Hamish Rutherford: Alarming warnings for Energy Minister as electricity system credibility is in question

OPINION:

Among the many letters from the public complaining that New Zealand is burning too much coal, Megan Woods has received a few pieces of correspondence as Energy Minister this year which must have caused alarm in the Beehive.

On March 1, Gretta Stephens, chief executive of New Zealand Steel, wrote in explicitly existential terms about the impact of spikes in electricity prices to “unsustainable” levels.

“Ultimately, it’s a question of whether we want to make steel and other energy-intensive products in NZ,” Stephens wrote at a time that New Zealand’s only steel mill was paying $500 per megawatt hour for electricity, some ten times higher than the long term average.

As well as pointing to the fact that Glenbrook employed 1400 people directly and noting “a further 2500 people rely on us for their income”), Stephens reminded the Energy Minister why, when its existence came into question “we’ve landed back on the strategic importance” of making steel here.

When a truck crash in high wind caused damage to a strut on the Auckland Harbour Bridge, New Zealand was able to quickly make the parts required to repair it here.

A complicated fix took around three weeks. But, Stephens warned, using imported steel would have meant “a six-to-eight week delay”.

Electricity policy is an area in which doctorate level experts are prone to strange arguments about what amounts to good and bad policy and how to go about it.

But politicians know explaining such disruption is likely to be unbearable.

It was not the only interesting warning Woods received.

Oji Fibre Solutions – owner of the Kinleith pulp and paper mill – warned in April that it had only narrowly avoided a “catastrophe” in the food packaging supply chain, as a number of gas customers juggled supply to ensure it could continue to make the cardboard used by many of New Zealand’s exporters.

But the price it had been required to pay to secure the gas was so hefty that Oji’s chief executive, Dr Jon Ryder, and chairman, Azumi Kawabe, asked Woods to “take measures to alleviate this situation”.

Weeks later, Methanex (a Taranaki methanol producer which uses most of New Zealand gas) struck a deal to sell a substantial amount of its contracted gas supplies to Genesis Energy (the owner of the coal and gas fired Huntly Power Station).

If Woods did not actually broker the deal, she would have been forced to broker that type of deal if it had not happened.

Even those who believe the sector needs significant reform appear to accept the a shortage of gas and hydro storage have the sector under strain.

Prices have also receded from the days that NZ Steel and Oji were putting pen to paper. But they are still at a level which is clearly causing pain.

Pulp and paper mills are closing. Supermarket groups are warning of a huge jump in energy costs. Independent retailers are publicly stating they are not taking on new customers.

Forward wholesale electricity prices suggest prices will remain at levels which the Climate Change Commission knows are uneconomic, especially in the context of climate goals that are at the mercy of a massive electrification programme of industry.

Fonterra warned months ago it needed enough gas in the North Island to wean itself off coal in the South. Current conditions must put its plans in doubt.

Calls for major reform of the electricity market – generally to split the sector into retail orgeneration, but not both – are far from new.

Meridian claimed this week that small independent retailers were attempting to discredit its integrated business model and that two of the noisiest companies – Flick and Electric Kiwi – had deep pockets which could allow them to generate electricity if they wanted to.

The small retailers certainly are attempting to discredit the integrated or “gentailer” model, but the electricity market is meant to encourage retail only players.

The Government has a strong incentive to maintain the status quo in the electricity sector: the hundreds of millions of dollars of annual dividends from the three companies it majority owns.

But anyone who thinks that the current strain might not lead to a knee jerk from the Beehive is placing considerable faith in a policy process which resembles a game of whac-a-mole.

A chorus of people complaining they could not cycle over the Auckland Harbour Bridge led to the Government saying with a straight face that it plans to build a cycle and pedestrian-only bridge across the Waitematā Harbour.

The hastily developed housing package shows the Government will act when the political noise gets loud enough.

Woods has already appeared to hint variously that a structural split of the sector could be possible in the future, as was changing who monitors behaviour in the wholesale market.

In the middle of this is the Electricity Authority which does itself few favours if it is trying to overcome accusations that it is biased towards the incumbency.

While industry was begging Woods to intervene, it was publishing statements defending a wholesale market it designed and monitors and hinting the problem was to some extent risky market behaviour, betting that when Rio Tinto said it was closing the Tiwai Point aluminium smelter it wasn’t lying.

Last week the EA claimed it had announced a “robust” examination of the wholesale market in March. Apparently this was delivered verbally by the CEO at a conference, with no sign of a press release alerting anyone to its rigorous efforts.

The credibility of the electricity market increasingly looks like it rests on what the authority comes up with, or the industry could face a shake up.

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