The generators are busy firming investment decisions to meet future demand while looking sideways to the government for a stable, long-term energy plan, writes Graham Skellern.
Thanks to the Huntly agreement, the country’s generators are confident of meeting the present electricity demand and are looking ahead to cater for future growth in consumption.
The dry winter and low hydro levels last year, coupled with the spike in gas prices caused by lower production, created an energy shortfall and a great deal of nervousness. Some called it an energy crisis.
The four major generators, Genesis Energy, Mercury, Meridian and Contact, quickly shored up the security of the electricity supply. They recently established the 10-year Huntly Firming Options (HFOs) contract, a strategic energy reserve agreement to maintain generation capacity.
The Huntly Power Station’s Rankine (thermal) units will remain operational through to at least 2035, and a stockpile of up to 600,000 tonnes of coal will provide backup for dry winters with low hydro inflows and gas shortages.
Mike Roan, Meridian chief executive, said, “If we can’t get enough gas to secure supply, then we have an alternative through the Huntly arrangement. I’m not concerned about a shortage of supply. We are sorted by replacing gas with coal.
“If we can’t use gas to make electricity, then we need coal to make electricity. It’s a shame but we need energy to power the economy. We have dealt with the unexpected collapse of the gas sector quite quickly and efficiently.”
Meridian looked at importing liquefied natural gas but went for the Huntly deal.
Roan said the gas shortage has spurred the sector to invest in renewable energy faster than expected. A big capital investment takes time to come to fruition but some of the solutions will be online by the end of next year and through 2027 and 2028.
He said there will be investment in wind and solar farms, battery storage, geothermal generation, and increasing hydro storage capacity.
“Meridian is looking at a need to invest $3 billion by 2030. We are a third of the market and I expect $10b will be invested through to 2030. There’s been $12b of investment in generation assets over the last 15 years.”
The electricity sector currently consumes 42 terawatt-hours (TWh) in a year, and Roan estimates the consumption will increase to 60TWh by 2050.
Roan didn’t think the government needed to make any changes to encourage the sector to invest faster “than we are” – though shortening the consenting timeframes would be helpful.
I’m not concerned about a shortage of electricity supply. We are sorted by replacing gas with coal.
And releasing the contingent storage would bring the consumer price of electricity down by $4 million to $5 million a year. (Contingent storage is the extra hydro-electric water held in lakes below normal operating levels permitted by resource consents).
Simon Mackenzie, who steps down as Vector chief executive at the end of the year, said the electricity sector has well-known challenges because of the market costs coming through – and fundamentally it comes down to the generation capability coupled with the generation mix.
“It used to be more about gas and thermal – there was more thermal capacity back in the late 1980s and early 1990s - and now Huntly is doing God’s work. Hydro and other renewables such as solar and wind are dependent on nature. It creates a major problem – we haven’t got firming capacity.”
Mackenzie said he still hasn’t seen any plan or accountability, yet energy is so critical for the national economy. “I’ve long argued for a Ministry of Energy that manages the plan and looks at what is needed going forward.
“Or an independent system operator could be separated out from Transpower to run the market in real time and over the longer-term complete planning and analysis. Something needs to be put in place - we don’t have a cohesive, whole-of-system view.”
The industry is waiting for the release of the Frontier report and Energy Minister Simon Watts’ proposed actions. Broker Forsyth Barr said the Minister indicated that any changes will be “surgical” in nature.
Assuming the report tackles the key issues in the sector, “we expect changes will target security of supply, though the Huntly HFOs have already done this to a large extent, and enabling additional generation to be built”, Forsyth Barr said in its Power Points report.
Malcolm Johns, chief executive of Genesis, said there has been uncertainty around the long-term rules for the electricity sector – look at the falling gas production and scrapping of the Lake Onslow pumped hydro scheme.
“Regulatory stability will open up the ability for capital to be deployed in real generation assets. We are in a competition for capital and the rules matter.
“We need a road code for the energy sector for the next 25 years. We need to know that if you invest $1b in renewables, then the electricity market will be stable,” Johns said.
“We need to know where the wholesale electricity settings will be sitting and the rules around retail and long-term policy. This all requires a bipartisan approach (from political parties).”
We need a road code for the energy sector for the next 25 years. We need to know that if you invest $1b in renewables, then the electricity market will be stable,
Another gentailer boss said the policy/regulatory focus is on retail competition. It should be on long-term energy security and competition for capital.
Pricing and affordability – which haven’t eased since 2019 - were still major issues in the energy sector. Increased line charges, approved by the Commerce Commission, made up 66% of the latest electricity price rises.
Roan said the rise in wholesale electricity prices was driven by the increase in the cost of gas, and this has flowed through to industrial and commercial businesses.
“We are concerned about this and we have written long-term purchase contracts - up to five years and plus - with our large customers, at affordable prices,” said Roan.
The Mood of the Boardroom survey asked: How concerned are you about the risk of energy shortages and their impact on your business over the next 12 months? The responses averaged 2.78 out of 5 with 1 being not concerned at all and 5 extremely concerned.
Also, given forecasts of rising electricity demand from sources such as AI, electric vehicles, and large-scale data centres, did CEOs believe New Zealand has made sufficient investment in energy infrastructure to support this growth?
There was strong unanimity amongst the respondents – 87% said No, and 8% Yes.
On the question, should the Government require structural separation between electricity retailers and generators to encourage further investment and competition in the generation market?, the response was evenly matched. A total of 39% said yes, 34% no and 27% were unsure.
An energy boss said New Zealand still has the most stable domestic energy market delivering globally competitive costs, with the exception of natural gas. The gas market results from the failure of long-term energy policy leading to market meltdown. Everybody will pay the price for this.
An independent director said the need for reliable, affordable and abundant renewable supply of energy is “the balance we live with every day. This will always be a balance - the sudden and unexpected drop in gas supply (as a result of past government policy) combined with the dry weather seriously challenged the resilience of the system. It is important that policy settings for critical national infrastructure are kept consistent between political parties.”
A gentailer director said that whilst acknowledging it can be tough for customers, ”I think the sector does a pretty good job working with customers to help smooth their path. International comparisons suggest we punch well. We need to see the income side of the economic ledger improving.”
A transport chief executive said the energy companies’ consolidation around the Huntly reserve provides short-term comfort. A port boss said: “We just need to
accept coal burning at Huntly is core to the next 20 years, and 100% renewables is a Labour and Greens fantasy.”
Fraser Whineray, an independent director, said the Emissions Trading Scheme through Huntly’s coal generation adds a tax which inflates the whole market when there is no lower carbon alternative. This unnecessarily adds circa 20% to the futures curve, which sets the price for commercial and retail alike.
Whineray said solar energy is only good at times. “We still need the normal power. The benefits haven’t really shown up the other way enough to fully switch over to solar. Incidents like what happened in Spain and Portugal with no power are an example we need to observe and learn from.”
Dave Rouse, CarbonClick founder and chief executive, said solar and battery back-up is in place, which has been a good investment, and others should do the same instead of worrying about energy shortages. It will help the grid considerably.
An electricity sector chief executive wasn’t quite sure. “No one should have confidence. The energy system is in the worst shape it has ever been, with electricity shortages and excessive prices, coupled with gas in a dire state. There is no short-term solution other than hope.”
But an infrastructure chief executive said, “We will be fine in the short-term but five years out, things get sketchy. The model doesn’t incentivise building resilience.”