As certain as death and taxes, power prices are going to rise

By NZPA

Friday 31st January 2003

The low battery indicator is already flashing that the power crisis of 2001 caused by an unusually dry winter could be rerun this year.

Wholesale prices are above average for this time of year, demand is higher, in-flows lower and the all-important hydro storage lakes which generate 60 percent of power, are below historical averages.

It should be noted that rainfall can't be accurately forecast more than three months ahead and all players say it is premature to predict a dry winter with consequent low hydro generation.

There have been some special factors influencing prices, notably maintenance on Contact Energy's Otahuhu B station and on the Maui gas pipelines.

Nevertheless, there is a degree of nervousness.

"It's far too early to tell. In January and February all sorts of things can happen but as we get into March/April we will know if we are going to have a repeat of a dry year," said Ralph Matthes, executive director of the Major Electricity Users Group.

Asked whether he can give assurances of no repetition of 2001, Energy Minister Peter Hodgson categorically said "No!"

"How can I do that? We had the lowest (rainfall) since records began, we had no brown-outs let alone blackouts, and you're asking me for an assurance it won't happen again?"

Generator Contact Energy's share price rose 10 cents to a record $4.22 both on the concerns about winter prices and on long-term worries stemming from the availability of gas to replace the giant Maui field.

One way to ensure no re-run is to build more power stations, but that will guarantee higher priced power.

When New Zealanders are asked if they want cheap power with more risk or more security at a higher price, they answer they want the best of both: cheap power at low risk.

A Government inquiry in 1992 concluded New Zealand needed to go from a 1/20 risk of a dry year to a 1/60 risk, but having moved to a market-driven regime in 1999, consumers will pay for such "luxury".

So has anything changed from two years ago when wholesale electricity prices on the "spot" market spiked nearly 10 times, leading to rises in retail prices that have become permanent?

The answer is: yes, but not dramatically so.

Energy Minister Pete Hodgson has tweaked some "gaming" and disclosure rules, pushed for more co-operations between players, but generally concluded that the free market worked in 2001.

Some big commercially driven changes resulted from 2001. There are no longer the huge mismatches in the market between those with power (literally) and those without but with a lot of customers.

NGC's On Energy sold its electricity customers to state-owned generators Genesis and Meridian at a cost of hundreds of millions of dollars while Trustpower has bought more generation capacity and taken out long-term hedge contracts.

The minister has pushed generators to take a more co-operative approach guided by grid-operator Transpower and within commercial realities.

He has told the industry to do more in terms of contingency planning and Transpower has put early warning systems in place.

Transpower has improved its network to allow easier reversal of the normal south-north flow of power, lifting tolerances on transmission lines to allow more "juice" down the lines traded off for a greater risk of outages.

Consumers will be offered incentives to save power at peak times.

On the vexed issue of hedging (long-term contracts), Mr Hodgson has threatened mandatory contracts, although done nothing.

After much investigation, the ministry concluded hedging is available, it's just a matter of price.

"It wasn't clear that there was a big problem obtaining hedges," said Mr Hodgson's spokesman said.

Many major users prefer to buy power on the spot market because it's normally cheaper.

Big users such as Norske Skog screamed at huge cost rises and preferred to halt production instead of paying high power bills.

Now people understand the risks more, but it won't stop them blaming the Government or the system when they are caught out every one in 20 years.

Carter Holt chief executive Peter Springford this week claimed no one will build a new pulp mill to cope with New Zealand's "wall of wood" in the current environment.

"I don't think anyone would be wanting to make new commitments or new pulp mills until we have some certainty on the future of our energy supply and the cost of that energy."

While the Government would love the thousands of jobs created by the building of a new mill, Mr Hodgson's spokesman said what Carter Holt was essentially asking for was a return to the old days of centrally-managed regime with guaranteed power prices forever.

"The answer is to take a long-term hedge. He just doesn't want to pay the price," the spokesman said.

The reluctance of major users causes a circular problem -- if big users and retailers don't buy long-term hedges then on the supply side there is no incentive for generators to build new generation.

They then tell customers they can't guarantee supply.

"It's a feature of the market that is giving the minister pause for thought," Mr Hodgson's spokesman said.

He is toying with the idea of compelling generators to offer longer-term hedges and requiring them to offer more than their current capacity.

Dry year or not, as certain as death and taxes, consumers can be sure power prices will rise.

With the giant Maui Gas field due to be exhausted in 2007, the days of cheap, abundant energy in New Zealand are due to end.

The big hope to replace Maui, Pohokura, yesterday downgraded estimates of the size of its field to as low as 45 percent of the original project.

There are a number of imponderables about by how much power prices will rise. These include: how much gas is available to replace Maui, whether enough new generation is built to cope with an expected 150MW/year extra demand, and how much the effect of signing the Kyoto Protocol influences prices.

Mr Hodgson's own estimate is that prices will be up 8-10 percent by the time the next station is on line in 2006.

That station is supposed to be Genesis' planned 400MW E3P station by Huntly. But it looks increasingly likely to be shelved like Contact Energy's similar sized Otahuhu B plant because of uncertainty about the availability of gas.

The giant 100MW Huntly station, which essentially kept the lights burning in 2001, is likely to switch to coal use post-Maui and in a world worried about greenhouse gases that may cost consumers.

Mr Hodgson said last year he had been told in commercial confidence that some 2000MW of generation is planned in the next 10 years -- more than the expected increased demand of 1500MW, 2 percent per year.

Meridian's 570MW Project Aqua on the Waitaki will tap the last big hydro reserves available, but it has yet to receive resource consents and the first stage of just 585MW is not scheduled for completion until 2008.

There will be an increasing number of micro-hydro, geothermal and wind projects come on stream as the wholesale price rises to make these more economically viable.

Macquaire Equities investment director Arthur Lim believes that with economic growth of 3 percent-plus for the last three years, demand for electricity will be rising at around 5 percent per year.

The University of Canterbury's Centre for Advanced Engineering in its sixth report on electricity supply and demand last October concluded there would be insufficient gas to run New Zealand's existing gas-fired plants.

However, Mr Lim said New Zealand is very "gas prone" and successful exploration would come as Maui depletes.

Energy consultant John Noble wrote in this month's Unlimited magazine that Mr Hodgson was "downplaying the seriousness of the situation for all he's worth".

"You've got an energy minister who either knows something nobody else does, has been misled by his officials and thinks there isn't a problem, or is hoping the problem will go away of its own accord."

Noble believes the electricity reforms are fatally flawed and calls on the Government to make contingency plans and even "intervene in the market".

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