Government action required on NZ electricity market rules

Tony Clifford, Managing Director, Pan Pac Forest Products

This past year, several long-standing manufacturing businesses were forced to close, with sustained high electricity prices being a significant part of the decisions for these closures.

The impact of such closures on our regional economies is significant, not the least being job losses that strip communities of life and critical incomes that have sustained them for generations. In addition to the tax loss and export revenue to the overall economy, many suppliers to those mills will also be forced to close or downsize, causing further job losses and economic pain for regional communities.

Despite talk of an ‘energy crunch’, excessive electricity costs are not simply a seasonal issue that manufacturers might reasonably be expected to budget for. For the past six years, wholesale electricity costs have progressively increased. The graph below highlights the 2.5 times increase in New Zealand’s electricity prices compared to our Canadian pulp and lumber competitors’ prices, which have hardly moved since 2016 (data set does not include the so-called ‘energy crunch’ in August 2024).

Wholesale electricity prices in New Zealand began to rise when the Pohokura gas field shut down in Q4 2018 due to an engineering failure. However, when the gas field came back onstream in early 2019, electricity prices remained higher under the same hydro conditions prior to the event. Prices have continued to increase every year since, as generators test the wholesale market to see what it can bear.

Analysis work by the Electricity Authority in 2019 and 2020 identified through statistical modelling that NZ$38/Mwh of the increased pricing could not be justified by costs.

To highlight this issue, major energy users in the pulp and paper industry such as Pan Pac Forest Products, which contributes 6% to regional GDP, have been petitioning the Government since June about New Zealand’s unsustainable electricity market. Our campaign had nothing to do with the high spot prices experienced in August; we understand inter-month volatility. We have been in the wholesale electricity market for over 50 years – longer than every advisor to the Government.

We were not looking for a permanent sweetheart deal such as that provided to aluminium smelter Tiwai Point. However, we were hoping for a commitment from the Government to make real changes to the affordability of electricity to prevent more businesses from closing. They also need to provide confidence to heavy users of electricity that continuing to invest in our businesses has credible long-term benefits.

Instead, we read in the media a statement from the Minister of Energy that “Neither the Government nor the Electricity Authority nor the system operator [Transpower] will step in to insulate wholesale market participants from risk or to protect [major energy users] from their failure to manage their own energy supply risks.”

These statements show a lack of understanding of the challenges faced by major energy users. We accept that we did not have hedges in place to cover very high wholesale electricity prices for two weeks in August – but that is a symptom of the problem, not the root cause which is affordability.

Traditionally, Pan Pac hedged 50%-60% of its electricity requirements and was prepared to pay the premium charged by generators for the smoothing effect it provides. However, since 2021 the price of hedges has soared so high they exceed our break-even costs of pulp production.

We understand the Electricity Authority is considering a range of options to improve the market transparency and affordability; however, the options shared publicly appear to be more tweaking than genuine reform.

We are not criticising the large generators – they are working under the current market rules and are motivated and expected to provide maximum returns for their shareholders (including the Government). There is no regulation that says they are required to make electricity affordable.

Rather than blame major energy users for hedging decisions made back in 2021, it is up to the Government to take real action before more businesses close down and more communities are affected.

Source & image credit: Pan Pac Forest Products