Energy users want more assurance about prices and supply, and certainty that capacity is being built to meet future demand, writes Graham Skellern
Many company executives, particularly in manufacturing, are spending a lot of time managing energy issues to the expense of increasing productivity and investment in their business.
Rising prices and their impact, along with the security of power supply are never far from the chief executives’ thoughts.
They were asked in the Mood of the Boardroom survey: How affordable are your business energy costs (electricity, gas, petrol, other) currently? The respondents’ replies averaged 3.05 out of 5, with 1 being very unaffordable and 5 easily affordable.
How concerned are you about electricity pricing and its impact on your business over the next 12 months? The average response, this time, was 2.8 out of 5.
When thinking about New Zealand’s energy system, which is most important to your organisation? A third of the respondents said availability and security of supply; 20% pricing/cost; and 2% sustainability/emissions impact. But 44% of the respondents said they were all equally important.
Interestingly, 50% of the respondents said if coal was the lowest-cost source of electricity to provide insurance for dry hydro years, this would not create a problem for the international sale of their goods and services?
A September report by broker Forsyth Barr was headlined: “Electricity demand storms back”.
The demand increased 5.7% in August compared with the same month last year, with the country’s largest consumer, the Tiwai Point aluminium smelter, returning to full demand for the first time in 14 months and making up 60% of the increase. The cold weather largely accounted for the other 40%.
Hydro storage, at September 1, had fallen to 72% of average, marginally lower than the same time last year. Forsyth Barr said in a sign that the lessons from winter 2024 have been taken on board, the electricity market is more confident of meeting winter 2026 electricity demand.
“We believe the large Huntly Firming Option contract signed between the four largest generator-retailers in August is a key reason for the market’s confidence,” Forsyth Barr said.
The Huntly contract will make a material difference ahead of the next dry winter, ensuring there was sufficient coal on the ground at all times and should help cap the wholesale electricity price.
Tony Clifford, managing director of PanPac Forest Products, spends 20% of his time managing the company’s ongoing energy needs, whether it’s securing long-term power purchase agreements, finding alternative energy sources or dealing with other issues.
“The complexity of energy is so massive that it has become an industry itself. I’m spending management time on a utility instead of developing markets and our people, and that’s unproductive. It’s a dilemma.”
Clifford said the increasing cost of energy and the impact on the business had been an issue for 10 years and said it was getting steadily worse.
“One of our challenges is that electricity makes up 25% of the costs in running the mechanical pulp mill – it’s a key driver of our economic durability. The lumber operation uses less electricity and is 5% of the costs.”
He said his company lobbies the Government to try to understand the critical relationship between energy affordability and business continuity.
“We’ve reduced our consumption of electricity by fortunately changing the product line-up for pulp. For one tonne of pulp, we are now using half as much electricity as we did 10 years ago – but in that time the cost per unit (wholesale electricity) has gone up three times.”
So, has this impacted profitability? “Hell yes, worse than that – it’s undermined investment confidence, in the company and generally.”
Clifford said the market structure was not sufficiently incentivised for building new generation. Some entity in New Zealand needs to take responsibility for a long-term energy plan.
“There’s sufficient evidence that shows energy doesn’t suit a pure market theory and this has a long-term chilling effect on investment in any energy-intensive business,” he said. “Why doesn’t a pure market model work – one of the issues is the latency between increasing demand and increasing supply.”
Methanex NZ, which has three methanol production plants and is the country’s largest user of natural gas by far, has shut down for up to six weeks over the last five winters “to help the energy supply balance, take the pressure off the hydro lakes and keep the lights on.”
Stuart McCall, managing director of the New Zealand operations, said, “We are still feeling the effect of the 2018 oil and gas exploration ban. A lot of trust was lost.
“The lower gas production highlights the risk profile of the energy sector as it transitions to renewables, which can be less reliable if it doesn’t rain, blow or shine.”
McCall said the country needs a mature energy strategy. “You’d think last year’s energy crisis was enough political capital to do something about it. The market and the investment confidence is broken, and someone needs to step up and fix it.”
The lower gas production highlights the risk profile of the energy sector as it transitions to renewables, which can be less reliable if it doesn’t rain, blow or shine.
He said gas is an extractive industry and there needs to be more upstream activity such as drilling more wells. “We need to find ways of restoring confidence – with things like royalty holidays, tax incentives and underwriting investment - and not flip-flop on policy.
“I think people have lost sight of the importance of energy to the national economy, and the uncertainty and risk that comes with supply and demand.”
Anne Gaze, founder and chief executive of Campus Link Foundation, said over the past 12 months, “our operational costs have escalated by 18.4%, driven largely by rising expenses across electricity, petrol, and other essential inputs. Challenging under current market conditions, and we actively explore efficiency measures on a monthly basis.
“We are expecting further increases, with wholesale prices having already lifted circa 40% since 2019, and market trends indicate continued upward pressure with limited new generation capacity,” she said. “A 10% rise in electricity costs most definitely has a material effect on operating expenditure and competitiveness.”
Matt Wilson, managing director of DB Breweries, said pending spikes in gas prices and a lack of a clear electrification plan - grid capacity and matching generation to demand - will have significant negative impacts.
Craig Bonner, who runs Cordis Hotels in New Zealand, said the gas supplier has provided notice of cessation of supply entirely in 18-24 months from now. This necessitates out-sourcing of one part of the business and significant capital outlay in another part to ensure continuity.
Sanford managing director David Mair said fuel is a huge cost and will likely go one way. “Who banned gas exploration? Gas is the transition fuel.”
A logistics boss said electricity costs are skyrocketing and a challenge to recover from customers. An agribusiness chief executive said volatility has made it difficult to plan – “We cannot live with prices that double year on year.”
Beca Group chief executive Amelia Linzey said, “High energy prices are having a significant impact on our clients, which ultimately flows on to the economy.”
Waste Management is proud that its power needs are covered by converting the organic waste deposited at its five landfills around the country into gas and electricity.
Evan Maehl, managing director of Waste Management NZ, said, “We can produce power for 25,000 homes off the back of waste going into the landfills. We actually produce more than enough to power ourselves.”
But Maehl is “deeply concerned” about the impact of rising energy prices and constrained supply on the national economy.
“More process-driven businesses will close because of the cost of energy and more people will lose their jobs. Households are spending too much on electricity to the detriment of other things. We have an energy crisis and we need every bit of energy we can get,” he said.
“If there’s a drought or low wind, we can end up with the power not going on. New Zealand needs more baseload electricity or energy insurance to back up the shortcomings of renewables (subject to wind, sun and rain).
“If we want a buoyant New Zealand economy, we need to lower energy prices. There doesn’t seem to have been a plan over the last 10 years. We need to free up distributed generation and flatten the demand peak and fix the distortions caused by the Emissions Trading Scheme,” Maehl said.