Power crisis cost the economy $300 million this year, expert says

A leading energy analyst estimates this year's power crisis cost the economy $300 million in lost exports.

The actual cost will be revealed next week when quarterly GDP figures come out.

Enerlytica head of research John Kidd crunched numbers, including Ministry of Business, Innovation and Employment (MBIE) data, to reach his estimate.

Figures showed a 10 percent drop in industrial electricity use for the June to September quarter compared to the same time last year. Following the spot price soaring in that quarter, three North Island mills closed, resulting in the loss of hundreds of jobs.

Kidd said the industrial sector contracted production in response to what was happening.

Business leaders in the upper North Island met last week, where it was agreed high energy costs were one of the biggest handbrakes on the New Zealand economy. The group is working on a proposal to reform the electricity sector.

Kidd told RNZ's Nine to Noon on Friday the true hit to the economy was bigger than the $300m figure suggested.

"That estimate is really just the foregone export revenue that would have been realised had our largest industrials not had to turn down over the winter and frankly turn their energy over to the domestic sector.

"That $300 million bill you could split that across really two sites - and that is the Tiwai Point aluminum smelter and [https://www.rnz.co.nz/news/business/524995/methanex-temporarily-shutting-new-zealand-methanol-plants Methanex's operations up in Motunui. Both of those operations turned down and liberated energy so we could keep our lights on at home."

He said similar problems have been happening for years.

"Methanex has been turning down its operations, for example, for the last four or five years. And if you add the two together, in other words beyond just the most recent period, you're talking closer towards $1 billion of foregone export receipts simply because we don't have the domestic energy to be able to convert into manufactured and finished goods."

This year was extreme in that Methanex, for example, had to shut down completely.

"We've found since, actually, since those 13 August agreements, the energy that they turned over to the market is too great for the market to be able to absorb.

"And even today, we have a significant gas surplus in the market. We have too much of the stuff we can't find home for it, which is quite a ridiculous thing to say given that the catalyst for the 13th of August agreement that turned me off were the exact opposite."

In a normal year Methanex would use up to 45 percent of the overall market, Kidd said.

"We've just seen that when they turn off, the gas sector flips on its head."

While prices have come down since mid-year, future prices were still looking high.

"We went through a very long period until 2019/20 where spot prices and futures prices were broadly in line with each other at below $100 a megawatt hour.

"Now we are seeing, well, certainly during winter 2024, we saw some very high forward price that were in line with the risk profile… assessed at that time.

"Prices have come back now… we've got past the crisis, the immediate crisis and some pressure has come out of the market. But forward prices for winter in particular for 2025/26 are still $200 a megawatt hour, north."

Companies typically pay for power in advance to lock in a price ahead of time. The mill closures were partly prompted by high power prices - one citing a cost of $500 per megawatt hour.

"It is a big part of their decision-making," Kidd said. "It's never the only part of the decision making. The reality of course, is that for a number of particularly legacy industries which or legacy sectors, operations… some of them are already bordering on being viable… it does break the back if you're coming into the market at the wrong time and you need to go and buy yourself three years of electricity at precisely the wrong time."

After a few years of uncertainty, Kidd said increased capacity was finally coming online.

"We are now seeing increased capacity coming through. But the cost and the speed of that to bring to market are both extremely onerous."

There were a couple of years with big hydro surpluses, he said, perhaps leading to complacency and the winding down of the country's coal stockpile.

"Clearly that was not what was needed in the winter 2024, and I think there will be a lot of learnings that come through this as we head into '25 and beyond as to how to how better to manage risk.

"You know, the bottom line is we need a deep coal stockpile in the country. We didn't have it this year. And that's a fuel of last resort, whether you like it or not. And none of us do. We need to call on it when all else has failed us and we didn't have enough of that fuel in the system to be able to meet the capacity that we had during winter '24."

Having a bigger coal stockpile could have prevented the use of the "nuclear button" in stopping industrial gas usage in August, Kidd said.

"It rained heavily and for a long time, almost immediately after those deals were struck. Hey, presto, we've got a lot of free fuel that comes into the system. All of a sudden, we don't need this stuff which has been liberated and Methanex, by turning off, has released half of the gas sector into the market and the market can't absorb it. It's too much…

"I'm not sure if it would have avoided it, but if we'd had more coal in the system earlier than what we did, we would have been able to smooth out the lead- in to the 13th of August…

"I think there will be even now a lot of deep thinking and discussions and negotiations and ultimately agreements that go on that make sure that, you know, we do have a lot of coal and system heading into next winter. We do have better demand side arrangements than what we ended up striking with Methanex, which was just to turn one of our largest energy users off and to turn the energy over to the market, which was too much.

"You know, there are better ways of doing that and I think we'll, we'll end up there, we should end up there, and if we don't end up there, we need to ask ourselves again as to why we didn't end up there."

Reform proposals

Northern Infrastructure Forum executive director Barney Irvine told Nine to Noon on Friday the group was working on a proposal to reform the electricity sector.

"There's a lot of concern out there - we work very closely with the Auckland Business Chamber and that is certainly the sentiment coming through the membership there.

"Obviously, the concern is focused at the bigger end of the sector in terms of usage, the manufacturers and the industrial users. But it's being felt right through the business community. Everybody from the cafe to the car groomer has experienced the pressures."

Irvine said energy prices had doubled in the last six years and were having a "massive impact".

A poll of Auckland Business Chamber members found two-thirds had experienced a large increase in energy costs, 80 percent saw energy costs as a concern for their business, and two-thirds again thought energy reform was a very high priority for the government.

"There was a bit of discussion about some more immediate initiatives, some things we could do right away, and one of those would be to ensure that there is adequate back-up if we don't get enough rainfall next year, if it's a dry winter.

"And [Kidd] referenced the importance of a stockpile of coal for instance, but other initiatives - there is an opportunity to separate out the pricing of thermals and renewables within the market. They're bundled together in quite a technical process which I'll struggle to articulate perfectly.

"But putting it in short terms, the thermal and renewable energy costs are bundled together and the cost ends up being set by the thermal cost, pulling everything right up. If you were able to separate those out within the market that would reduce wholesale price."

There was also talk of a single regulator for the industry.

"What you really want is a single agency overseeing the sector and being held to account for its decision-making. For instance, there was nobody there sort of overseeing the system earlier in the year as the pressure started to come on, there was nobody there to identify you know, what was being done in terms of the stockpile.

"And so leadership there is certainly required, also part of that leadership is developing a plan, a strategy, a long-term direction for the sector."

Separating generators and retailers entirely would be "at the harder end of the spectrum", Irvine said.

"But look, let's put it this way - one of the comments that came out of the discussion was that 30 years ago, the world was looking at New Zealand and as a model and seeking to replicate the changes that have been put in place here in the 30 years that have followed

"The rest of the world has evolved as markets have evolved and we haven't. And so there's a very strong feeling within the sector that we need to adapt in order to be able to properly meet the present-day requirements."