‘There is no need to panic’: Electricity industry takes first steps to prepare for shortages

New Zealand’s electricity system is taking steps to prepare for the risk of conservation measures, with Energy Minister Megan Woods acknowledging soaring wholesale prices are putting some companies in jeopardy.

Transpower has begun publishing daily reports on the security of New Zealand’s electricity supply, with water levels in hydro lakes – the key driver of New Zealand’s day-to-day power needs – at unusually low levels.

Woods revealed on Wednesday that an inter-agency team to observe the electricity industry was being stood up, as Transpower says New Zealand is now approaching an early warning level on its “risk curve”, a model which measures the risk of the country facing supply outages.

“I think everybody in the system knows that there is no need to panic; we’re not at the 1 per cent risk curve yet, which is 99 per cent ‘there’s not going to be a problem’,” Woods said.

“But the fact that we have to make sure that the systems are ready to go, we need to make sure we’re preparing.”

Some energy observers say the industry is already under immense strain, with the key South Island lakes lower than average and unlikely to see significant inflows as we head into winter during a La Nina weather pattern, which means below-average rainfall.

Currently at around 66 per cent of average, it is the lowest for this point in the year for any year since prior to the creation of the wholesale electricity market in 1996.

Wholesale prices have soared, often to above $300 per megawatt hour, three to four times the long-term average.

“We are very stressed, right now. There’s no way of dressing that up,” John Kidd of Enerlytica, a leading energy analyst, said.

“And it’s not obvious in the system, how it’s going to fill itself, during the peak demand period which is, of course, winter.”

New Zealand would be short of electricity were it not for the giant Huntly Power Station “running hard” on coal. Kidd, along with other observers of the industry see rising risk of some form of political intervention.

Last week, Woods told an electricity retailers event that she had asked the Electricity Authority, the industry regulator, to check whether the current wholesale prices were fair, and what would be done to bring prices down.

She denied this was a step towards some other kind of intervention, and she was simply asking the question: “is it fair, is it reasonable, and, if it’s not, I want advice on what my options might be”.

'Like conserve water, but with no rules'

The complex risk curve formula of Transpower is approaching the 1 per cent point. In the event that it rises to 10 per cent – something which would likely require a further two months of dry weather in hydro catchments or other unexpected disruptions – it would trigger a nationwide conservation campaign.

Woods played down the significance of such a measure, likening it to “a summer water [saving] campaign, without the rules about when you can put your sprinkler on”.

Although she had identified the risk that elderly people – who tend to be the best in conservation campaigns – could expose themselves to the winter cold in unheated homes.

But she was not aware of a key aspect of a conservation campaign which would require electricity companies to pay account holders $10.50 a week if a campaign was called, a mechanism which would cost the sector millions of dollars a day.

“I have no advice that anyone’s gearing up to give anyone money,” Woods said.

The financial payments are designed to put the cost of conservation on the electricity companies rather than consumers, and the EA’s notice on the measure states that companies may initiate their own compensation measures before a campaign is called.

“There’s a lot of shared incentives across retailers to make sure that [conservation campaign] doesn’t happen,” Enerlytica’s Kidd said.

Many wholesale users 'have taken a punt'

The soaring price of wholesale electricity has already prompted a number of large industrial companies to curtail operations due to high costs, prompting a warning from the Major Electricity Users Group that without the problem being addressed, thousands of jobs could be lost.

“This is not a scenario that any of us wants to be in. I have no doubt that this poses risks to a number of companies,” Woods said.

But she also indicated that part of the problem was that some companies had “taken a punt” on the possibility that electricity would be in much greater supply.

According to Woods, around 60 per cent of New Zealand’s industry is currently exposed to the wholesale electricity market (as opposed to having purchased electricity at a contracted price), well above the 40 per cent that typically are.

This, she said, appeared to be a sign that users had bet that the Tiwai Point aluminium smelter would close in August, as majority owners Rio Tinto had claimed it would in mid-2020.

“A large number of industrial users made the decision to wait and see what the ultimate decision around Rio Tinto and their future at Tiwai Point would be and whether there would be cheaper electricity available in the future,” Woods said in Parliament on Thursday.

“That hasn’t come to pass.”

Tiwai Point’s deal to remain operating until 2024 saw it strike an electricity deal which is speculated to have it paying only about $35 per megawatt hour, a fraction of the prevailing spot price.

At a certain point, Meridian is able to trigger a clause in its contact with Tiwai Point to require it to curtail part of its electricity draw, freeing more supply for the rest of the market.

Another was to release fuel would be in the event that Methanex – which uses the bulk of New Zealand’s gas supply to produce methanol for export from plants in Taranaki – required to reduce its draw, freeing more gas for other users including electricity generation.

Although Transpower’s models appear to imply that Methanex would eventually reduce its consumption of gas as shortages loom, it is less clear exactly what would trigger curtailment.

Asked if she was considering intervening to reduce supply to Methanex, Woods played down the complexity.

“These things are inbuilt in the system, they are levers that are there, for when things do get tight, when we do encounter a dry year … This is neither unprecedented or unforeseen.”

Although the point at which Meridian asks Tiwai Point to curtail electricity use is set out in contract, it is less clear how such a request would be made for other major users.

“There’s a concern in the market that the minister could invoke some demand response,” Kidd said, however it would be a “dramatic step” if she required a user such as Methanex to curtail use.

“These companies take these positions for the very reason of managing their risk through the cycle, so, to ride into that and essentially reserve or take fuel from a market position and cut through commercial arrangements would be dramatic.”

The crumbling energy 'trilemma'

Kidd said all three legs of the “energy trilemma” of security, affordability and sustainability which Woods used to frequently talk about in the past was now crumbling.

New Zealand was short of both hydro electricity fuel (water) and gas, leaving the country’s supply reliant on imported coal.

The strain on supply had caused an affordability crisis with the cries from industrial users now “deafening”, Kidd said. “They cannot get economic energy for their process.”

Sustainability was “the worst area, by some measure”, Kidd said.

New Zealand was already reliant on 750 megawatts of coal-fired generation from the Huntly Power Station in Waikato, which was on track to burn one million tonnes of coal in four months, Kidd said, meaning New Zealand was likely to smash its all-time record an import around two million tonnes of coal this year.

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