Contact Energy is shutting down its gas-fired 400 megawatt Otahuhu power station in Auckland at the end of next month, as it announced that operating profits had fallen more than 10 per cent for the year.

Otahuhu is the third big power station closure announced this year, which will remove more than 1000 megawatts of capacity from the system in total over time, with an independent martket watcher saying that showed the extent of a power glut. But the closure would potentially wipe out any power surplus and put the country at greater risk of a power shortage in a dry year.

Contact's bottom line profits fell 43 per cent to $133 million in part because competition in retail power saw prices fall and profit margins come under pressure.

"The retail electricity market remained highly competitive with discounting dominating the market," said CEO Dennis Barnes.

Contact customers paid about $40 million less for their power from Contact than they did in the previous June year, effectively 2 per cent less for the generation and retail costs from Contact, excluding other transmissions costs..

"The retail electricity market remained highly competitive with discounting dominating the market," Contact chief executive Dennis Barnes said. Competition was expected to remain intense and discounts to continue.

"The price is falling," Barnes said. "I expect discounts to continue to feature. Revenue from customers next year.. will more likely decrease". But that would be more than outweighed by lower costs and service improvements.

"Our decision to close our Otahuhu B station reflects the growth in renewable electricity generation, such as the new Te Mihi geothermal power station, which has effectively replaced Otahuhu in Contact's portfolio" Barnes said.

Contact has two "combined cycle gas turbine" stations , the other at Stratford, and they had only been running about a quarter of the time.

"They don't run together and one could say that the Otahuhu station is spare to the market and spare to us," Barnes said.

"This is the right action to reduce costs in an over-supplied market and it is right to make the decision in good time for the market to respons," Barnes said, with plenty of time to come up with "whatever the market may need in 2019, after the final two coal-fired units at Huntly close.

Otahuhu was built in the late 1990s at a cost of $350m and was seen by some in the industry as a cheap station.

Genesis Energy also plans to shut down the last two coal-fired stations at Huntly in 2018, taking out 500MW of power capacity, adding to risks of a power shortage in dry years, a market watcher said recently. At the start of this year, Mighty River Power announced its gas-fired Southdown power station in Auckland would close at the end of the year.

Independent energy consultant Bryan Leyland said the closure of Otahuhu was in line with an industry aim of keeping the country on "the edge of a shortage".

"New Zealand has a surplus of generating capacity at the moment and this means that generators have less control of the price. To make money, they need to keep the system on the edge of a shortage. Shutting down Otahuhu is consistent with this objective," Leyland said.

"The closure brings forward the day when we will be more vulnerable to dry years and the possibility of serious shortages when the next one occurs," he said.

Barnes agreed the market was over-supplied and Otahuhu was not getting a return. But the market would be "adequately supplied" till 2018.

"There may be a need for additional capacity in 2019 (after Huntly closes)," Barnes said. But it remained unclear what would happen with the Tiwai smelter longer term.

"Even in the driest periods in the last few years we have not run the two (Otahuhu and Strateford) together. One has truly been spare, even in a dry period," Barnes said.

Contact said that the percentage of customers getting a discounted price had risen from 50 per cent a year ago to 70 per cent on more than the standard discount of 10 per cent off the "rack rate". The average discount was 18 per cent and 55 per cent got a 22 per cent discount.

Barnes said he expected that to increase.

The company will pay a final dividend of 15 cents a share, to be paid on September 15. The dividend will be unimputed following Contact Energy's imputation credit balance dropping to zero after the recent sale by Origin Energy of its cornerstone shareholding in Contact.

The Contact board also planned to conduct a share buyback programme in the first half of the 2016 financial year.

Contact will delay the annual meeting from October to early December, as it looks for new directors to join the board after the departure of Origin Energy.

Otahuhu power station

Contact will close its 400 megawatt Otahuhu B power station at the end of September

Built: 1999 at a cost of $350 million

It has been running for about half its expected life.

The plant will be dismantled and may be sold off as a power station or for scrap which would cover any remediation costs.

The site which contains asbestos and heavy metals would be "remediated" and cleared in a process that should take less than a year.

The 37 hectare site next to the motorway at Otara, Auckland will be sold off "promptly", but Contact gave no estimate of its potential value.

"It is a good site" Contact Energy chief executive Dennis Barnes said.

It is zoned for flexible commercial and industrial use but the Auckland Regional Plan has many suggestions for zone changes for land such as Otahuhu. But it would be up to a buyer to decide on future uses.