As businesses navigate the need to slash fossil fuel usage, the burning question is: can backing renewables be both a pragmatic commercial decision and contribute to climate action?
Some businesses may be surprised that while Aotearoa’s electricity is ~85% renewable, our energy consumption is only ~30% renewable. This means around 70% of New Zealand’s energy consumption is met by burning gas, oil and coal, mainly for transport, heat and electricity production.
So, how do businesses burn less fossil fuel, and therefore meaningfully contribute to climate action? There are three main options:
Eliminating or reducing fossil fuel use (e.g. reduce air travel, encourage active and public transport)
Increasing energy efficiency (e.g. improve building insulation)
Supporting renewable energy
In this article, I’m going to focus on ‘supporting renewable energy’, which is a more nuanced topic than you might think. Currently, there are two climate-friendly options for New Zealand businesses to support renewable energy:
Demand response: consume more electricity when renewables are plentiful, and less when gas and coal-fired generation is running.
Additional renewables: procure electricity in a way that helps to add more renewables to the electricity system.
At this juncture, I need to briefly discuss three other commonly discussed renewable energy options:
Green hydrogen (hydrogen made from renewable electricity)
Biogas and biomethane
Woody biomass
Globally, green hydrogen is in its early stages and, in New Zealand, biogas and biomethane are in their infancy. Currently, woody biomass is primarily used in the wood, pulp, and paper sectors, where harvest residuals are readily available (*1).
Experts and scientists are cautious about the scope of these fuels in the clean energy transition due to issues such as: green hydrogen’s inefficiency compared to direct electrification of heat and most land transport (*2), the challenging economics of large-scale biogas/biomethane production in New Zealand (*2), and elevated CO2 emissions over decades created by burning woody biomass produced from whole trees (*3 & *4). In my view, woody biomass production should be limited to harvest residuals, and priority given to its use as energy storage to address electricity shortages.
Ok, returning to demand response and additional renewables:
Demand response Demand response (also called ‘load shifting’) is the shifting of electricity consumption into periods of time when renewables are plentiful (and out of periods of time when it’s scarce), and was discussed last month by Andy Cooper from The Energy Collective.
Andy explained how businesses can use demand response to save money, reduce scope 2 carbon emissions, and help defer costly investment in the electricity network. He also discussed current limitations of Renewable Energy Certificates (RECs), also called Energy Attribute Certificates (EACs).
Additional renewables It’s necessary to support additional renewables such as wind and solar, otherwise new electricity demand (e.g. EVs, heat pumps) will need to be met by gas or coal-fired generation.
According to the Climate Change Commission, Aotearoa needs approximately an additional 1,000 GWh of renewable electricity every year between now and 2030 to meet our climate targets. That’s around 2.5% of New Zealand’s annual demand (~40,000 GWh), roughly equivalent to 300 MW of wind or 550 MW of solar, every year.
So, how can businesses help add renewables to New Zealand’s energy system? Impactful and readily available solutions for businesses are:
On-site renewable generation (e.g. rooftop solar)
Corporate Power Purchase Agreement (PPA) (*5) with a renewable generation project (i.e. a business buys electricity directly from a generation project)
Indirect PPA with a renewable generation project (i.e. a PPA entered into by an electricity retailer on behalf of a business)
Electricity supply agreement (*6) linked to a renewable generation project
Businesses can combine these solutions, such as having on-site generation, a corporate PPA and an electricity supply agreement. Combining a PPA with a supply agreement is called PPA ‘sleeving’. For all solutions, businesses retain a relationship with an electricity retailer.
In Part 2, I’ll look at each solution in detail, discuss their pros and cons, and explain why solutions 1 and 2 tend to be the most impactful. I’ll also discuss the important role played by RECs, or EACs, explaining why these certificates should be used in most cases.
These posts are my current thinking, which I hope opens up more discussion about the impact businesses can have on Aotearoa’s clean energy transition.
—
About Paul Coster
Paul is the Founder of EVA Marketplace, Aotearoa’s marketplace for renewable PPAs. EVA assists businesses by matching them to renewables projects, facilitating PPA negotiations, supporting green products (including RECs/EACs) and enabling corporate PPA sleeving. EVA also publishes a quarterly report on the renewables market.
Total Utilities works with EVA to offer customers the option of a corporate PPA sleeved into their electricity supply agreement, helping to control electricity costs and ethically reduce carbon emissions, while retaining the convenience of an FPVV supply arrangement.
PPAs tend to be longer term contracts (5 – 15 years) where a buyer commits to buying electricity from a specific project, such as a solar farm, usually at a fixed price.
Electricity supply agreements tend to be shorter-term contracts (1-5 years) where buyers purchase electricity from a retailer for their sites or buildings, typically at a fixed price.
Changes to national grid operator Transpower’s transmission charges took effect in April – and as with most things in life, there are winners and losers.The updated transmission pricing methodology (known as TPM) significantly differs from previous years, and has delivered a mixed bag of rises and cuts for domestic and industrial users.
State owned enterprise, Transpower, has been allowed to recover $830 million by the Commerce Commission for running the network and the increased costs are now being passed on to end users.
Changes to charging methodology
Transpower Head of Grid Pricing Rebecca Osborne said the Electricity Authority has designed the new methodology to more closely reflect the costs and expected benefits of electricity transported across Transpower’s 12,000 kilometres of transmission lines.
There should be no surprises across the electricity industry about the new transmission charges, she said.
“We’ve consulted with customers along the way and provided information as the elements have developed, including updating our indicative prices… and providing indicative rates information in early November.”
“Total transmission revenue, as set by the Commerce Commission, remains the same, but how it is distributed among Transpower customers has changed.”
Encourage renewable generation
The Authority expects the new approach to transmission charges to encourage investment in renewable generation and electrification of industrial processes.
According to Transpower, the main change in the new transmission pricing is a move to a benefit-based approach where customers pay in proportion to the benefit they are expected to receive from some historic and all future transmission investments.
The previous methodology spread the cost of the HVDC (High Voltage Direct Current) link connecting the two main islands across South Island generators and spread the cost of all other interconnection assets across local lines companies and major industrial users.
Some Northland, East & West Coast customers hit hardest
In general, this means cost increases for local lines companies and some of the largest industrial customers in the north of the country because they are further away from where the bulk of generation is located in the South Island.
It also means North Island generators will begin contributing to the cost of the interconnected transmission assets and South Island generators will contribute less.
Consumers in Northland, the east coast of the North Island, and the West Coast have faced the biggest hikes, while Wellington and some South Island areas have seen prices fall.
The final amount that consumers pay for their transmission charges is ultimately decided by local lines companies, these charges typically make up between 8 and 10 percent of power bills.
Big power users such as the Tiwai Point aluminium smelter have seen an almost $10m price cut, while NZ Steel mill at Glenbrook faces an $11m increase.
Earlier in the year the Electricity Authority calculated movements would generally be small.
Those most affected may take issue with this. Indeed, Buller Electricity filed for a judicial review after being told its transmission charges would rise by 427 percent.
As renters and homeowners in the 1970s and 80s we were accustomed to hot water cylinder ‘ripple control’ – the mechanism whereby power companies assured us of a cold shower when we got home from work.
The trade-off was that households were able to operate stoves, lights and televisions without power cuts. Then along came the Clyde Dam and all this went away.
Until now.
If we take all our light vehicles off the road and replace them with EVs, this would increase our electricity demand by 20% (EECA Nov 2022). Add to this new ‘green’ data centres built by Google, Microsoft, AWS and our own IT companies, and this will likely add a further 10% to our current electricity needs. Our already stretched electricity supply infrastructure simply won’t cope.
The Energy Trilemma is defined as the need to find balance between energy reliability, affordability, and sustainability and its impact on everyday lives.
Understanding the challenges to balancing these three core elements is vital to keeping the lights on, the economy operating and achieving goals such as Net Zero carbon emissions.
Energy Reliability
The energy system aimed at ensuring reliability in New Zealand is made up of three interconnected parts:
Generation which comes mainly from the dams in South Island Lakes.
Transmission – Transpower’s multibillion dollar electricity supply backbone, built mainly in the 1950s and 1980s on 30,000 properties, with 25,000 transmission towers supporting 11,000 kms of lines and their essential 170 substations.
Distribution – Delivering electricity to homes and businesses via 27 regional Lines Companies, most of whom are locally owned. These companies own the power poles, lines and transformers that bring electricity to our door.
These three elements are highly regulated and involve investments in assets worth billions of dollars.
Our whole energy system is funded by debt that must be paid for by current and future generations.
Who pays and when is the big issue here. Is it today’s user, their children or their children’s children?
This is called intergenerational debt servicing and presents huge challenges when deciding the fairest way to distribute the cost of assets that in some instances might have a useful life of fifty years or more – or in the case of dams much longer than that.
To make things worse, an emerging issue with these investments is the risk of what is known as ‘stranded assets.’ This happens when transformational technologies such as solar and wind based distributed energy systems makes further investment in centralised dams, transmission and distribution uneconomic. When this happens the debt remains but the ability to pay by leveraging (charging for) existing or new assets is reduced or disappears completely.
Affordability and Equity
The New Zealand economy is reliant on agriculture which in turn is reliant on energy. However, economic theory suggests that on a ‘user pays’ basis, a farmer in a remote location should pay more than an apartment dweller in a big city or town. After all it is, at first glance, far cheaper to provide an urban dweller power than it is to run kilometres of copper wire to a small number of farms down a rural highway.
Recent changes to the way costs are allocated for Transpower’s transmission backbone came up with the proposition that the further you are from the source of the power (the lakes) the more you pay because you accrue greater benefit.
This means that a dairy farmer in Northland pays much, much more for connection to the grid than a Southland farmer producing the same products with the same amount of electricity. It conveniently ignores the fact that three quarters of the population of New Zealand is in the North Island and therefore paid for at least this proportion of the massive costs of building our generation and transmission infrastructure in the first place.
Taking this economic puffery to its logical extreme we should be seeing city lines companies like Vector punishing those who are not living in the inner city by charging more for connections to their homes. Thank heavens for the Elected Trustee model that makes this kind of logic totally politically untenable.
While the Trust model provides a level of protection from purist economists, unelected energy officials aren’t as susceptible to the wrath of the voters.
Our government market regulator, the Commerce Commission, doesn’t even have an affordability or equity objective when addressing the electricity market. Instead, it’s ‘Right investments, Right Time at the right cost.’
What about doing ‘right’ by the rural communities generating enough food for 40 million people globally and generating exports in excess of $72 billion annually?
Sustainability
Electricity generated by gas fields, coal and oil fired power stations is expensive, carbon emitting and directly impacts the wholesale market price of electricity.
Over the past decade or so we have seen a steady decrease in their contribution to the country’s generation capacity as generators have switched off coal and gas fired capacity. A government ban on further oil and gas exploration and the rapid decline in our existing gas resources in and around Taranaki has placed even more pressure on our electricity supply.
The net result, as demand threatens to exceed supply, is that wholesale and forward prices are at record levels now and well into the future.
One answer to this supply issue might be Lake Onslow – pumped hydro – essentially a $17 billion, ten year project to deliver a giant hydro powered battery designed to help protect against hydro shortages.
Adding 1200 megawatts capacity (roughly an eighth of the country’s current peak capacity) would potentially help bring the volatile wholesale market for electricity back to some semblance of normality.
The Government has just made a decision to complete a $70 million business case on Lake Onslow. Add to that the $30 million they have already spent and it looks like this decision will be a major electricity industry inflexion point.
It’s difficult to see the GenTailers detaching themselves from the status quo and its associated super profits. As such it has been no surprise at all to see them aggressively highlight research from reports that paint the Onslow Project as an expensive and impractical idea.
What I have failed to see is any practical alternative being offered – other than the monopolists’ favourite – punishing vulnerable consumers into changing their behaviour by raising prices at peak time. This is not a great option when young consumers are juggling hungry children, bath times, winter heating bills and brutal mortgage interest rates, and dairy farmers have cattle lined up outside the sheds for milking.
Barring the embedded carbon costs of construction materials like steel and concrete, Onslow offers a sustainable opportunity to enhance the viability of inconsistent generation sources such as solar, wind and tidal generation. By providing a massive hydro based battery to store load as and when it is created, we could see wholesale prices back in the 8-12 cents per kw.
This would see the benefits of lower input costs flowing to farms, businesses and households instead of into the pockets of the gentailers and governments eager to feed off the dividends their super profits are providing.
Part three of this series will address that most controversial of subjects – Water, Waste and Stormwater. Call it Three Waters if you like. I call it a right mess.
Shop around early for new energy contracts is our advice to customers seeking to avoid the risk of skyrocketing energy prices this winter.
Our warning comes hot on the heels of Transpower cautioning that the Electricity Authority’s recommended measures to ensure the security of electricity supply for this coming winter are insufficient, and that urgent action is now needed to prepare for winter demand.
The Gas Industry Company is also ringing the alarm bells saying, “To avoid the situation where some customers are coming to market at times of tightness across the energy sector, we advise industrial and commercial gas customers with upcoming contract renewal to ‘go to market’ for supply well in advance of the contract expiring. It is our view that going to market early will reduce the exposure risk associated with low hydro inflows impacting on gas supply in Q2, 2023.”
Decreasing generation, rising prices
So how and why has this situation arisen? Well, it’s been a long time in the making with NZ’s operational generation capacity reducing since 2010, as thermal base load generators have closed and not been replaced.
New generation that has come on stream since 2010 is mostly intermittent wind generation that is reliant upon the caprice of mother nature. Consider the fact that on an annual basis, NZ wind farms generate at an average of 40% capacity – meaning replacing baseload thermal capacity with like for like wind capacity results in an average 60% shortfall.
The early bird catches the worm…
With all indications pointing towards winter shortage and increasing price volatility, we encourage our clients to review the market well in advance of energy contracts expiring. This allows time to shop around and find the very best deals for your business while you still have some room to manoeuvre.
Leaving it to the last minute will likely leave your business exposed to the vagaries of the winter market and the possibility of surging prices. You could be forced to accept increasingly unfavourable energy contracts that end up costing your business dearly.
The below tables show how prices have surged over just the last month:
Light at the end of the tunnel?
While the current picture of the energy market seems fairly bleak, there is perhaps some room for optimism with signs pointing to new generation in the pipeline – albeit slowly.
News from Transpower is that NZ could bring on more than 7230 megawatts of new grid-connected generation capacity if the top 51 projects in its new Connections Management Framework are commissioned. Six projects totalling 595MW are currently in delivery phase with 22 projects under investigation.
A Transpower spokesperson says that the new framework, which went live in November, was developed in response to the sharp increase in grid connection enquiries during the 2021/22 financial year. They say enquiries to connect new generation projects to the grid have increased from around five per year, to 124 in FY22.
The new framework has been encouragingly described by Helios Managing Director Jeff Schlichting as ‘robust’ and he believes it should work well to ensure the timely development of renewable energy projects needed to help the country decarbonise and meet its climate change commitments.
Here’s hoping that Jeff’s got it right and that things are finally starting to move in the right direction. In the meantime it pays to prepare early and hunker down for the winter of energy discontent.
Sign up below for Total Utilities Market Commentary to receive all the latest market news and insights.
With prevailing energy market conditions causing sharp price hikes that show no signs of abating – what can you do and who do you turn to for advice and viable solutions?
Since the beginning of 2021, negotiated contract pricing for large commercial customers has increased from 11c/kWh to 18c/kWh for a three year period. This means a customer using one million kWh per year is paying $70,000 more for electricity per year than 19 months ago.
Mass market customers have not been impacted to the same degree with pricing moving from 9c/kWh to 12.5c/kWh.
Rather than bore you with the (too numerous) details and interrelated factors that have caused this unwelcome turn of events, let’s explore the options open to businesses to mitigate sky high energy costs.
Time to turn to the experts? Many businesses are turning to energy management consultancies to help them navigate the challenging energy markets and provide services to assist them to get the very best deal on their utilities.
They are also hiring consultants to explore sustainable and renewable energy options to help them diversify their energy portfolio and give them maximum bang for their buck in terms of energy efficiency, pricing and carbon liabilities.
But according to Total Utilities Director Chris Hargreaves, it’s a case of ‘buyer beware,’ when it comes to hiring an energy management consultancy. He says the quality of service and outcomes vary dramatically.
“If it was my business, there are only a small handful of organisations I would consider using in New Zealand to obtain energy contracts on my behalf and to have the ability and insight required to properly explore efficiency and sustainable solutions.
“The consultancy industry for energy is not regulated, so effectively anyone can start up a business that offers procurement services,” he says.
Chris advises considering various factors before hiring a consultant, including how many procurements they conduct each year. The energy market is highly dynamic and energy retailers are entering and leaving the market at unprecedented rates and pricing models and practices are changing daily.
If the consultant or advisor you are using is not pricing in the market on a regular basis, then you are likely to get caught out by the market changes. Look for companies conducting over 100 procurement exercises per year (as an example, we average almost 350).
You should also establish whether your consultant reviews the entire market of energy retailers for pricing (we do), or just their favoured few companies (nope, not us).
Also, does your advisor or consultant gather detailed market intelligence to track wholesale pricing and industry developments? Do they warn you of potential ‘gotcha’ clauses to look out for in energy contracts as part of their procurement process? Needless to say, Total Utilities ticks all these boxes.
Aside from engaging a reputable energy management consultancy to help you traverse choppy utility waters, Chris explains there are various ways to hedge against rising costs, to minimise budgetary risk and ensure you comply with regulatory requirements.
Cost saving starts with sustainability & efficiency He says that first and foremost, now is the time to explore efficiency, sustainability, and low carbon solutions to increase resiliency.
“By exploring sustainable solutions such as LEDs, Renewable Energy Certificates, solar and energy conservation methods, you can achieve short term wins and relief from volatile energy prices, whilst also unlocking long term sustainability benefits and future proofing your business.
“Sustainability not only saves money by creating energy efficiencies, it also decreases your reliance on the grid, so you are no longer at the mercy of volatile energy prices,” he adds.
Keeping the lights on One of the trends we’re seeing in the industry is a move away from centralised, utility based generation – to so called ‘distributed generation.’ This is a shift from a single source to many sources to allow for increased resiliency and reduced reliance on the grid.
For example, traditionally if the grid goes down, you have no real option to keep your business going. But if you have solar with battery storage, you might be able to keep the lights on until the grid comes back online.
Additionally, you avoid the full impact of market volatility if your energy sources are distributed – it goes back to the wisdom of the old proverb, ‘don’t put all your eggs in one basket.’
Talk to us A great place to start when it comes to navigating the ever-changing energy markets is to talk to our team at Total Utilities. Our data-driven approach, born out of comprehensive investigations and analysis, allows us to carefully tailor energy services and solutions to your business.
With our proven 20 plus years in the energy business, we negotiate over $400 million worth of energy contracts for our clients every year. We can leverage relationships to get you better prices.
Our detailed pricing analysis and tendering services help save time and money by pinpointing the best possible energy contracts and ensuring the most favourable terms and prices.
We put sustainability, cost saving and energy efficiency at the heart of our clients’ businesses, so that they can be both sustainable and highly profitable.
And in this environment, setting sustainability and carbon reduction targets isn’t just about reducing your environmental impact – it simply makes good business sense.
Contact us to find out more about our energy management consultancy services.
Sign up below for Total Utilities Market Commentary to receive all the latest market news and insights.
Staying ahead in business is often about being the first, being the best or doing something that no-one else has thought about.
But being the best demands an ability to gather accurate, independent and reliable information in an increasingly complex world.
Total Utilities Market Commentary will help provide you with all the insights and tools you need to take immediate steps to get the very best deal on your utility prices, while simultaneously leading the way with sustainability best practice. We collate market research and trends to help you navigate volatile energy markets and make better, more informed decisions.
As an independent voice in the market, we strive to deliver holistic insights and advice so that you are better equipped to deal with the changing environment in which we operate.
‘The purpose of information is not knowledge. It is being able to take the right actions.’
Peter F. Drucker
So says founding father of modern business, Peter F. Drucker. Total Utilities Market Commentary helps ensure you have the right information to support the right actions now. We continuously track utility prices in relation to prevailing market conditions so that armed with this knowledge, you can take immediate action to optimise your energy procurement strategy.
No vested interests
As an independent voice in the market, we have no vested interests other than to strive to deliver comprehensive insights and advice. We have been tracking price trends in the energy market since deregulation began and have a comprehensive understanding of the various drivers in the market. We also keep fully abreast of policy and regulation changes to ensure we pass on all the strategic advantages from our independent analysis
As with all things in life, the right actions are not necessarily the easiest or the most straightforward. But we are passionate about providing you with the knowledge to not only leverage the best deals with your utilities, but also to take action now to assist you with decarbonisation and reducing greenhouse gas emissions.
Cleaner, greener business
Paritutu Rock in New Plymouth, New Zealand
At the COP26 summit in 2021, NZ signed up to an agreement to reduce emissions by 50% at 2030 compared to 2005 levels, meaning decarbonisation is no longer a ‘nice to have’ – but critical to future proofing your business.
Sustainable business is about more than just reducing your impact on the environment. Businesses who can create circular economies – i.e., those who save money by eliminating waste and reinvesting in further savings activities – can achieve deep sustainability and lay the foundations for long-term success.
With expertise and guidance provided by our Market Commentary, you can ensure you are reading the latest information regarding competitive energy pricing and make savings to help fund your decarbonisation journey.
And that is most certainly the right action.
Sign up below for Total Utilities Market Commentary to receive all the latest market news and insights.
