Our national grid struggles to deliver enough power where and when it’s most needed by households and industry – in cold snaps. Richard Woodd looks at why we don’t have electricity to burn.
New Zealand’s energy sector has entered another tense winter. Householders and business owners reliant on consistent power supply have become accustomed to uncertainty: the past four winters have brought supply crises and price spikes when power is most needed – during cold snaps – with low hydro lake storage levels heading into winter the only constant. This year, the same conditions apply.
Last year, the inconvenience and health risks of the big chill were overshadowed by economics: Winston Pulp International blamed power prices for the closure of two central North Island mills, with 230 jobs lost in already struggling small towns. Some other major electricity users temporarily closed to avoid massive spot price increases in July and August.
At the end of June, another 230 jobs will go when paper production ceases at the Japanese-owned Kinleith Mill in Tokoroa, with Oji Fibre Solutions largely blaming skyrocketing power costs.
And for businesses and householders, power prices keep rising – despite the unreliability. Last November, Consumer NZ estimated electricity bills were placing financial strain on 20% of households. From this month, household bills are set to rise by an average $10-$25 a month, depending on where you live, after transmission network operator Transpower was allowed to raise charges to cover increased costs and improvements to the national grid.
Added to that, the gradual phase-out of low user tariffs (due to end by 2027) is hitting low-income and single-person households and older age-groups hardest, an April report by the Ministry of Business, Innovation and Employment found. And higher energy costs for producers and manufacturers flow on to the cost of food and other consumer goods.
In March, Transpower warned our hydro catchments had had the driest start to the year in 93 years, though by the end of April storage had improved to 83% of the historic mean. Higher gas prices linked to declining gas fields are adding to the pressure, though Resources Minister Shane Jones is adamant there’s enough gas and coal this year to keep the lights on.
Last July and August, as the dry spell extended well into winter, spot prices soared above $800 per megawatt hour, compared with an average of around $180/MWh between 2018 and 2023, before slumping after the rains came. Such spikes impose enormous costs on big electricity users.
Our electricity market, long acknowledged as deeply flawed, effectively incentivises generators to withhold supply so spot prices spike. The Electricity Authority recently introduced changes to address such “scarcity pricing”.
About 60% of our electricity comes from hydro generation, 18% from geothermal, 9% gas, 7% wind and just over 2% coal. With climate change affecting lake levels and gas supply dwindling, we’ve been slow to bring new renewable capacity on stream as demand has grown. Just as our electricity market distorts pricing, it fails to incentivise generators to invest in additional capacity – particularly if it might be needed only at times of peak demand.
Further large-scale hydro schemes have long been ruled out on environmental grounds, particularly as most suitable remaining river catchments that could be dammed are in national parks. And with the government favouring renewed gas exploration and coal to meet shortfalls in the short term, New Zealand is not on course to meet its 2022 emissions reduction targets of 90% renewable energy generation by this year and 100% by 2035.
Since 1999, generating capacity has increased by a net 16%, a report last October by Concept Consulting found; population alone rose 38% in that time. A 2024 Electricity Authority report says demand from 2019-50 is likely to grow by 68%, driven largely by the transition to electric vehicles to help meet emissions reduction targets. In 2022, Boston Consulting Group estimated New Zealand needed to boost generating capacity from 8.6 gigawatts to 22.7 gigawatts by 2050 to meet these targets, with billions required in new investment by 2040. A January briefing paper from Electricity Networks Aotearoa, which represents retail lines companies, to incoming Energy Minister, the aptly named Simon Watts, sums up the situation: “There is a lack of new plant being built that can reliably generate to meet peak demand when the wind is not blowing, the sun is not shining and the rain has not fallen.”
Vast profits
Despite last year’s shortages, three of our “big four” generator-retailers, Contact, Mercury and Meridian, continued to enjoy huge profits in 2024; only Genesis experienced a decline. This prompted Paul Fuge, manager of the Consumer NZ-owned Powerswitch service, to observe: “Simply put, we have not built enough power stations. Our parents and grandparents built most of them before an electricity market even existed.
“The price of electricity is now determined by the market, not what it actually costs to make, and it’s been that way since 2019.
“What I see is huge amounts of money sloshing around in the system, people saying it’s not right and has to change, but nothing does. Vested interests manage okay, but the consumers paying the bills are the ones who suffer, particularly those on fixed incomes.”
Contact says its $1.9 billion purchase of 26 small hydro schemes owned by Manawa Energy (formerly Trustpower) will help it to better manage “dry year” hydro risk and ease price spikes. The announcement of the “merger” last November triggered complaints that market consolidation would reduce competition and hurt consumers. However, on May 7, the Commerce Commission cleared the deal, saying its concerns about the merged companies’ ability to influence wholesale power prices and electricity supplies to other power retailers had been eased.
Lack of storage
Lack of hydro storage is a fundamental deficiency in our generating capacity, says hydro expert Stephen Batstone, director of energy sector training consultancy Whiteboard Energy. The hydro-electric dams in the South Island and on the Waikato River are no longer enough to keep the country functioning through a dry winter. “Our dams contain only six to 12 weeks of unpredictable water storage,” says Batstone. “Last winter, we came close to blackouts because renewables of solar and wind power struggled to generate enough due to long periods of windless days with no sunshine.”
In comparison, Norway’s hydro schemes have 12 months’ supply stored and Brazil has seven years, he says. “Hydro storage has been trending downwards since February 2022. In fact, cynics say we’re seeing a 100-year dry about every three years.
“If and when we get power from big offshore wind farms, the near constant wind at sea could well take over some of the hydro baseload and help retain water storage until it’s really needed.”
But that’s a big if – most of the potential offshore windfarming investors in Taranaki have gone cold after the government threw a lifeline to a company planning to mine the seabed in the area best suited to offshore windfarming. The Trans-Tasman Resources sandmining proposal – rejected three times by the courts – is now on the government’s list for fast-track resource consent approval (see “Blowing in the wind”, page 32).
Megan Woods, energy minister in the previous government, was a fan of offshore turbines. Another casualty of the change of government was Labour’s proposed $16b Lake Onslow pumped hydro storage scheme, designed to provide a buffer during shortages. “This winter will again see high energy prices because we do not have adequate storage and we store energy in coal and gas, which are the most expensive options,” says Woods.
The coalition has yet to deliver its own energy strategy, which was promised by the end of last year.
Understandably, the commercial sector is nervous about another winter of shortages. Tina Schirr, executive director of BusinessNZ Energy Council, says businesses are asking what they can expect in terms of gas supply in the next few years. Last year, Resources Minister Shane Jones reversed the oil and gas exploration ban introduced by Jacinda Ardern’s Labour-led administration in 2018 when he was regional development minister. But any new gas finds would take years to come on stream.
The government also made moves last year to remove hurdles to imports of liquified natural gas as a stop gap, but that would require the construction of an LNG terminal. Schirr says there’s little understanding of how LNG imports might help small to medium businesses and no clear path.
Ministers seem to be relying heavily on rebuilding investor confidence in the gas market, she says. “There is a lot of work under way, but there’s very little communication between the government and the broader public on ‘here’s our plan on managing this’.” She was speaking before the Budget announcement of a planned government “co-investment” subsidy of up to 15% to attract new gas investment.
Coal imports
The consequence of last year’s hydro generating shortfall was a 67% increase in fossil fuel burning: gas and coal, with more than 1 million tonnes of coal imported. In its risk modelling this year, Transpower hopes the market will cut back to protect existing coal and gas stockpiles for thermal generation. “If this does not occur, there will be an increased risk of the need to access contingent [emergency] hydro storage and very high prices this winter,” says Transpower’s operations head Chantelle Bramley. That would mean allowing hydro generators to go below consented minimum lake levels in emergencies.
“There are no easy answers,” says Bramley. “Making it easier to use contingent hydro storage to reduce gas and coal burn may feel like a no-brainer, but it’s our fuel of last resort. If we use our contingent hydro storage early and it doesn’t rain, we can run out of hydro energy later in winter.”
Jones, meanwhile, has parked investment in liquified natural gas in favour of geothermal development. The government is funding a $60 million investigation to drill three deep geothermal wells in the Taupō volcanic zone. Greymouth Petroleum has offered to drill for “supercritical” fluids – extremely hot, high-pressure resources capable of generating up to three times more power than standard geothermal methods.
There’s very little communication between the government and broader public on ‘here’s our plan for managing this’.
The Budget pledge of $200m over four years for the crown to take stakes of 10-15% in new gasfield developments that promise to reduce domestic risk – though yet to be put to cabinet – is a clear attempt to attract new exploration. “We have demonstrated potential for significant gas development and while investors are interested, we need to show their commitment will not be a wasted exercise,” says Jones. “We are looking to take a stake in the development of the next Pohokura, Kupe, Mangahewa or Tūrangi to accelerate the investment needed to support our energy system.”
But prospects for onshore gas finds are unlikely and energy analyst John Kidd and petroleum geologist Joanna Godwin question whether the incentive will be enough to stimulate costly offshore exploration, which has a high failure rate and can take many years to result in commercial production.
Gas reliance
Just how dependent the nation is on what comes out of Taranaki was on full display in 2011 when a land slip cracked the Maui gas pipeline, halting supply northwards for five days. Consultants Worley Parsons estimated the cost of the shutdown and repair at $650m, while millions of litres of milk were dumped on farms in Northland, Waikato and Bay of Plenty.
Fonterra, which relies on gas heating for milk powder processing (but still uses coal in most South Island plants) is switching to massive 30MW electric boilers in three North Island plants, costing $150m. Spokesman Jack Ballagh says North Island gas supply interruptions threaten milk production each season. Its nine North Island plants use 4.5 petajoules of gas each year, about the same amount of energy use as 150,000 households. “Long-term gas supply is a constant worry for us.”
The gas shortage is also a threat to the country’s broiler chicken industry, which is reliant on gas for consistent heating to keep newborn chicks alive and ventilation.
Two aluminium recycling companies ‒McKechnie Aluminium Solutions in New Plymouth and Glucina Alloys in West Auckland – are struggling with high gas costs and may have to cease turning scrap into reusable ingots.
The country’s biggest user of gas is the Motunui, Taranaki, methanol production plant owned by Vancouver-based Methanex, which exports 95% of production. “The scale of Methanex’s usage is staggering,” says Jeffrey Clarke, CEO of GasNZ, which represents major gas companies. “Methanex uses 14 times more gas than all our residential users combined. One year’s consumption would be enough to supply all households on the North Island residential network for 14 years.”
Last year, Methanex agreed to resell the gas it would normally buy to power generators to combat the supply shortage. It may have looked like it was taking a hit for the nation, but one analyst calculated it earned $200m from the sales after expenses, boosting its annual profit by $75m.
In early May, Contact Energy and Genesis Energy announced they would buy gas from Methanex for eight weeks to help cover winter demand, offsetting record low inflows to their hydro catchments and gas shortages. In 2017, Todd-owned Nova Energy gained consent for a 360MW gas-fired power station at Ōtorohanga, estimated to cost $350m, for use at times of peak demand. But it won’t build unless gas supply is guaranteed. “A minimum of at least 10 years contracted flexible gas supply is required to build a business case for investment,” says CEO Babu Bahirathan.
Plugging the gaps
While there’s little sign of fresh gas exploration on the horizon, investment in renewables is gathering pace. In May 2023, the country had 270MW of installed solar generation. Genesis Energy’s newly opened solar farm covering 93ha at Lauriston, near Ashburton, adds 63MW, enough to power 13,000 homes. Construction of Meridian Energy’s 130MW Ruakākā Solar Farm south of Whangārei, costing $227m, is due to begin in August. Meridian is also part of a joint venture with New Zealand Windfarms to repower the Te Rere Hau wind farm in Manawatū. Its other projects include the 90MW Mt Munro Wind Farm near Eketāhuna, and a joint venture with Nova Energy to build the 400MW Te Rahui Solar Farm near Taupō. All up, its investment through to 2030 is tagged at $3b.
Contact’s Te Huka Unit 3 geothermal power station, near Taupō, started supplying power to the national grid last October. At full capacity, it will supply about 60,000 homes, consultants MartinJenkins report. Contact’s $900m Tauhara geothermal power station also became fully operational late last year and is capable of powering 200,000 homes. Its 168MW Kōwhai Park solar farm covering 230ha near Christchurch Airport, is due to open late next year, generating “equivalent to the annual electricity demand of around 36,000 homes”.
It’s estimated the country needs to add 500MW of new generation every year until 2040.
Mercury is building a $287m wind farm near Dargaville, part of a $1b investment in renewables over two years including the Ngā Tamariki geothermal power station near Taupō and expansion of its Kaiwera Downs Windfarm in Southland.
Then there are battery storage plants connected to the national grid, such as the $186m one just opened at Ruakākā, which store energy when electricity is cheap and release it at times of peak demand, helping to even out regional supplies.
Other alternatives are emerging. The first biofuel plant using Auckland food waste as feedstock to produce methane gas has been opened at Reporoa by Clarus and Ecogas, and Powerco is working on another at Feilding. Eventually, such plants will spring up next to many urban areas, subject to available feedstock and transport.
Development work on green hydrogen – billed as the super fuel of the future – is proving slow and very costly.
But if we are to cope with climate change, the transition to renewables and rising demand from population growth and industry needs, a lot more is required. Boston Consulting Group’s 2022 report, “The Future is Electric”, estimated the country needed to add about 500MW of new generation every year until 2040 to decarbonise the economy. This would require “investment of $42b in the 2020s, including increased spend across generation, transmission and distribution”. Ultimately, this level of investment would lead to lower electricity bills. But at the time, the level of investment planned by the country’s gentailers was $22b.
A power security blanket may be on the way, but for now, another winter of discontent looms.