Winstone Pulp International closed its two central North Island mills due to high power prices.
The Electricity Authority (EA) said market options were available to big power users during the winter price spike that some blamed for their closure.
The closures prompted the EA – the regulator – to investigate the options available to big power users, and it found hedges available tended to be lower than the overlapping average ASX price at the time.
Over July and into the first week of August, fuel scarcity in the electricity system – limited natural gas supply and low hydro storage – pushed wholesale electricity prices from about $300/megawatt hour (MWh) to over $800/MWh.
This exposed unhedged energy users, including several pulp and paper businesses, to very high wholesale electricity prices, the EA said.
Some businesses see benefits in holding in short-dated hedges while others opt for longer hedges, it said, and some may have both.
If a participant holds a hedge and reduces consumption, they can sell that hedge on without being exposed to the spot price.
Market participants also make decisions on their level of exposure to spot prices, and for managing that exposure on an ongoing basis, it said.
“There are advantages to being under-hedged, including being able to take advantage of very low prices. However, there are also downsides when spot prices are high,” the EA said.
On September 10, Winstone Pulp International (Winstone) announced it would permanently close its pulp mill at Karioi and its sawmill at Tangiwai.
On September 18, Oji Fibre Solutions (Oji) said it was also closing its Penrose paper recycling mill.
The EA investigated the market options available to these businesses.
It said several North Island wood processors were exposed to the high August wholesale electricity prices, with some curtailing production.
The authority used its statutory information-gathering powers to issue data requests to electricity generators asking for details of their hedge offers to Pan Pac Forest Productions (Pan Pac), Oji and Winstone, for any hedge where at least one date is included in the timespan between July 1 to September 30.
“Through this inquiry, we found that these three industrials were offered a similar quantity of hedges,” the EA said.
“These hedges had similar characteristics given their size and length.
“The prices of these hedges were often near the overlapping ASX price.”
Pan Pac has a plant in Hawke’s Bay.
Oji has three mills – one in Penrose and the others in Kawerau and Tokoroa.
Winstone had two plants near Ohakune.
The EA said all were exposed to high spot prices in August to varying degrees.
During the period of high prices in August, some of these industrials reduced their electricity consumption.
Then changes in electricity demand, wind generation, gas availability and hydro storage led to the decline in wholesale electricity prices in mid-August 2024, and the daily average national spot price sunk to as low as $1.1/MWh on September 1.
The authority is reviewing its stress-testing regime, which is aimed a helping users identify risks in their power arrangements.
“All participants exposed to the spot market made risk-management decisions regarding their exposure to the spot electricity price over winter 2024,” the EA said.
The authority’s review of the stress-test regime will consider potential enhancements such as extending the stress-test horizon to further than the coming quarter in order to give participant boards an indication of longer-term risk positions, and requiring specific information on hedge cover.
The Electricity Retailers’ Association of New Zealand (ERANZ) said electricity consumers can use the hedge market to manage their exposure to high wholesale prices.
“All electricity market participants in New Zealand know that our wholesale electricity market is volatile due to our dependence on intermittent renewables, and hedging is a risk management tool available to them. Hedging while wholesale prices are low will naturally deliver a lower-priced hedge.
“Being under-hedged can allow users to benefit from lower prices. However, it also carries risks when wholesale electricity prices rise as they did this past winter due to low hydro lakes and a shortage of gas,” it said.
ERANZ chief executive Bridget Abernethy said EA’s stress testing regime highlighted the risk to large commercial and industrial customers seeking hedges during periods of wholesale market volatility.
Abernethy, quoting data from the UK’s Department for Energy Security and Net Zero data, said New Zealand’s industrial wholesale electricity prices rank fourth lowest of 28 countries.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.