New Zealand Aluminium Smelters has struck a new deal with Meridian Energy which means the smelter will remain open until at least Decemeber 2024. We don’t yet know the prices that Rio Tinto has agreed with Meridian, but Forsyth Barr estimates that Rio will be paying a contract price of 3.5c/kWh. Compare that with large energy users across the country, who are paying over 11c/kWh.

Last week, the news pushed already elevated ASX energy futures higher. Customers leaving contracts on or around a raw energy price of 8.5c/kWh struck 3 years ago are now facing, on average, raw contract pricing of 13-14c/kWh — an increase of 65% or more.

Is pricing sustainable for large users?

In July 2020, when the market was expecting a full exit from Tiwai by the end of 2021, pricing fell significantly. South Island consumers were especially fortunate — Total Utilities helped customers negotiate raw energy pricing around 6c/kWh. North Island pricing also fell from around 12c/kWh to 9c/kWh.

New Zealand’s large commercial businesses are paying a premium for the smelters continued electricity supply in the current electricity market. And it’s not just electricity pricing that has increased, but gas too, with prices moving from around $5.50/GJ to over $9/GJ in the last three years.

Transmission pricing hasn’t changed. Yet. But it is almost certain that Tiwai will see transmission costs reduce, while the rest of the country is left to pick up the upgrade bill when Manapouri gets connected to the Clutha Upper Waitaki network.

Additional energy and gas costs cannot just be absorbed by consumers, particularly in the primary and food production/storage sectors where energy-intensive operations exist. The cost of living will continue to inflate, while income increases will struggle to keep up.

Looking forward

The government-commissioned review conducted by the Interim Climate Committee in 2019, recommended New Zealand transition its energy sector to 100% renewables while keeping pricing affordable. To quote: “To achieve these emissions reductions it is vital that electricity is affordable in order to encourage switching.” 

Overcapacity of generation must be built between now and 2030, while an increase in gas-fired peaking plants is needed to ensure a secure supply. 

In the current market, there is no incentive for an oversupply of energy production. Instead, due to basic supply and demand principles, constrained generation allows producers to make tremendous profits. 

In large part, the Government has ignored the 2019 report and instead focused on the proposed pumped hydro scheme at Lake Onslow. This multi-billion-dollar project won’t be commissioned in the short-term and is located well away from high energy demand areas. The government would gain faster traction if they subsidised microgeneration and battery storage.

Gas production is still a major and immediate concern, with New Zealand’s largest gas more or less 35% down on expected volumes. Remedial work and new drilling projects are unlikely to start until early 2022, so it’ll be some time before gas supplies return to “normal” levels. 

Generators have various projects to increase renewables-based generation. These will not likely come into service until after 2024, though. A lack of clear market strategy means timing and development have been poorly managed. The “just” transition to renewables is underway, but who exactly is it “just” for?

A window into the future

On 31st January, 2021 He Pou a Rangi/Climate Change Commission released a 2021 draft advice for consultation report. This report delivers more focused advice that the government would be wise to follow to stand a chance of reaching our country’s zero emissions target.

The energy prices that businesses are paying now is a result of uncertainty and not having enough renewables-based generation to meet dry year demand when gas supplies are constrained. This is not sustainable.

From page 81 of the report: “Future electricity prices are uncertain due to a range of factors, such as the weather, gas availability, future infrastructure requirements and pricing structures.”

The report clearly shows that we need more energy generation, that we should accelerate and incentivise the move to electric vehicles, that we need to make the transition affordable and attractive to businesses and families, and that natural gas plays a role in helping us get there. And it asks if we should do what we can to retain and retrain the incredible talent that exists in the natural gas sector instead of losing them to offshore contracts.

Building more wind and solar generators is money and time well spent, as this will increase energy supply, and translate to lower energy prices. That’s why new renewables-based generation needs to be built and fast, otherwise energy pricing will only remain high and increase further as we decarbonise the economy.

As page 112 of the report so clearly puts it, “For consumers and industry to invest and convert to electrification, they need to have confidence that electricity will be available, affordable and reliable.”

What can you do?

The harsh reality is that the cost of energy is going up. Without significant new generation being commissioned and the ongoing gas supply issues, costs are unlikely to fall again in the next four years. 

That’s why we recommend you review your pricing and go to market early, as prices are front end loaded. You could potentially get a better price well in advance of your contract end date and lock it in. Alternatively, having a second round is always an option closer to contract-end.

We’ve given a considered view of where pricing is heading in this blog, but it could be conservative. In any case, budget for a serious increase in costs. 

If you want to mitigate rising costs, the best thing you can do is reduce the amount of energy you consume from the grid. You can achieve this by understanding what you consume and optimising your consumption and generating your energy onsite (through solar panels or similar renewable sources). 

With increased energy pricing on the cards, now’s the time that you get significantly more bang for your buck when you invest in energy and carbon reduction projects. That’s why the team at Total Utilities are here to help you achieve energy efficiencies and, when you’re ready, guide you through the switch to solar and other renewable sources.