All businesses need electricity. All people in a modern society like ours need electricity. The trouble lies in finding balance between combatting climate change and generating enough electricity to sustain our population.
We all know and understand the importance of decarbonizing given the ominous challenge posed to us by climate change globally. But, New Zealand is a small, remote country which only accounts for 1/15th of 1% of the world’s population of 7.5 billion.
New Zealand’s electricity and natural gas markets are inextricably inter-linked. Electricity and gas compete as alternative energy sources, but rely on each other for production. Electricity generation is the second biggest user of natural gas after methanol production by Methanex. Gas is the second biggest source of electricity generation after hydroelectricity.
With this intricate dependence on one another, the effective management of our national energy strategy (including electricity and gas etc) is critically important to our continuing economic health and hence to the well-being of all 5 million kiwis.
What impact does prohibiting natural gas exploration have on New Zealand’s energy supply?
The outright prohibition three years ago of all new offshore oil and gas exploration, is having a profoundly negative impact on the natural gas sector and hence on the health of the electricity sector.
No matter how well intentioned this original decision was, it was not thought through properly at the time. The recent apparent softening of the Government’s stance on the role of natural gas as a transition energy source on the road to 100% renewability is, however, to be commended.
Coal-based electricity generation in 2020 was the highest for a decade.
It’s unfortunate that, as a result of these policies, coal-based electricity generation in 2020 was the highest for a decade. This coincided with the lowest gas-based electricity generation for nine years.
Given that coal emits +/- 1.9 times more CO2, on a gigajoule-for-gigajoule basis than natural gas, this is an environmental step backwards. In this regard, coal imports of +/- 1 million tonnes from Indonesia in 2020 are currently on course to triple in 2021 as we understand it.
What other factors impact New Zealand’s energy mix?
The negative impacts of the above prohibition have unfortunately been compounded by various other negative electricity supply and demand factors since then.
These factors have included:
Rebounding electricity demand following the Global Financial Crisis in 2008.
Back-to-back very dry summers in 2019/20 and 2020/21.
The retirement of thermal powers stations like Otahuhu B and Southdown.
The inability of new renewable power stations to meet the combined challenge posed by growing electricity demand and reduced thermal generation.
Gas and geothermal energy supply in New Zealand is struggling
Pohokura has been our biggest natural gas field for some years. During the past two years however, production has fallen sharply for unspecified technical reasons. This decline in gas production has reduced gas supplies available both for gas users and for electricity generation.
The prohibition of all new offshore oil and gas exploration, has also meant that there will be no offshore oil rigs available in NZ waters until 2022, at the earliest, to identify let alone resolve the ongoing production problems at Pohokura.
Other gas supply options have been constrained in the longer term by the non-renewal by the Government of existing offshore field permits for undeveloped fields, once their initial term had expired. Previously, successive Government’s lead by both major parties renewed these permits unless there was a compelling specific reason not to.
Power companies are passing costs on to businesses
Seriously damaged gas industry morale has also resulted in a combination of reduced/delayed/cancelled capex in existing gas fields.
Competition has essentially collapsed at the big end of the gas market.
The profound uncertainty surrounding the shorter term, let alone longer term, future of the natural gas industry has already resulted in Contact Energy vacating the time of use (TOU) part of the gas market as TOU agreements covering supply to larger customers expire. Two other gas retailers have also declined to quote for supply to various existing TOU customers.
We are also well aware of other very large TOU gas users (not our clients) who have to use natural gas and have been forced onto punitive spot market-related gas pricing. Major electricity-users like Whakatane Board Mills have also had a huge question-mark over their future due to huge gas-related electricity price hikes.
There is still some limited competition in the non-TOU part of the market (impacting smaller customers), albeit at much higher prices. To all intents and purposes, competition has essentially collapsed at the big end of the gas market.
What would Total Utilities recommend?
Looking to the future, New Zealand must formulate an integrated supply/demand energy strategy covering the transition period until 100% renewable energy is achieved in practice. Much like the cross-party Superannuation Accord in the 1990’s, we need a similar cross-party accord now in this vitally important area.
As such, the Government should:
Reverse its previous ill-advised decision not to extend existing gas field permits on undeveloped fields.
Greatly extend the scope of the existing EECA GIDI Fund/ETA initiatives.
Extend the separate Genesis Energy decarbonisation funding initiative to include Mercury and Meridian too.
To conclude, the appetite for future investment in the gas infrastructure is key to improving certainty in the market. Not only does it send signals to the sellers of natural gas but also to major users who are often multinational organisations. If it becomes more apparent that investment will be very limited, these organisations could very well leave NZ prematurely, obviously impacting employment, business activity and tax revenue.
Business and media enquiries can be made to Total Utilities.
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By 2050, the government has pledged to eliminate emissions of long-lived greenhouse gases, and to reduce biogenic methane emissions by between 24-47%. This means energy pricing is changing fast! While this is good news for the environment, it requires business to make some major adjustments.
Let’s look at the impact of these changes and then the solutions that are available to you.
Decline in gas production drives an increase in price
New Zealand’s main gas field has been experiencing production issues since 2018. This year, their production is already down by 42%.
This significant shortfall is having a heavy toll on electricity generation. By 2030, gas production is expected to be half of what it is now.
Gas consumption by sector in New Zealand, 2020
Natural Gas Production Down and Energy Pricing Up
Natural Gas or LPG fired boilers have lower emissions than their coal-fired counterparts. But we have seen oil and gas exploration companies already hand in their exploration permits because of New Zealand’s policy changes.
Because of this, access to gas is becoming far more restricted. When production declines but the demand is still high, prices inevitably rise.
Forecast Gas Production as Reported to MBIE 2020
This has led to an increase in using coal as a substitute. In the South Island, for example, where there is no natural gas, many boilers remain coal fired. Having said that, some are attached to reticulated LPG networks in Christchurch, Queenstown and Dunedin.
But by 2022, a ban on new low and medium temperature coal-fired boilers will also be enforced, with a proposal to phase out any remaining coal boilers by 2037.
This will severely undercut the feasibility of these coal-fired burners in the near future.
How can industries respond to changing energy pricing?
52% of sustainable businesses have an energy strategy
You need two action plans:
Short-term plan: optimise what you have to get the best bang for your buck now.
Long-term plan: understand your options, decide which route you’ll take, and plan how to get there.
The good news is Total Utilities can help you now and well into the future. Plus, we’ll regularly review and track your progress.
Short term energy pricing plan: optimise what you have
For our large commercial and industrial gas customers, we are now seeing an increase of around 180% in cost as they come off contracts signed three years ago. Despite the increase, gas is still a cheaper source of fuel than electricity. But it is fast catching up. As gas supplies further decline, gas prices will only continue to increase.
The chart below shows the upward trend in total costs from raw gas pricing and the ETS scheme over the last three years:
Total Utilities Retail Price Index of gas plus ETS costs – 2018-2021
We are helping clients by tracking the trends of retail gas prices and negotiating cost-effective gas contracts. We also help you save money by optimising what you have for the remaining lifespan of your current heating systems.
Long term energy pricing plan: switch to sustainability
Working closely with the specialists at New Zealand Energy Systems, we help you decarbonise and eventually replace your boiler. We do this by understanding the energy source, the technical options for replacement, and what triggers price changes.
Moving from fossil fuels to electricity, or to another renewable energy source will reduce emissions and help New Zealand achieve its goal of being Net Zero by 2050. In some cases, existing coal-fired boilers with decades of life remaining can be converted to burning biomass instead of coal.
However, in some regions, such as Canterbury, the supply of woody biomass residues falls short of the energy demand for process heat. Total Utilities considers these variables and complexities in your long-term plan.
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.
Here for you now and into the future
The team at Total Utilities can help you achieve energy efficiencies for the remaining lifespan of your current systems. We do this by conducting a low-cost study into your energy consumption and identify ways you can save money.
Over the long-term, a switch to carbon reduction energy sources makes sense for the environment and your bottom line. That’s why, when you’re ready, the team at Total Utilities can guide you through the switch to solar and other renewable energy sources.
Contact us today to turn cost-effective, environmentally friendly strategies into action.
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?
ASX Energy Futures climb higher and higher
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.
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.
Future path requires significant investment in new wind and solar generation
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.
The deployment of grid‐connected photovoltaic (solar PV) systems continues to grow at an impressive rate. In 2018, there was a 30% increase in systems implemented and it continues to move forward.
Most of this growth involves residential systems, which have an 80% share of the connected capacity in NZ.
Where’s the growth in commercial solar pv systems? Why are the industrial and commercial sectors lagging behind?
The following article was written by Perry Hutchinson, who holds a Master of Engineering Studies in Renewable Energy Systems and has 30+ years of experience designing and implementing industrial electrical systems.
One benefit drives decisions about solar PV for industrial/commercial use…
Commercial Solar Power System Cost
The New Zealand Smart Grid Forum identified that although residential consumers consider a range of potential benefits ‐ such as energy independence, environmental impact and a desire to participate in the technology ‐ sound economics is what drives industrial and commercial consumers.
So the challenge in photovoltaic design is to present solar as a viable business investment in New Zealand, even though we lack the government subsidies and generous feed‐in tariffs enjoyed in many other countries.
What is a feed‐in tariff?
Feed‐in tariffs (FIT) offer you a defined payment for the energy you feed into the grid from your solar PV system. In New Zealand, this can be as low as $0.04/kWh.
When generous feed‐in tariffs are available, the key constraint to system size is essentially the available space for the PV array; for viable projects, the bigger you build it, the greater the return.
However, having low feed‐in tariffs changes the whole approach to system design. There is a tipping point where increased size (and increased investment) actually results in diminishing returns.
Forget feed‐in tariffs. Focus on offsetting electricity costs
The viability of a PV system (photovoltaic system) with low feed‐in tariffs depends on offsetting electricity cost. And offsetting electricity cost depends on discovering the optimal level of self‐consumption.
There is a tipping point for self‐consumption with on‐grid PV systems. This is the maximum size of the system where we still achieve 100% self‐consumption. Building the system larger than this results in some of the PV generation being fed back to the grid and therefore, self‐consumption starts to fall.
Generation Profile for commercial solar power systems
But with the generation profile changing ‐ not only seasonally, but also daily and hourly ‐ what is this optimal level of self‐consumption? A system size maximised for 100% self‐ consumption in summer will fall short of that in winter. Conversely, a system size maximised for winter will over‐generate in the summer (and lower self‐consumption as surplus is fed back to the grid).
Load Profile for commercial solar power systems
In addition to this, load profile must also be considered. What if the load is biased towards the morning or biased towards the afternoon? This could impact the optimal direction you orient the array (the azimuth). For example, a more westerly orientation may be better for load profiles with an afternoon bias.
Tariff Structures for commercial solar power systems
Tariff structures could have a similar effect. We have worked with clients with quite complex tariff structures that could influence array configuration. For example, high morning tariffs could mean a more easterly orientation is better.
Obviously, each situation is unique and requires something more than an “out of the box” solution due to the complex interplay between these constantly changing variables – the solar resource, load profile and tariff structure.
Our approach to getting Solar Power right
Traditionally, a project’s net present value (NPV) is used to evaluate and prioritise projects. NPV takes into account the time value of net cashflows over the life of a project by applying a discount rate.
But rather than treating this as an “endpoint” calculation, at Pacific Energy we use NPV to optimise the PV design.
We model a system on an hourly basis over a year using NIWA weather data, the tariff structure and load profile from the time‐of‐use meter as the key inputs. The model then finds the optimal combination of size, tilt and azimuth that maximises the NPV of the project over its 25‐year life.
The maximised NPV reflects the optimal level of self‐consumption for the system which in our experience can be anywhere between 85 – 95% on an annual basis. This provides the starting point for more detailed design to be undertaken.
For solar projects, Total Utilities partners with Pacific Energy whose focus is on bringing sustainable energy projects to life.
By combining sharp economic analysis with a deep understanding of industrial power systems, they design and specify viable and pragmatic solutions that optimise energy use and reduce carbon footprint. They are experts in system analysis and provide unbiased, independent advice for investment decisions.
The retail price of energy for large commercial customers in New Zealand will remain elevated in 2020-21. So what are you going to do about it?
New Zealand’s large commercial market for electricity and natural gas has been on a roller coaster ride for the last 2 years, the likes of which have not been seen before.
There are numerous drivers that influence market movements. Fundamentally though it comes down to the balance between availability of supply and user demand.
Oil, gas, thermal and hydro
The Government’s decision to ban future offshore oil and gas drilling put an end date on New Zealand being able to meet all of its natural gas requirements. The closer we get to the end of current supply the higher the price will climb.
Supply issues with our largest field, Pohokura during 2018/19 and reduced gas production overall has more than doubled gas spot pricing from 2016/17.
In dry years, the electricity system relies on natural gas and coal to provide security of supply. This is for both base load and peaking generation.
With little to no new renewable base load generation planned in the immediate future, the market price is largely driven by the use of thermal based generation.
As consumers of electricity and natural gas, we have no control over the market. However here are a few prudent measures that can be taken to mitigate cost increases in a rising market.
Strike while the iron is hot
Electricity and Gas procurement should not be a once in a 2- or 3-year event. Leaving purchasing decisions to the last minute can have significant negative consequences.
You may only have limited options, having to accept what the market is offering or move to expensive default rates. If there are short term constraints in the market, then pricing may have been more cost effective 3-6 months ago.
Aligning your procurement strategy with a specialist energy consultant provides independent advice and a view of wider market considerations. This is particularly important when setting budgets for the following year.
Have I got a deal for you?
Incumbent retailers will at times be proactive in offering “deals”. However, this is usually from their view of the world and can be part of a defence strategy to sidestep customers reviewing the wider market.
In a rising market, we typically see a significant accordion effect. This is where the difference in prices offered can range more than 20%, even among the large generator retailers.
Without context, pre-emptive renewal offers can at times be viewed with suspicion. A specialist energy consultant can vet such offers quickly.
Understanding the market means pricing is checked against offers they are currently seeing. Advice can then be provided whether to accept the offer or go to market.
The mystic art of Power Factor
Often missed on large commercial invoices are power factor related penalty charges. These are billed by the electricity retailer on behalf of the local network distribution company.
Not all networks charge large commercial customers for poor power factor, but when they do the related charges can be avoided with correction equipment. (See: what is a power factor correction unit?)
There are a multitude of off the shelf solutions out there, however employing a specialist power factor company that designs solutions specific to requirements ensures you get the best bang for buck on your investment.
If correction equipment is already installed, make sure that this is added to your maintenance plan. If well looked after, correction units should last 10 years or more. They are susceptible to heat degradation. A quick check to make sure that air extraction fans on the units are work correctly and filters are kept clean can extend the life of the unit.
Rectifying power factor related issues can also help reduce peak KVA demand and associated costs if these are being billed by the local network company.
The secret life of kilowatts
Do you know how much energy your business uses when you are not there?
Energy monitoring combined with energy data analytics will help you identify energy wastage. Monitoring electricity use with real time energy analytics can also alert you to potential issues during operational hours.
This will allow you to act immediately rather than just seeing the impact on the monthly invoice the following month. With the rapid evolution of the internet of things, energy monitoring as a service is more cost effective than ever.
Are the good times over?
Unless there are structural changes in the market, Total Utilities does not see the retail price of energy for large commercial customers doing anything but remaining elevated (+/- 25% higher for electricity and +/- 45% for natural gas) compared to the 2013-2018 period.
A combination of dry weather, growth in the New Zealand population, general growth in usage and Government policy have put this in place.
Having an Energy Strategy that aligns with your business strategy and planning ahead, being proactive in minimising wastage and understanding where savings can be made will minimise the impact of rising prices.
