Energy crisis: North Island mills close, citing unsustainable electricity prices

One of the Winstone mills.

The spectre of three pulp and paper mills closing in the North Island, the announcements made a week apart, highlighted how high electricity prices are impacting the ongoing profitability of business.

Oji Fibre Solutions is closing its mill in Penrose, Auckland, “partly due to high power prices”.

Winstone Pulp International shut down its two mills in the Ruapehu district, with chief executive Mike Ryan saying: “The nature of our operations means we need competitive pricing to be sustained over a long period; we cannot work around short-term price dips in the market.

“Even though current spot pricing has fallen significantly from August highs, current electricity futures pricing indicates nothing is going to materially change in the medium-term regarding wholesale market electricity pricing.”

Respondents in the Mood of the Boardroom survey were asked: Are current energy issues impacting your business operations?

And then: How affordable are your business costs (electricity, gas, petrol, others)?

A majority of respondents, 60%, said the energy issues weren’t impacting their businesses, and 40% said they were. But 77% said business costs were unaffordable at varying levels, 10% said they were easily affordable, and 13% had no opinion.

During the winter, a shortage of gas supply — used as a buffer in power generation when hydro, wind and solar dry up — combined with low hydro lake levels to send wholesale electricity prices to unprecedented highs.

Since September 2021, wholesale prices have risen from about $100 per megawatt hour (MWh) to an average $700 per MWh, and at one point they spiked to nearly $1700 per MWh.

Wholesale prices are back to around $165MWh in the lower South Island and $200MWh in the upper North Island but still well ahead of the $20MWh in late September last year.

National hydro storage levels fell as low as 45% of the historical average but Meridian said in the month to September 9 the level had recovered to 99%, with South Island storage at 104% and North Island 82%.

Contact secured gas from Methanex — the equivalent of 350GWh of electricity — to support security of the power supply to New Zealanders. The supply was settling.

Paul Newfield, Morrison chief executive, said “high short-term energy prices have, ironically, been negative for our domestic energy business (Manawa). But we shouldn’t overreact to this.

“Any interventions in what has been an effective and stable long-term market structure could have unforeseen consequences that ultimately leave the public bearing more cost and risk.”

A board director said there are mechanisms for well-managed businesses to hedge their energy costs against volatility in the spot market. Les Morgan, chief operating officer of Hind Management, which runs the Sudima chain of hotels in New Zealand, said the uncertainty of supply was leading to unplanned and unbudgeted investigation of alternative energy sources.

“The real risk is that if we cannot move in time to avoid reduction in services, we will need to compromise.”

A dairy cooperative executive said it was actively managing access to natural gas and alternatives. Craig Stobo, chairman of NZ Windfarms, said “higher energy prices are a strong incentive for us to invest in renewable energy projects”.

Another chief executive said implementation of a major solar project had reduced energy costs.

But an energy retailer said the focus on supply security has led to inaccurate use of capital, and the inability to secure competitively priced electricity will lead to less innovation “where we need it most”.

A hotel executive said percentage increases were too high to pass on to customers, hence they impact margins.

A port company chief executive said there were reduced export volumes due to high energy costs and reduced production.

Anne Gaze, co-founder of CampusLink Foundation, said energy costs were having a tangible impact on business operations — price volatility in electricity and fuel markets has led to increased operational expenses, especially in New Zealand’s manufacturing and logistics industries.

“Energy prices have risen disproportionately compared to other input costs, driven by global factors of fuel shortages and the transition to cleaner energy.”

Unpredictable energy costs make it difficult to budget effectively, and the lack of investment in renewable infrastructure has left New Zealand vulnerable to energy supply shortages, Gaze said.

Chris Quin, chief executive of Foodstuffs North Island said: “We have more than 500 buildings, most of them well in excess of 1000 sq m and some more than 3000 sq m. Each of those has dozens of industrial fridges and freezers.

“Increased energy costs will add to the range of rising costs that we will either have to absorb, which we can do to a certain extent, or pass them on to customers.

“One of the other cost increases is from suppliers who are often small and have no choice but to pass rising energy costs on to us.

“If you are not hedged or protected, then it’s very tough,” Quin said.

David Carter, Beca Group executive chairman and regional director Asia, said there were two contrasting impacts. Firstly, many of Beca’s industrial clients were suffering and this was negatively impacting their viability and causing projects to be placed on hold. Conversely, as a consultancy operating in the infrastructure sector, helping increase electricity generation represented a substantial opportunity.

What major energy companies say

The major energy companies have a different perspective. One chief executive said too many myths were populating conversations.

Another said regulatory yoyo and political work to avoid tackling the mixed ownership model limitations aren’t helpful for opening up major long-term investment opportunities.

Malcolm Johns, chief executive of Genesis Energy, said forecasts indicated long-run cost of electricity abating over coming years as new renewables were added, likely to around $115MW in today’s dollars.

Demand for electricity has been flat for a decade, and investment has been made to lift the level of renewable generation from 70% a decade ago to more than 80% today.

“Attracting capital is different to making it land, as we learnt post the Christchurch earthquakes. Capital will land with clear demand signals from the economy alongside stable long-term policy and market settings,” Johns said.

The last word to Peter Reidy, chief executive of KiwiRail: “We are able to recontact and consolidate energy pricing contracts. The closure of the Winstone pulp mills will have a significant impact on our Napier/Palmerston North/Ohakune Rail network and freight operations.”