What rising energy prices could mean for businesses in New Zealand
With higher energy prices, it’s harder for heavy industry to operate in New Zealand, Pattrick Smellie of Business office examines how the market might adapt.
What does Norwegian pulp and paper giant Norske Skog’s say about the accelerating deindustrialization of New Zealand’s economy? probable closure of its operations in Kawerau barely in the news?
Granted, the announcement was obscured by the budget last Thursday. And contrary to the announcement of the Auckland ports that its Managing Director Tony Gibson was leaving, Norske Skog did not issue a press release. He doesn’t even have a spokesperson in New Zealand.
Rather, it has been left to the relevant union to tell the world that 160 jobs that underpin the economy of the town of Kawerau are now on the line.
A consultation process has started and once a business is at this point it is rare to see a change of mind.
Part of the problem, of course, is that its main product since production began in 1955 has been newsprint for newspaper and magazine publishers. The precipitous decline in the size and circulation of newspapers around the world is hardly relevant.
Maybe the end of this line has been inevitable for some time. But there are other things that a large pulp and paper mill can be retrofitted to manufacture. The fact that Norske Skog appears to be abandoning New Zealand, despite the country’s immediate wood fiber supply, suggests deeper issues.
The most obvious liability is the wholesale price of electricity.
High electricity prices are back
After an extended period in the middle of the last decade where wholesale prices were low and stable, electricity prices in the spot market have not only been very high, but also more volatile over the past two years.
The first months of this year were particularly difficult for some large electricity users.
Norske Skog could have avoided at least some of that pain by signing new fixed-price supply contracts. However, the company has apparently chosen not to and has cut production and day shifts since the start of this year to avoid the highest electricity prices.
A generous person would say that Norske Skog misjudged whether the Tiwai Point aluminum smelter was going to close and bet last year on lower spot electricity prices once the smelter was confirmed to close.
Instead, the majority owner of the foundry, Rio Tinto, signed an agreement with Meridian Energy that will keep the foundry in operation for another three years.
Power company executives, who say they are “begging” major electricity users to sign $ 90-per-megawatt-hour electricity contracts before Christmas last year, are now drafting contracts at $ 175 per megawatt hour. MWh.
Jarden analyst Grant Swanepoel told BusinessDesk last week that unless a heavy user is willing to take on a contract of three years or more, he could expect to pay $ 155 to $ 165. per MWh for the foreseeable future on long-term contracts.
For those who use the spot market, prices have steadily exceeded $ 300 per MWh in recent times.
A dollop of water flowing through the South Island’s largest watersheds since the start of May has allayed fears of a classic “dry winter” leading to power shortages.
However, natural gas shortages caused mainly by production problems at the country’s largest gas field, OMV-owned Pohokura, are expected to keep the electricity market tight and prices high well over the course of the year. next year.
Some scenarios suggest that winter 2022 could be more difficult to manage if drier-than-average conditions persist throughout the spring and summer to come, as a gas industry company working document published last Friday may see situations where natural gas shortages become critical as early as 2026.
If security of supply, prices and environmental impact are the three guiding lights of energy supply, then the first two appear fragile now and increasingly by the middle of the decade.
We do not care?
Yet hardly any of this makes the news the way it used to.
Perhaps that’s because Covid-19 has undermined public interest in an old-fashioned question. More likely, New Zealanders have grown used to the idea that dry winters are manageable.
More importantly, the government has chosen not to bite. That’s a big relief in executive suites from major generator retailers – Contact, Meridian, Mercury, Genesis, and Trustpower.
Although the wholesale electricity market has survived for just over 25 years, it has never been loved. Electricity producers-retailers remain more vigilant than ever against signs of regulatory intervention that could change their economic models.
Small electricity retailers, who cry foul whenever they are surprised by the volatility of spot prices, keep the problem alive.
At present, however, there does not appear to be any political desire to intervene. Energy Minister Megan Woods was quick to embrace the line of power generators that heavy electricity users suffering from high spot prices could have blocked had they chosen to do so.
She may not be a huge fan of the electricity market, but there may be very little desire to open a new political front as the government is already grappling with a huge, over-covered reform agenda. by the current challenge of containing Covid.
Flippant as it may be, ministers could even claim it as a victory for New Zealand to move closer to its targets for reducing climate change-related emissions when industries producing large greenhouse gas emissions close their doors.
Instead, there are two emerging factors that utility executives may be more concerned about for the structure of their industry in the future.
The first is the apparent inevitability of the pumped hydroelectric project from Onslow to Central Otago. The second is the likely need to reform wholesale electricity market arrangements anyway, to take account of the rising carbon price.
The Onslow program is widely criticized by industry experts. They say it’s likely to be so much more expensive than its approximate price of $ 4 billion that it will have to be scrapped. Or that it is unlikely to be consentable because it involves flooding a wetland. Or it may prove to be impossible to build because digging tunnels through 15 to 20 kilometers of fragmented rock will prove to be impossible.
The most confident industry leaders say that will never happen and will continue to build a new renewable wind, geothermal and solar power plant.
However, if the Onslow Project were to be built, it would be controlled by the government and give its operator the power to release stored water and lower electricity prices at any time. The market would no longer be a market.
With a completion date for Onslow no earlier than 2035, that obviously won’t happen overnight, but it does give ministers something to aim for.
Meanwhile, different factions of the sector argue that the rules of the wholesale electricity market must change anyway, based on predictions that carbon prices will rise and provide exclusively renewable producers like Meridian with an exceptional gain in higher electricity price terms.
This, rather than a sudden urge to change the electricity market in response to volatile spot prices or the closure of industrial sites, may be where the greatest danger lies for power producers who have spent a generation honing their sense of regulatory risk.
This article originally appeared on BusinessDesk. Their team publishes quality independent news, analysis and commentary on business, economics and politics every day. Find out more.
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