Power sector keen to avoid election-year focus

Karapiro Hydro plant. Photo / Supplied

Electricity retailers will be hoping recent low wholesale power prices persist into 2020 as the industry tries to avoid becoming a political football in election year.

Eighteen months of sustained high prices came to an abrupt end late December as flooding in the lower South Island slashed electricity demand from irrigators and pushed national hydro storage to its highest level in more than 10 years.

Gas supplies returned to more normal levels, and geothermal plants shut earlier in December for maintenance also returned to the market as demand started winding down for the summer break.

The steep drop in prices – down to an average $14.40 a megawatt-hour yesterday from almost $161/MWh two weeks earlier – is unlikely to last. But lower starting prices and relatively high storage in Mercury NZ's Waikato hydro scheme will be welcomed as the industry navigates a succession of planned gas field outages and transmission upgrades which will reduce fuel supplies from Taranaki and power supplies from the South Island during the next three months.

Lower power prices – if they can be sustained – may also take some of the public sting out of a complaint against Meridian Energy and Contact Energy that they extracted $60 million extra from customers during the past two months by holding prices higher than they needed to be given both firms were spilling water at the time.

Both firms deny any wrongdoing and the threshold for the Electricity Authority to declare an undesirable trading situation – a UTS - and reset prices is high.

Andrew Harvey-Green, senior analyst with Forsyth Barr, said the conduct of Contact and Meridian may be fine in a technical sense, but that may not count for much in the eyes of the public.

"It's a perception issue as much as anything else," he told BusinessDesk.

"Explaining why prices are so high when there is so much water around is going to be incredibly difficult."

The electricity industry emerged from the government's electricity price review – pledged in the lead up to the 2017 election – relatively unscathed.

But it's an easy bandwagon for politicians to dust off every three years and the industry is aware of that risk.

In November, Mercury chief executive Fraser Whineray warned the sector faced greater regulatory and political intervention if the high wholesale power costs already affecting businesses and industry started flowing into household bills.

2020 was always going to be challenging. While construction has begun on two wind farms – the first major wind developments in six years - a decision is expected from Rio Tinto in the first quarter on the future of the Tiwai Point aluminium smelter – the country's biggest electricity consumer.

The Electricity Authority is also due to announce its final decision on changes to transmission pricing in the second quarter.

Fraser Whineray, chief executive of Mercury Energy. Photo / NZME

With almost 1,000 jobs at stake at the smelter, which also produces some of the world's lowest-emission aluminium, Harvey-Green expects the carbon-conscious government will involve itself in that debate.

But to date it has been happy to let the transmission pricing discussions run their course, even with the prospect of higher costs for upper North Island consumers. Nor does it have a role in the Electricity Authority's investigation of the UTS claim.

John Kidd, head of energy research house Enerlytica, said that abundant hydro supplies have arrived at the wrong time - about four months earlier than needed for winter demand. High electricity futures prices for 2020 and beyond show that participants are still worried about reliability of supply, he said.

Industrial and commercial users coming off contracts have faced much higher energy costs in recent years and those higher power prices will continue until supplies of local gas and coal improve.

"It's an inevitability that gets passed through to households," Kidd told BusinessDesk.

Power prices soared in 2018 as a combination of planned and unplanned gas field outages cut fuel supplies for generators when hydro storage was also low. Two smaller electricity retailers shut as a result.

Starting next week, work planned by national grid operator Transpower on the high-voltage inter-island link will cap power flows from the big South Island dams until mid-April. Production from Pohokura, the country's biggest gas field, will also be reduced at times during January, February and March and entirely for two weeks from March 11.

The smelter at Tiwai Point. Photo / File

On the plus-side, First Gas recently completed work intended to increase the rate that gas can be drawn from, or injected into, its Ahuroa storage facility near Stratford.

Transpower has been working closely with generators and gas field operators to minimise supply risks during the work which it has been planning for two years.

Kidd said the "political direction of travel" during the past couple of years has left the country with domestic fuel constraints.

The combination of low hydro storage and insufficient Waikato coal and Taranaki gas saw New Zealand Steel and Genesis Energy import a million tonnes of coal in the past year – and the emissions that came with it, he noted.

OMV, the country's biggest gas producer, is spending more than $500 million on a programme to eke additional gas from the ageing offshore Maui field and to maintain production from the Pohokura field, which is also now in decline.

Kidd said New Zealand has a portfolio of mature fuel-producing assets and OMV's work will be "very important" to shore-up security of gas supply and ensure that daily deliverability can be relied on.

But that will take time. In October, Methanex, the country's biggest gas user, said it expects constrained supplies will leave its plants in Taranaki operating at about 80 percent capacity in 2020.

Kidd noted that the biggest supply disruptions last year came from two gas field shutdowns that hadn't been planned.

"The big risk is going to be an unforeseen outage."