Energy Supply Crisis – Causes, Consequences & Implications

by Richard Gardiner | Aug 14, 2024 | Carbon Sustainability, Energy, News

Richard Gardiner, Founder & Chairman of the Board at Total Utilities, shares his insights on the unfolding energy crisis in New Zealand. With years of industry experience, Richard delves into the causes, consequences, and future implications of this pressing issue.

Until six years ago NZ, was in the happy position of being self-sufficient for its electricity, natural gas, and LPG requirements.

Our electricity supply was already 80% to 85% renewable, based on a combination of hydroelectric, geothermal, solar, and wind power-based generation. An enviable position in an increasingly volatile world!

We were self-sufficient for our natural gas requirements too.

Overall, we were also self-sufficient when it came to LPG supplies – a net exporter for +/- six months of the year and a net importer for the rest of the year.

Seven years ago, the incoming Labour/Green Government banned all new offshore oil and gas exploration.

The background to this initiative is that political parties ranging from the Greens to ACT, all recognise that NZ is facing an ‘energy trilemma’. This trilemma centres on:

• Sustainability considerations – decarbonisation in a climate change impacted world
• Price and affordability considerations 
• Security of supply considerations

While the political parties disagree regarding the importance attached to specific components of the energy trilemma, they all agree that all three are vital to the wellbeing of our country.

Well-intentioned though the gas exploration ban may have been, its practical impact backfired badly on all three elements of the trilemma:

• Sustainability negatively impacted – gas supplies already reduced by over a third with the resultant need that additional coal had to be imported for electricity generation at Huntly. Coal emits nearly twice as much carbon as natural gas on a kWh-for-kWh of energy delivered basis.
• Electricity and natural gas wholesale and retail prices have rocketed, especially for time of use (TOU) business users.
• While the four wholesale divisions of the big generator/retailers (gentailers) are making excellent profits, their retail divisions are not. Neither are the retail businesses of their smaller competitors like Electric Kiwi.
• Security of supply considerations – the Winstone Pulp International example during the past week says it all as do the recent occasions when electricity supplies were very tight nationally. This should not happen in a First World country.

Compounding the above problems is the fact that:

• Competition has largely collapsed in the current natural gas market. Amongst other things, previous major suppliers like Contact and Ongas have exited the market. Because of this, the option of importing liquified natural gas (LNG) is now being considered.
• With LPG, an announcement during the past month confirmed that one of the major LPG suppliers is selling its LPG division to a competitor. Furthermore, as we are no longer self-sufficient for LPG supplies, NZ customers will be more exposed to international LPG price hikes, based on changes in the Saudi Aramco index and fluctuations in the NZD:USD exchange rate.

The implications of the above include:

• Electricity and gas procurement is no longer a one-off exercise every two or three years. It is an ongoing process.
• The contract review process needs to start much earlier, in terms of existing contract expiry dates, than used to be the case.
• Merely signing a new three-year Supply Agreement is not necessarily the best thing to do now.
• Opportunities may exist for a short-term supply arrangement to ‘buy time’ for signing up to a longer-term Supply Agreement, as and when a suitable opportunity occurs in the market.
• With hydro-electricity accounting for 60% plus of total national electricity generation and our hydro-electric dams only having six or seven weeks storage capacity cover, there is always going to be a degree of volatility in our electricity supply. But this volatility has been significantly compounded since 2017 by our reduced fossil fuel-based generation and inadequate replacement renewable-based generation to ‘plug the gap’.

The bottom-line for electricity and natural gas/LPG business customers is that they need to adapt to the reality of drastically increased prices, tight supply and generally adverse market conditions.

• Please contact us if you have any questions on the above.

NZ Energy Prices Surge Amid Declining Hydro and Gas Production

by Chris Hargreaves | Jul 23, 2024 | Carbon Sustainability, Energy, News

New Zealand’s energy landscape is facing a perfect storm. With hydro storage at historic lows and natural gas production declining, energy prices are surging. As we turn to costly imported coal, the impact on electricity costs is significant. In the following article, Total Utilities Director Chris Hargreaves delves into these challenges and their implications for our energy future.

The New Zealand Electricity market relies heavily on hydroelectricity, which accounts for approximately 60% of total generation in most years. This is supplemented by other baseload generation sources that are available 24/7, including geothermal, natural gas and coal.

Despite New Zealand’s significant hydroelectric capacity, our water storage is limited, usually providing only six weeks of coverage, and often dropping below 30 days during winter. To address this, natural gas and coal are used to manage water storage and provide a top up to meet energy demand.

From a hydro storage perspective, May 2024 was the driest on record. And as of 22/07, total water storage has fallen to 31% of total capacity, which is around 55% of average levels for this time of year. In addition to this, our domestic production of natural gas has been steadily falling since 2018, meaning that natural gas is used less and less for electricity generation. 

Why is this important? Because if natural gas is not available, we have to use coal. This carries a much higher marginal cost as we import coal from Indonesia, and costs associated with the emissions trading scheme are much higher than natural gas (for further insights on gas production and consumption and historical electricity risk curves check out Gas Industry Co and the Electricity Authority). 

The Coal Cost Dilemma

While you might say, ‘great, we have an alternative fuel source to keep the lights on,’ the downside of using coal is that it sets the price of the electricity wholesale market and drives forward retail energy contract pricing higher for large commercial and industrial customers. Lower priced forms of electricity generation such as hydroelectricity then carry a scarcity premium as demand remains strong in a time when supply is extremely constrained.

The Electricity Authority has for several years stated that we have a competitive retail market environment. As of June 2024, there are 47 electricity trading companies in the New Zealand market. Most of these only supply residential customers or are extremely niche players supplying few electricity connections.

Big Four’s Influence: Market Control and Pricing

There are four major generators in New Zealand: Contact Energy, Genesis Energy, Mercury Energy and Meridian Energy (the big four). These four together produce about 90% of New Zealand’s electricity and supply around 80% of the retail market. They hold significant power( no pun intended!) in dictating terms to smaller independent retailers that do not have generation assets.

These independent retailers face challenges in securing competitive prices for upstream energy hedging to offer their customers. They must also meet substantial prudential cover requirements with the market, which increases with rising wholesale prices. This often means that when wholesale prices escalate, the independent generators are unable to quote pricing to customers as they cannot cover prudential requirements, or they are unable to buy upstream hedging. In essence, the big four can dictate how big the independent retailers get by the way that generation supply is managed.

Over the last 10 years, New Zealand’s baseload generation capacity has declined. Genesis has mothballed part of Huntly power station, which can run on either natural gas or coal. Contact has decommissioned the gas fired generator at Otahuhu B and is now using the gas-fired baseload component of Stratford very sparingly. Similarly, Mercury has decommissioned the gas-fired Southdown power station in Penrose.

New generation has been extremely slow to come into the market, with generators blaming the uncertainty surrounding Tiwai, which has resulted in systemic price increases. This has led to Transpower issuing warnings for the last three winters that electricity generation is struggling to meet demand. The result of this was a blackout in Hamilton during 2021 and a near miss, this year. 

Although wind and solar projects are increasing, their intermittent nature fails to provide the continuous coverage needed during dry years, leaving a gap created by the reduced gas supply.

The infrastructure commission states that we have a major deficit and that to meet forecast demand, generation needs to more than double over the next 30 years. This is going to cost a significant amount of money when energy prices are at record highs which businesses are already struggling to absorb. Read ‘How is our infrastructure tracking,’ by the New Zealand Infrastructure Commission to find out more on this.

Coal will also be required in greater quantities and for much longer due to the forecast shortfall in gas production over the next 3 years.

MBIE markets manager Mike Hayward says,“New Zealand has used around 150 PJ of natural gas per year for the last two years. While New Zealand holds 8.7 years of natural gas in usable reserves, field operators only expect to extract up to 140 PJ each year for the next three years.” See this MBIE report for further details.

In 2017, we were procuring five-year fixed price contracts for large industrial customers at around $75/mWh (7.5c/kWh). Pricing obtained last week averaged $170/mWh for the period 01 Jan 2025 to 31 Dec 2029.

Investment Incentives: Why New Projects Are Stalled

However, with four major generator retailers controlling the delivery of significant new generation, there’s little incentive for them to invest in new projects. Instead, they continue to profit from long-paid-off assets. 

Until competition emerges in the generation market, I struggle to see how the Electricity Authority can stand behind their claims of a competitive electricity sector.

Act Now: Contact Total Utilities

Navigate the changing energy landscape with confidence. Contact Total Utilities to explore customised solutions and implement an energy management plan today!