve is rapidly changing also. As one of the fastest growing developed cities in the world, about a quarter of New Zealanders now call Auckland home. No other developed nation has such a concentration of its population in a single urban area. Auckland’s population is expected to hit two million by 2028 according to Auckland Council. Growth is a resilience challenge, as infrastructure must accommodate it smartly, reliably, and cost-effectively. One consequence of this growth is traffic congestion, which hampers response times for Vector’s field crews seeking to restore critical services each time the network is damaged and power is cut. Vector must provide the platform for new technologies while at the same time keeping the lights on for more and more people. We must continue to execute on our network and customer strategies to proactively respond to emerging technologies and the expectations of customers, now and into the future. To help this, Vector has, alongside tech start-up company mPrest, developed a ‘system of systems’ energy platform solution called DERMS (or Distributed Energy Resource Management System). This is allowing Vector to build an ‘Internet of Energy’ platform for the future, enabling a flexible and dynamic environment that responds quicker to new technologies and consumer preferences. In July 2018 Vector announced it will distribute more than $16 million of Loss Rental Rebate (LRR) surpluses directly to Auckland electricity account holders as an annual payment. LRRs are the surplus created once the costs in New Zealand’s electricity wholesale market have been calculated and they vary year by year. While historically Vector has provided LRRs to retailers, our concern has been that for retailers whose customer base extends beyond the Auckland area, it is difficult to ensure that the rebates are returned solely to Auckland customers. We believe direct distribution is fairer and more transparent. Gas Trading saw a growth in revenue on the back of increased Kapuni field production and higher LPG and Bottle Swap volumes, with the state-of-the-art new bottling plant opened in Papakura significantly increasing bottle fill and refurbishment capacity. Bottle Swap volumes were up 8% on the previous year, and the new plant is delivering significant efficiencies and safety benefits, as well as being the first Major Hazard Facility in New Zealand to have an accepted Safety Case. Our technology and unregulated businesses continue to develop. Vector Advanced Metering Services Australia (VAMSA), our Australian smart meter business, is successfully deploying smart meters for most of the major Australian electricity retailers following the Power of Choice market reforms in 2017. Vector has built a strong track-record of meter deployment in both Australia and New Zealand. Vector is putting the finishing touches on a large 5MW battery for Territory Generation in Alice Springs in the Northern Territory, while a similar PowerSmart project in Niue in the South Pacific is well underway. Strong connection growth and an increase in replacement capex has resulted in a significant increase in regulated capex, up to $245.8 million from $210.6 million in the prior year.
2017 SUSTAINABLE BUSINESS NETWORK AWARDS Our project with Ngāti Whātua Ōrākei property
investment arm Whai Rawa to install a networked system of solar panels and battery storage on the 30 home Kāinga Tuatahi housing development won the Revolutionising Energy award at the Sustainable Business Network Awards.
2017 NEW ZEALAND INNOVATION AWARDS
Our Glen Innes network-tied battery was highly commended in the Technology Solutions category.
Group Chief executive’s REPORT continued
Given the size of the investment required to support the ongoing anticipated growth of Auckland’s energy networks, it is of significant concern that our regulated electricity network is not earning its regulatory cost of capital. Vector’s electricity network ROI for the 2018 regulatory year was only 5.49% - significantly lower than the regulatory WACC of 7.19%. This is largely due to Commerce Commission forecast errors in the current regulatory parameters. Absent these errors, Vector’s electricity revenues for the 2018 regulatory year would have been almost $28 million higher. We anticipate the majority of these errors will be corrected at the next reset (April 2020), but will continue to significantly impact network returns until then. Although the regulatory environment is relatively stable, balancing safety, price, service quality, and investing in the future can be challenging for network operators and regulators alike. In that regard, we are working closely with the Commerce Commission on penalties for breaches of quality thresholds. The reality is the Commerce Commission’s current regime may not adequately account for congested Auckland traffic, changes to health and safety best-practice, and more extreme weather events. As a result, meeting quality targets will be a significant challenge for Vector and the wider industry. It is crucial that this issue is addressed no later than at the 2020 reset of regulatory parameters. Our approach to health and safety is informed by the founding principle that nothing matters more than people. This is true also of our approach to our own people. Vector is proud to have been the first large corporate in New Zealand to become an accredited Living Wage employer. Alongside this, we are taking steps to proactively identify and address any pay equity issues within our business. The year also saw changes to the Vector management team with Rod Snodgrass joining us in November 2017 as Chief Customer Officer, and Brian Ryan, our GM for Emerging Technologies, departing in July 2018 after four years with Vector to take up a role in the United Kingdom. In July 2018 Vector was also proud to be one of the founding companies of the Climate Leaders Coalition, a collective of business leaders who have committed to act on climate change, a move consistent with our commitment to be Net Zero Carbon by 2030. LOOKING AHEAD. We have many reasons to be confident about the future. As the economy continues to progressively electrify, trends such as widespread EV adoption must be planned for at an industry, network and community level to ensure those who can afford new energy technologies are not being, in effect, subsidised by those who cannot, in the form of costly upgrades to, or cost impositions from, generation, transmission or distribution assets. With the pace of change rapidly increasing, Vector must invest dynamically to ensure good optionality, and have the flexibility to pivot as and when scenarios emerge. This will help avoid poor
investment decisions as well as maximise the benefits to consumers of new energy technologies. More dynamic investment also requires us to better understand customers energy use. Right now, a significant challenge is that distribution companies do not have ready access to smart meter data held by retailers. This impedes the ability of networks to adequately respond to storms as they cannot ‘see’ faults at the household level. As a collective industry, it is clear there needs to be better sharing of secure real-time information to deliver improved customer service. A political review of the New Zealand electricity sector is currently underway. We welcome the review, because distribution companies are already fully transparent through regulation and we hope to see greater transparency across the sector. The New Zealand generation and retail market has not been looked at in earnest for around a decade and it is right to question whether consumers are receiving the benefits of competition. Recent reviews in similar markets such as the United Kingdom and Australia have identified genuine market concerns at both the retail and generation levels of the market. Technology has an ever more powerful role to play in New Zealand’s future – as an enabler, it will unlock greater choice, increased resilience, lower costs, and a reduction in carbon. Regardless of what we or others wish, industry disruption will march on, so Vector must stay ahead of the technology curve and meet the needs of customers, tomorrow as well as today. Looking ahead we expect largely flat Regulated Network earnings through to the next electricity reset in 2020, and continued growth in our Technology business. We expect adjusted EBITDA for FY19 to be between $470 - $480 million. 1
Simon Mackenzie Group Chief Executive
—— 1 This excludes any impact from the adoption of IFRS 16 Leases .
case study: Electrification of the economy
WHEN ENERGY AND TRANSPORT CONVERGE.
There is no denying that the threat of climate change has turned the world of energy on its head. Under the Paris climate accord, ambitious carbon targets have been set, and businesses around the globe have been challenged to step up and help deliver. As more industries move away from fossil fuels and towards cleaner electricity, Vector is firmly focused on preparing Auckland for a new energy future. A key area of focus for us is the growing convergence of the energy and transport sectors. It’s clear that the popularity of EVs is on the rise and that the reign of the internal combustion engine (ICE) is on the decline. What is less obvious is the impact these trends will have on our network, and our place in the new energy ecosystem. THE RISE OF ELECTRIC VEHICLES IN NEW ZEALAND. New Zealand’s mostly renewable energy supply puts us in a unique position to transition swiftly to an EV nation. Consumer appetite for EVs is already evident, with 4,363 EVs registered on Auckland roads as at January this year compared to just 600 in 2016. When respected futurist Tony Seba visited New Zealand last year, he boldly predicted EVs will be cheaper than petrol cars within a decade. This is all good news for the environment and the air we breathe, but the rapid rise of EVs is going to bring its own set of challenges, including to network management. If we don’t work collectively to solve these challenges, it could hold New Zealand back from reaching its target of net zero carbon emissions by 2050.
PREPARING THE MARKET FOR AN EV REVOLUTION. Next generation EVs will have bigger batteries, which will mean longer charges. By today’s standards, one slow EV charger (7kW) adds the equivalent of 2.8 houses to the grid. Every fast charger (22kW) adds 8.8 houses and a rapid charger (50kW) adds 20 houses. This level of demand is expected to put unprecedented pressure on the network, which will ultimately require significant technology upgrades. Under the current market and regulatory settings, these upgrade costs will compete with other demands for network expansion and investment. They will need to be spread out evenly across all electricity users – regardless of whether they are in the position to upgrade to an EV. For these reasons, Vector is working to raise awareness of the expected (and unexpected) consequences of energy and transport convergence. Our goal is to ensure the next set of policy and regulatory decisions gives us the certainty we need to make smart investment decisions that more equitably benefit all Aucklanders now and in the future.
case study: Electrification of the economy
Although there will be speed bumps along the way, the reality is that, ready or not, the EV revolution is coming. It’s just a matter of when.”
OPPORTUNITY, INNOVATION AND NEW TECHNOLOGY. Recently Vector introduced a two-way EV charger that transforms EVs into mobile power sources. When connected to a Vehicle-to-Grid charger at home or work, charge from an EV can be used as a power boost for the building, as a cheaper power source when electricity prices are at their peak, and will eventually be able to power homes during electricity outages. This type of technology has the potential to smooth out the growing impact EVs will have on our peak electricity demand, while also giving people energy reserves on demand, greater flexibility and an alternative to using energy from the grid. When you add solar and battery systems into the home along with emerging home energy management systems, you’ve got a truly future-ready smart energy home that diversifies energy supply, lowers carbon emissions and reduces consumer energy costs.
EVS COULD BE THE ANSWER. Although there will be speed bumps along the way, the reality is that, ready or not, the EV revolution is coming – transforming the energy world in the process. It’s just a matter of when. Beyond clearing the air and achieving our carbon neutral targets, Vector believes EVs could assist the resilience of power networks – particularly as the frequency of extreme weather events increases and demands we diversify supply as much as possible. As a leading voice in the new energy future discussion, Vector is committed to understanding these trends and providing solutions for consumers. n
case study: The Internet of Energy
All of this is occurring while, at the same time, Vector’s network control has full visibility of when and where spikes in the demand for energy will occur, so that we can better plan for and control the network, and manage energy load to lessen stress on infrastructure. It also means that as the city grows and evolves we can seamlessly upgrade and future-proof Auckland’s energy platform to help ‘plug-in to the grid’, whatever the future has in store. In this way, our network can provide you with the freedom to take up energy alternatives, as well as sell energy back to the network, trade energy via peer-to-peer trading, or store energy via batteries. It sounds futuristic. But it wasn’t that long ago that the idea of solar panels powering homes was scoffed at – now they’re going to be compulsory in all new homes in California from 2020. DERMS. Today, across Vector’s energy network, there are thousands of solar panel and storage battery connections on the network. In the past five years, the number of EVs in New Zealand has skyrocketed from just 192 in January 2013 to 9,241 in July 2018 – a 4,713% increase. This spike in EVs and other distributed
THE INTERNET OF ENERGY.
The world of energy is rapidly becoming more complex, and transitioning from ‘hardware driven’ to ‘hardware and software driven’. How you receive, use and store your energy in 10 years’ time will be significantly different to now. Can you remember how your day played out before the iPhone was launched in 2007? How you had to physically go to the bank or sit at a desktop to transfer money? Or how you got around in a new town before clicking to open Google maps? Ten years is not that long. Vector is doing everything it can to help you stay ahead of the curve by investing in an intelligent, connected, open and innovative platform that will allow smarter network management and enable innovative retailers to create exciting new products and services for consumers. HOW YOU MIGHT USE ENERGY IN THE FUTURE. Picture this: you’ve just arrived home in your EV. It’s been a sunny day, so the HRV solar panels on your roof have generated enough energy to fully charge your home battery. The family is turning on the heater, the television, and appliances in the kitchen in preparation for dinner. The price of using power may have changed from earlier in the day. But it’s all good – you’ve got a full storage battery, so you can use that to power your home. And while that’s happening, you’ve plugged your EV into the wall to discharge energy left in your car’s battery to sell onto the Auckland energy network and make a little bit of money. As you’re getting ready for bed, you reverse the charge of your car battery to fill it up for the commute to work tomorrow – either from what’s left in your storage battery, or directly from the power grid now that the price of electricity has changed again. The next day you repeat the cycle.
case study: The Internet of Energy
energy resources (DERs) is in line with our projections for tens of thousands of these DERs to be connected to the grid by 2020. This prompted Vector to develop and introduce a sophisticated management and control ‘system of systems’ energy platform solution called DERMS (Distributed Energy Resource Management System). In development for 12 months, the first DERMS product release in April 2018 gave us the ability to monitor batteries on substations such as in Glen Innes. Later this year, an additional release will allow integration of EV chargers and home batteries onto DERMS. When fully operational, it will connect traditional infrastructure (like electricity lines and substations) with new energy generation and storage (like solar and battery energy solutions) onto one platform. It will allow Vector to integrate, oversee, manage, and optimally power more than half a million homes and businesses in real-time. Or to put it another way, the ’Internet of Energy’. The potential benefits are enormous. For example, we will be able to better predict potential transformer overloads and draw from other energy sources to avoid outages. We will be able to dynamically shift loads in response to sudden changes in demand or during significant weather events such as the storm
in April 2018. We will be able to easily move energy around the network and to and from homes. We also see it as a way to help democratise energy and address energy poverty through greater network control and by providing a platform for choice and innovation. We can help enable consumers to make the most of any distributed technology, including solar, battery and peer-to-peer trading. In introducing the Internet of Energy, we have had to develop a hybrid delivery model. Alongside traditional network engineering we’ve had to work with relatively new IT concepts such as an open micro-service architecture, and exponential technologies such as artificial intelligence, machine learning, and cloud storage and management. It’s a new and exciting prospect for the energy sector – not just for New Zealand but even globally there has been significant interest in this emerging network technology. n
How you receive, use, and store your energy in 10 years time will be significantly different to now.”
case study: Vector Lights
A BEACON FOR THE FUTURE OF ENERGY.
Globally, the energy sector is being transformed through innovation and new technology. It’s one of the most exciting times to be involved in the industry, but it is also one of the most unpredictable. As New Zealand’s biggest energy distributor, Vector must lead the adoption of clean energy technology to improve the network, reduce Auckland’s carbon footprint, and to ensure the region’s infrastructure can keep pace. In this age of technology steamrolling over traditional business operating models it’s about making the right choices and providing customers with options to support Auckland’s long- term interests. Investing in the network is about ensuring resilience as the city grows, and doing what we can to make sure the lights stay on for Aucklanders – especially during major weather events outside of our control, like the storm in April 2018. Vector Lights on Auckland Harbour Bridge, part of a 10 year smart energy partnership with Auckland Council, has become a symbol of new energy. It has its lighting needs met by solar and battery technology, with almost 3km of LED pixels (over 90,000) installed. It serves as a reminder to us and our customers in Auckland that times are changing. To get an idea of the pace of change in energy technology, it’s worth trying to imagine retrofitting old technology in place of new. If Vector Lights consisted of over 90,000 filament
lightbulbs instead of LED’s, not only would the installation give off a disconcerting warmth while driving across the Auckland Harbour Bridge, but it would also burn five times as much energy. To light the bridge with old-school light bulbs would have required 1,240 solar panels – compared with 248 currently – which would need the equivalent of more than 100 household rooftops to accommodate. Vector Lights is also an example of how new and exciting technology can come together to provide innovative energy solutions. Solar power, storage batteries, and peer-to-peer capabilities virtualise the connection between battery to bridge and power a massive lighting structure in a completely renewable and sustainable way which doesn’t put added pressure on our network or cost the earth in carbon emissions. There is no reason why the same thinking which led to Vector Lights being supported by a ‘micro-grid’ of sorts, such as the ones being developed by PowerSmart in the Pacific Islands, couldn’t be applied to more remote areas of Auckland. These areas are often connected by lines traversing many kilometres of rugged bush or coastline. In this way, Vector Lights is a real- world example of the exciting new energy solutions Vector can tap into for the benefit of Aucklanders.
case study: Vector Lights
Vector Lights is an example of how new and exciting technology can come together to provide innovative energy solutions.”
As well as transforming the Waitematā Harbour as a guiding light toward a smart energy future, Vector Lights has also become an experience and a destination, giving Aucklanders a focal point for celebration and recognition. Since its launch on Auckland Anniversary Weekend in January 2018, Vector Lights has played host to light and sound shows celebrating a breadth of diversity. From Māori history to Chinese New Year, Auckland Pride, Pasifika Festival, and Matariki celebrations, Vector Lights has quickly become a cultural destination in Auckland. Vector Lights on Auckland Harbour Bridge enhances an icon of the city, adding vibrancy and interest to Aucklanders and visitors from around the world. As an energy company owned by Aucklanders, it is Vector’s responsibility to contribute to our city’s shared future. Vector Lights is the highlight of that commitment and our work to prepare the region for the new energy future. n
VECTORTODAY. 02. EMPOWERING
VECTOR.CO.NZ EMPOWERING YOU.
470.1 $ MILLION
358.6 $ MILLION
Group Net Profit
Group Adjusted EBITDA
Regulated Networks Adjusted EBITDA
164.9 $ MILLION
Unregulated business Adjusted EBITDA
Net electricity connections up 7,976 (1.4%)
Net gas connections up 2,559 (2.4%)
381.2 $ MILLION
CENTS PER SHARE 16.25
Smart meters (cumulative)
Full year dividend
1 Includes meters managed not owned.
April’s storm saw 200 km/h plus winds cut power to over 150,000 homes
Now deploying smart meters across three Australian states
PowerSmart projects underway in South Pacific and New Zealand
Internet of Energy ‘system of systems’ DERMS in production
Opened new OnGas Bottle Swap plant in Papakura, with first accepted Safety Case for a Major Hazard Facility in New Zealand
Announced return of Loss Rental Rebates directly to consumers
Announced target to be Net Zero Carbon by 2030
Record number of new electricity connections in Auckland (11,135)
HRV Solar launched
Increase in percentage of women directly reporting to the management team, up from 21% to 34%
Vector Lights launched January 2018
First large New Zealand corporate to be Living Wage accredited
About VECTOR Our business model
THE WORLD IN WHICH VECTOR STRIVES TO CREATE VALUE//:
HOW VECTOR THINKS ABOUT CREATING VALUE //
Financial -- Cash and cash equivalents -- Debt -- Investment in infrastructure
— To create a new energy future, all parts of the Vector Group need to focus on customer choice and control. — In doing this, we will encounter opportunity and risk. — At a macro level, these opportunities and risks are all filtered through the lens of climate change, financial prudence, technological change, and changes to consumer expectations. — In response to these forces, and to create value, we have built a portfolio of energy businesses and/or brands, with varying degrees of maturity. — We take a long-term view with our portfolio. — Each business has its own strategy to create new customer solutions. — They are all supported by active consideration of our portfolio mix and potential partnerships and collaborations with like-minded others, and by a foundation of enabling qualities such as leadership, innovation, sound governance and customer focus. – Our targeted outcomes are consistent with the United Nations Sustainable Development Goals (SDG’s), in particular SDG 3, 7, 9, 10, 11, 13 and 17. We have applied the international integrated reporting framework to capture how we create value. This framework allows us to show how we use our resources or capital. We have represented our core business activities and how our business outputs help achieve our targeted outcomes. We also recognise the important enabling activities that support our various business activities.
Manufactured -- Property, plant and equipment -- Buildings and facilities -- Network
Intellectual -- Vector and utility-specific skills -- Research and development
Social & relationship -- Relationships with customers and suppliers -- Employees -- Collaboration with stakeholders -- Partnerships
Human -- Experienced and diverse workforce -- Responsible leadership
Natural -- Land: for infrastructure and operations -- Solar: for generation of solar power -- Gas: for processing and distribution
VECTOR FOUNDATION AND ENABLERS//:
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