New Zealand First is playing to its constituency as it runs political rings around its coalition partners over the electricity crisis.
NZ First Resources Minister Shane Jones yesterday bagged the generation – retailing companies (gentailers) saying they were making excessive profits and no longer operated in a vein that boosted or gave greater primacy to the national interest.
Jones’ comments are aimed at the ordinary factory workers in the growing list of timber mills and pulp plants facing shutdown because of the extremely high average wholesale electricity prices.
He is proposing a series of measures to address the immediate causes of the crisis, particularly the natural gas shortage. At the same time, the coalition partners are clearly debating longer-term solutions, which could include revisiting the so-called Bradford reforms of the 1990s.
Energy Resources Minister Simeon Brown, meanwhile, avoided any threats of structural reform and instead proposed bringing the Electricity Authority and the Commerce Commission down on the gentailers.
His caution possibly reflected a Cabinet concern that getting too heavy with the gentailers could restrict the dividend flow to their 51 per cent owner, the Government or that the Prime Minister was not keen to get into a scrap with the “big end of town”.
ACT was caught between its usual philosophical rejection of government intervention in a market and the political need to be seen doing something. Its Energy spokesperson, Simon Court, proposed a multi-party bipartisan accord to lift the ban on offshore oil exploration.
The chances of the Greens or the Maori Party agreeing to that would be slim to non-existent.
Meanwhile, Labour shut up shop. They asked no questions about the crisis in Parliament yesterday, presumably conscious that the coalition can credibly blame them for a large part of its origins.
The situation is grim.
Transpower says national hydro storage has declined further to 57% of the historic mean for this time of year with no significant inflows in either island last week.
The average renewable percentage for the week ended August 4 was 76%. Wind generation increased to 10% of the generation mix, while thermal generation remained high at 22%.
Historically, month to month, power has usually moved across the Cook Strait cable from south to north, said Transpower in its weekly operations report.
“This is because some of New Zealand’s largest load centres are in the North Island, while the bulk of the generation fleet sits in the South as hydro dams.
“This trend has been gradually reversed in recent weeks, as low hydrology has resulted in a reduction in generation from hydro stations and an increase in supply from thermal and geothermal generators located in the central and upper North Island.”
By the middle of last month, total thermal generation was the highest since winter 2021.
Almost half (47%) of this came from coal burned at the three Rankine units at the Huntly power station.
The large combined cycle gas unit at Huntly was also running
Transpower said it was relatively unusual for Huntly to run all of these units simultaneously.
“It usually happens at times of particularly low hydro storage and high prices. These are the conditions prevailing in the market currently, and conditions like these also occurred in the winter of 2021.”
The Transpower report said there was a strong relationship between thermal generation and price and a strong inverse relationship between both and hydro storage.
That is because the generating companies set the price at which they are prepared to supply electricity, and if they can’t use low-cost renewable sources like hydro or wind, then that price rises.
If gas (or coal) is short, they will raise their price further to try to limit demand.
That is what is happening now.
“Hydro storage is lower than it has been since winter 2021, wholesale electricity spot prices (CPI adjusted) are higher than they have been since winter 2021, and thermal generation is higher than it has been since winter 2021,” the report said.
Yesterday, Transpower said prices had increased even further last week, with the average wholesale price at Ōtāhuhu increasing from $377/MWh to $556/MWh.
“The North Island and South Island reference prices are about four times higher than they were this time last year.”
At this stage the prices are impacting only large industrial users like the pulp and timber mills who buy their power on the spot market.
Retailers set home prices over a longer period.
The current “dry year” has been amplified by the shortage of natural gas.
Last month, the Ministry of Business, Innovation and Employment produced the latest in a series of downward revisions of New Zealand’s gas resources so that there would not be enough gas to satisfy demand.
“For at least the next three years, data shows New Zealand’s natural gas reserves will produce ten petajoules (PJ) less than recent demand levels,” said MBIE Markets Manager Mike Hayward.
“The amount of natural gas in New Zealand’s reserves has decreased by 335 PJ or 20 per cent between January 1 2023 and January 1 2024, to 1,300 PJ.
“44 per cent of this reduction is due to gas extracted and used over the course of 2023. The remaining 56 per cent is a result of revisions to reserves figures from gas field operators. Operators revise their reserves figures as they get a better idea of exactly how much gas exists in—and can be extracted from—their fields.”
Central to the debate about gas are the so-called “contingent” reserves. They are reserves which are currently not technically or economically easy to access.
They are the reserves that would require further investment by the petroleum companies, something the CEO of Energy Resources Aotearoa, John Carnegie, says the companies are reluctant to do because of the uncertainty surrounding future Government policy.
That uncertainty was created when the Labour Government 2018 suddenly, without any consultation, banned offshore oil exploration.
Carnegie told POLITIK yesterday that the move has spooked the petroleum companies about any form of investment in New Zealand, whether it was an LNG import terminal or increased investment in gas field production and exploration.
“Anyone who’s going to invest in those things is going to have trouble getting it across through their board due to the massive sovereign risk that they now face, and that sovereign risk is what will happen when there’s a change of government and a change of policy settings.”
The Government has already got legislation ready to lift the ban on offshore exploration, but Carnegie believes they will need to do more than that, which would protect the companies from future regulatory changes.
Jones is understood to be considering a version of the original Maui “take or pay” contract between the Crown and the petroleum companies. This version would include a provision for massive compensation if an “adverse event,” such as a policy change, occurred.
In the short term, both he and the electricity generators will have to rely on the methanol company Methanex shutting down a substantial amount of its production and thus freeing up approximately 45 percent of the country’s total gas output.
That shutdown has already begun, and last week, the Canadian company reported that New Zealand production for the first six months of the year was only 455,000 tonnes, compared to 811,000 tonnes over the same period last year. At current prices, that is a loss of over $NZ200 million.
That raises the question of how much compensation would have to be paid and whether the Government itself would have liability if the gas cutoff were to become permanent.
Methanex and its gas supplier, Nova, part of Todd Corporation, are already in arbitration over compensation for Nova abruptly cutting off gas to Methanex in April.
But Carnegie is optimistic that New Zealand can extract more gas.
“In terms of speed, it’s likely to be onshore but there is gas, both on and offshore,” he said.
“With natural gas in the Taranaki region, we have the skills, the workforce, and the infrastructure.
‘We just need the right settings to give the producers confidence to invest.”
He expects the companies to try and get more out of their existing reserves to begin with.
“Once the legislation changes, they’ll be able to do what’s called near-field tie-ins.
“They’ll be able to use existing infrastructure to stretch into neighbouring permits.”
He said it would probably produce more gas more quickly than setting up the infrastructure to handle imports of LNG.
If that happens, expect NZ First to claim the victory and ensure that the mill workers in the central North Island, Hawkes Bay and Auckland whose jobs are currently threatened know who made it all possible.
