Major energy users say the electricity system needs more security of supply. Photo / NZME
As the long-awaited Government response to a Frontier Economics report on the state of the electricity sector nears, major power users are making a case for more certainty in the system.
Prime Minister Christopher Luxon announced the review last year after dry weather and constrained gas supply put the system under severe stress, driving wholesale power prices to an eye-watering $820 per megawatt hour.
Frontier Economics - a global consultancy - was appointed to lead a review of the system, with New Zealand-based Concept Consulting acting as an adviser.
The report has been under wraps, even though it has been with the Government for some time. The Government’s response to it is expected this week.
Last August’s price spike came at a big cost.
Among those who felt the brunt of escalating costs were industrial companies, who have experienced a 34% increase in prices over the past two years, the Major Energy Users’ Group (MEUG) says.
MEUG, which has among its membership Fonterra and NZ Steel, said the 150% jump in wholesale electricity prices over the past eight years had harmed the country.
“As consumers, we are constantly told that we should trust the market to work it out. The problem with this is the market created the situation we are in,” MEUG chair John Harbord said.
He says the big generators only build new power projects when prices are high, and when demand for increased generation already exists.
This results in a market that is always on the edge of a shortage and perpetual scarcity pricing, he told the Herald.
“It’s not a question of whether the market is ‘broken’ or not, it’s a question of whether the market is delivering the outcomes we need, and it is not,“ Harbord said.
“We do need something around firming.”
In energy, “firming” ensures constant supply of power to the grid, regardless of conditions at the time.
“In the big picture, the system is becoming more reliant on intermittent renewable generation - solar and wind - and we need something to effectively pick up the slack for when the weather is not co-operating,” Harbord said.
“The theory is that as you build more solar and wind, you displace a bit of hydro, and the more water can be left in the lakes to be used for some of that firming.
“What we would like to see more of is lakes being used as that sort of ‘battery’ storage by providing some of the firming going forward - effectively keeping more water in the lakes rather than running them down.
“But we do need the backstop of thermal firming and the issue there is outside of Genesis - no one wants to do it.
“So the system fundamentally needs it, but almost no one wants to do it.”
The market has already gone a long way towards backing up Genesis Energy, which runs the coal and gas-fired Huntly Power Station, which backs up the grid.
Genesis and the three other big power generators have signed agreements to establish a strategic coal reserve centred on Huntly.
MEUG has welcomed the arrangement, but wants to see still more security built in.
“That’s something that we would expect the Government to do - to either make it easier for Genesis to expand the firming that it currently has - or to do something else to ensure we have firming going forward,” Harbord said.
Genesis has been building its coal stockpile at Huntly and the company last week struck a two-year deal with BT Mining to supply 240,000 tonnes to the power station.
“We have the stockpile, but the reality is that the stockpile we have now is the same as it was this time last year, so to speak,” Harbord said.
Next year there will be less firming if, as expected, Contact Energy’s ageing gas-fired Taranaki Combined Cycle is retired at the end of this year.
While MEUG was supportive of the deal between the big four, Harbord says the entire electricity system is “fundamentally reliant” on Huntly, which plays a key role when the hydro lakes are low or when the wind stops blowing.
“From a resilience or security perspective, I think that’s not enough,” he said.
“We should have a second firming and peaking plant somewhere.
“We can’t have a system where all our eggs are in one basket because if something bad happens at Huntly, then the entire system potentially falls over,” he said.
“That’s a vulnerability that we should not have, because the market is very good at pricing and risk.
There were many “risk points” that needed to be reduced in order to bring prices down, he said.
“The long-term price they need in order to generate a good profit is around the $90 to $100 a megawatt hour point mark.
“And over the last seven, eight years, the price has consistently averaged $150, $160 a megawatt hour, and for prolonged periods, it’s been well above that.
“And even in periods this year when we’ve had ample rainfall and the rest of it, it hasn’t dropped it down to that point.
“So even when we’ve had an abundance of energy, the price is still not actually as low as people tell us it should be.”
Harbord says it comes back to scarcity pricing.
“We’ve got to figure out why is our price higher than it should be?
“The market has perpetual scarcity pricing and a lot of that is around building generation and utilising it.”
Last week, the Herald reported that nearly half of New Zealanders feel more concerned about their power bill than this time last year and believe breaking up the electricity gentailers could improve competition, according to a poll.
Associate Minister Shane Jones has continued his criticisms of the big generator-retailers (gentailers), and has made a case for re-nationalising them.
As it stands, Genesis, Mercury and Meridian are all just over half owned by the Government after being partially privatised in 2013 and 2014.
Contact Energy is the only independent gentailer.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.