Power price spike causes trouble for Pan Pac mill, Electricity Authority weighs in

Pan Pac's Hawke's Bay mill, north of Napier. Photo / NZME

The Major Energy Users Group (MEUG) says after Pan Pac Forest Products stopped its pulp production near Napier due to high power prices, more major employers are likely to suffer until prices come down.

“The energy crisis has become so dire, it’s become cheaper for some manufacturers to cease production, rather than produce at a loss,” Pan Pac said.

“An example is Pan Pac Forest Products in Whirinaki, Hawke’s Bay. The massive hike in electricity prices since Saturday has made it unviable for the company to produce its export pulp product.”

Pan Pac said its Lumber and Forest operations were still open.

But pulp production would have to stay on hold until electricity prices fell, said managing director Tony Clifford.

He said the cost of electricity now far outweighed any profit the company could recoup, so it was actually cheaper to halt production.

MEUG chairman John Harbord said it looked likely that more plants would close their doors in response to high wholesale prices, which this week hit $860 per megawatt-hour (MWh) from $194.49 MWh at the start of June.

“What you are going to see is the flow-on impact,” he said.

“Pan Pac, for instance, by themselves, comprise 30% of the business going through the Napier Port, and they supply wood chip to a whole lot of businesses up and down the East Coast of the North Island, and these businesses don’t have more than a month’s supply of wood chips.

“The provincial communities, where a lot of these big businesses are based, are facing the prospect of bleak times ahead,” he said.

On Wednesday, Oji Fibre Solutions said its Penrose paper recycling plant, which employs 75 people, may have to close due to high energy costs.

The news followed Winstone Pulp International’s decision to pause work for 14 days at its two central North Island operational sites because of high power prices.

Harbord told the Herald the energy shortage highlighted two issues facing the system – the supply of electricity into the market and the composition of that electricity.

“Over the last six years, in particular, we have been highly focused on getting as close to 100% renewable electricity as we can, and we have been heavily promoting wind and solar.

“They [wind and solar] have been great and they absolutely should be part of the mix, but they are highly intermittent.

“The best wind farms are generating electricity 40% of the time, so who is providing the electricity the other 60% of the time?”

Energy analysts say the system lacks “firming” – reliable and constant energy to back up supply during abnormal weather conditions.

As it stands, much of that firming is left to Genesis Energy’s gas and coal-fired Huntly plant and Contact’s gas-powered Taranaki assets.

“The only reliable sources of firming, in the volumes that we need, are coal and gas, and they are problematic,” Harbord said.

“It’s just that we have got the mix completely wrong,” he said.

He said about $600 million to $1 billion needed to be spent on new thermal firming facilities to back up wind and solar power generation.

The Electricity Authority, the body responsible for the governance and regulation of New Zealand’s electricity industry, says it is taking the current power shortage “extremely seriously”.

The Electricity Authority said it would use its powers to seek additional information about the current pricing and would make that public.

Wholesale power prices - which are volatile even in the best of times - have been very high due to low lake levels and constrained gas supply.

The electricity market, which prices power every 30 minutes, can be extremely volatile.

How much big businesses pay can depend on the kind of contract they have.

Some opt to take up long-term supply contracts while others leave themselves open to the spot market.

Most residential customers are on fixed-price contracts which offer insulation against the extreme volatility of the energy markets.

Big customers can also hedge against future prices through the ASX futures market.

New Zealand's gas reserves are running down quickly.

“The transition to electrification is accelerating as a result of the gas situation and this is putting immediate pressure on our wholesale market,” the Electricity Authority said in a statement.

“While we recognise the market appears to be doing what it is designed to do (high prices reflect low supply), we’re concerned about the outcomes for consumers over the next couple of years of the transition to electrification, as new generation comes online as well as innovations start to alleviate the pressures we are seeing now,” it said.

“We are also concerned that participants are not accelerating their own responses (investment, hedging behaviour, innovation) to match the quickening pace of the transition and as consumers need.

“We are taking the current wholesale market situation extremely seriously and will be using our powers to seek additional information about the current pricing and will be making that public.”

The authority said there are incentives for new investment and innovation and both are vital for getting New Zealand through the transition and lowering prices in the short and long term.

In comments supplied to the Herald earlier this week, Electricity Authority chief executive Sarah Gilles said uncertainty of gas supply had been affecting the market since the unexpected Pohokura gas field outage in 2018. This was one reason why wholesale electricity prices have not returned to those pre-2018 levels.

“Right now, some participants – especially retailers and large electricity users – were feeling the pressure of those prices more than others, particularly those exposed to the wholesale electricity price, who may not have the right insurance in place to ride the volatility wave unscathed,” Gillies said.

Last month, Vector chief executive Simon Mackenzie said it was time the regulatory framework was upgraded, following on from the 1998 electricity reforms.

Mackenzie noted that liquefied natural gas imports were being considered, but he said a conversation with Methanex, the country’s biggest gas user, should be looked at.

New Zealand’s gas reserves are rapidly depleting, but Mackenzie said more gas could be extracted from existing fields with additional investment.

“There is more gas in those fields – it’s just the economics of getting it out.”

Mackenzie has long made a case for an overarching energy policy for the country.

“It just keeps coming back to the same thing that there is no one party that has stewardship of the overall system – to look at these things on a long-term basis,” he said.

“It’s all disjointed and we are entering into a period of transition to more demand for electricity, with much more volatile weather conditions.”

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.