Govt anxious over soaring electricity prices’ effect on residential prices

Analysis: The kiwifruit coolstores that Seeka operates across the upper North Island use 50MW of power. It’s not Tiwai Point, and it’s not Glenbrook steel mill, and it’s not Fonterra – but when chief executive Michael Franks has to balance his books, it’s a lot.
It’s still early in the morning in Melbourne, where Franks is this week. He’s looking at power prices in Australia that are only a fifth of what New Zealand companies are paying on the spot market.
In New Zealand, his coolstores are full steam ahead. Forty three million trays of kiwifruit pass through them every year, bound for global markets. He’s hedged on his power bills, negotiating a price through to 2026, but he’s watching nervously as electricity wholesale prices rise.
A shortage of gas supply (used for ‘peaking’ power generation when hydro, wind and solar dry up) has combined with low hydro lake levels to send wholesale electricity prices to unprecedented highs. Electricity Authority data shows they’ve soared from as low as $3/MWh in the lower South Island in January 2020, just before Covid hit, to nearly $800/MWh this week. They spiked briefly to nearly $1700/MWh last week.
Winstone, Oji Fibre and Pan Pac pulp mills have all ground to a halt, at least for the time being, putting hundreds of jobs on the line.
Seeka is doing what it can, by hedging and installing solar panels on its roofs, to protect itself against rising prices. But, like other business leaders, Franks is worried. “Electricity is a major part of our business, because we’re trying to keep the fruit at the right temperature.”
This week, the Government is tipped to announce it’s stepping into the electricity market. Major Electricity Users’ Group chair John Harbord says he’s expecting a short-term intervention, such as importing liquefied natural gas for thermal firming, and a speedy study into competition barriers in the energy market.
Though the Electricity Authority and the Commerce Commission will likely contribute to that work, Energy Minister Simeon Brown is unlikely to be willing to wait around for a 12-to-18 month market study. He’ll want quick answers to where the Government can intervene with long-term structural changes.
“Nothing’s off the table in terms of the options that they’re getting advice on, from doing very little all the way through to very heavy-handed government intervention,” Harbord says.
It seems unlikely this Government would go to the lengths of structural separation of the generation and retail arms of the four big ‘gentailers’ – Meridian, Mercury, Genesis, and Contact. There are strong arguments that those companies’ healthy balance sheets enable investment in the renewable power generation the country needs to avoid these regular dry winter crises.
Harbord is sceptical, though. “There’s a high level of declared intention to build renewables, but declared intention is not the same thing as putting a spade in the ground.”
Mike Fuge, chief executive of Contact Energy, is promising announcements in the coming days about how it will address the problem in the short and medium-term. In The Post today, he says the market is working.
“What you’re seeing at the moment is a very high level of investment into the NZ market, which is quite frankly unprecedented, and the biggest risk to that is if the Government says ‘hang on, we’re going to change all the rules’,” he says. “The last thing we need right now is politicians rearranging the deckchairs.”
Fuge argues that volatility is part and parcel of energy markets – “things can get a bit bumpy at times” – but the average Kiwi household is protected from that.
Perhaps; perhaps not. The expectations are that rising wholesale prices will start to affect residential prices, and that’s something the Government will be anxious to mitigate.
At Seeka, Michael Franks says the answer can’t be importing more fossil fuels. “I’d make the point to you that we haven’t been undertaking gas exploration because it’s not good for the planet,” he says.
“But if it leaves us in a situation where we have to import it, it’s kind of a nonsensical situation. Not only are we not bringing it out of the ground, but we’ll then be bringing it halfway across the world. I can only hope they find a more sustainable solution so we can have stable renewable energy in the country.”