Kyoda. I'm Chelsea Daniels and This is the Front Page, a daily podcast presented by The New Zealand Herald. Back in May, on the Front Page, in the wake of warnings about overuse of the power grid, we discussed what challenges faced the Energy Center for the winter ahead. Over the last few weeks, those challenges have become more and more apparent, with diminishing supply sparking rising power prices across
the country. It's prompted the government to this week announce it is fast tracking a new liquefied natural gas import terminal, amongst other measures. So what's behind this latest energy crisis and what can the government do to stop it? Today on the Front Page, we're joined again by the Major Electricity Users Group chair John Harbord to analyze this latest crisis. John, let's start with the obvious. What's going on with the power prices at the moment.
It's a combination of two things. One is longer term we actually don't know. In the shorter term, it's very clear that we have a scarcity of energy with which to make electricity, so our hydro lake levels are low. We've got less gas available than we thought we did. And partly just because it's winter. You know, solar generation is down just because of the number of daylight hours we have in winter. And we've had sort of periods where wind levels in the places of the country where
we generate wind electricity have also been down. And when something gets incredibly scarce, the price goes through the roof, and that's seen wholesale prices go from you know, three four hundred dollars a mega wad hour, you know, going up one thousand dollars a Mega white hour. The longer term issue is we had an outage at the Papakurr
gas field back in twenty eighteen. So when the gas field went down, the wholesale electricity price jumped from around seventy five eighty dollars a Mega white hour to almost twice that. But when the gas field came back online, the price stayed up, and it stayed up for the last six years. So that price has been averaging around one hundred and fifty to one hundred and sixty dollars
a Mega white hour for the last six years. And the electricity authority had a look at it probably three years ago now and they couldn't explain why the price had stayed up as high as it was now, I think there's a legitimate question or criticism that they didn't do anything about that. They just sort of made a
finding and carried on. So lots of people have different theories on why the price is high, but we don't have a really rigorous examination of it, which is why I say we don't actually know.
What does this crisis mean generally for the average Keiwi. Is it simply that their bills are going to Yeah.
I think it's important to note that most Kiwis are on fixed term retail plans with their electricity retailer. So while their current contract is in effect, they're probably not noticing too much right at this very moment. But the next time their plan gets renewed, you know, households could be in for a bit of a shock. But ultimately, the high wholesale prices do get passed on to households
to a degree. We do know that the Big four Gen Taylors have been running their retail arms at a loss deliberately, and that has shielded households from a lot of the impacts that larger manufacturers are experiencing. Shane Jones is accusing the big power companies of profit tearing as big firms layoff workers.
The energy prices at the moment offered by Gen Taylors are the highest in the western world. The gent tailors have promised for so long that they can boost energy security. The shar shows.
That they've failed.
We've got to a point where not only a deep dive, but the time for talk is over.
The words price gouging have been thrown around a lot in this crisis, so those accusations fair.
I think what I would say is there is a basis on which to make those allegations. So if I unpicked that. Back in two thousand and nine, the Commerce Commission reviewed the wholesale market and found that prices were higher than they would be in a competitive market because the big four generators had market power and they were
using it to keep prices higher. And I want to stress though, the Commerce Commission also found there was nothing unlawful happening, so there's no no one's breaking any laws or anything like that. And there were a suite of independent studies that followed that that all found pretty much the same thing. The Electricity Authority itself again in that
same piece of work two or three years ago. They also found that same thing, that the big four generators have some market power and prices are higher because of that. MUTE itself commissioned some work around analyzing the level of economic profit, and we certainly found that in some cases there's evidence of that of very high levels of economic profit, but it wasn't across all generators, So I think we also need to be careful that we don't make blanket allegations across all generators.
The phrase gen Taylor's, and you've mentioned it once now it pops up a lot during the coverage. What is a gen Taylor?
Yeah, so it's basically referring to the four big companies we have that do both generation and who do retail. So you just combine gen with Taylor from retail, and we mash it together to make a single word. It's a recognition that they make electricity and they sell it to households.
So how have these Gen Taylors responded to all of this? You mentioned they're actually running at a loss.
They've been running their retail arms at a loss. Their generation arms over the last few years have certainly been making very high levels of profit. Some of the Big four have been running you know, almost all time record profits year after year for some of the recent periods. So there's like I said, there is certainly a basis on which to make those allegations. But equally, we haven't had a really rigorous analysis, like from say the Commerce
Commission into that issue. So like I said, there's there's certainly a basis to make those claims. There's certainly evidence of it, but I just think you also just need to be a little bit careful that, you know, we're not applying that allegation equally to everybody. Some of it could just be you know, a combination of fact is almost sort of beyond the control a little bit of
some of these companies. So you know, if you are Meridian, for example, and I'm not using them to shine a light on them, this is in the sense of, you know, a lot of their generation assets were built back in the nineteen sixties, you know, the big hydro dams in the nineteen seventies and nineteen eighties, and they've been built to a very high standard, so you know, they haven't had to spend a lot of money on new generation
until more recently. So because they're not spending that money on new generation, then kind that looks like their revenue is higher as a result of it. That's not to say they're doing anything unlawful or anything dodgy. It's just the fact of, you know, the assets that as a business they inherited. But there's no doubt that some gen taylors have been earning very high levels of profit in
recent years. And it's particularly concerning in the sense of electricity is in the truest sense of the word a public good. You know, we can't have modern life without it. Our households don't function without electricity, and our demand for it is highly anelastic. And by that I just mean you don't have a lot of control over how much electricity you use. You've got to have showers, you've got to cook your meals, you've got to heat your home
unless you just simply can't afford it. There's not a lot of discretion in there around how much electricity you use, so you've kind of got a captive consumer market. So it's important that people can have confidence that the price they're paying is fair. And I don't think the government or the regulators could say hand on heart at the moment that prices have been fair for the last six years, let alone in the current situation.
A review of the performance of the electricity market is being jointly conducted by the Commerce Commission and the Electricity Authority At the moment, what do you think that might reveal.
We haven't seen the terms of reference for it, so I'm not entirely for exactly what they're looking at. But if I assume it's a general review of electricity market regulation, then I think on the basis of past work, we're likely to have a finding that prices are higher in New Zealand because of a lack of meaningful competition in the generation space. Now we hope that changes over time with more generators entering the market and from the announcements,
distribution companies can potentially start generating as well. But it's also a reflection of New Zealand's a small country. We don't have a lot of operators in that space, so you know, regardless of the finding, not much might change in that space. But you've also got to unpick how we arrive at the wholesale electricity price. So the current market settings are very good at pricing short term scarcity
or short term availability of electricity. What it's not very good at is taking sort of a longer run view of pricing. So our prices tend to be high because everyone in the short term seeds risk, whereas if you're taking a longer term view, risk sort of gets evened out over time. So I would hope that we've come to some things that would end up with the market taking a longer view. There's also a really important question
around how we arrive at the wholesale price. So at the moment, if you're a generator and say you're generating wind or hydro electricity, because roughly speaking, supply of electricity matches the demand for that electricity. Genuinely speaking, if you're generating electricity, you know you can kind of sell whatever you're making. So what it is is you price up to the most expensive form of electricity. So in New Zealand, the most expensive form of electricity is coal fired electricity
because almost half the cost is from the ETES. But if you're making wind electricity, you're not paying any ETES costs. You just make a massive profit at the expense of consumers. So I would hope that it would look at what's the regulation around renewable electricity versus thermal electricity, and do you sort of decouple the two. So renewable generators aren't making excess profit at the expense of consumers because they
don't have to pay etes costs. Equally, I think one of the things that the current crisis has really highlighted is the market is very poor at taking an nz INK approach or perspective. So individual generators, you know, they're looking at what's the new generation we can build, and often that you're looking at wind or solar if for no other reason, then you've got a chance of getting
those consented. But people aren't looking at, well, who's going to be say the gas or qualified peaking plant we're going to continue to need for the next say ten years, because you'd never get it consented. And Equally, a lot of companies don't want to be seen to be building through more generation because social license and as a country we're not particularly keen on emissions. We need some way for the market to identify what generations actually required and
then to incentivize that generation. So I think there's a really interesting role there potentially for transparers the system operator to do that analysis around what generation mix do we need and in what amounts, and then whether it's through going to market for contracts to supply that generation, or through another mechanism you go back to the market for the provision of that generation. But there's no sort of coordination at all in the market in that respect.
The government this week announced a liquefied natural gas import terminal will be fast tracked. First of all, what in the world does that mean?
The shorthand version is we just pay for someone to send the ship to New Zealand carrying LNG and they just sail into port, they hook up to a pipe and they pump the gas into our existing network. That's fundamentally it. So it's just the means of getting natural gas from a means other than our own gas.
Fields, right, And so LNG is that natural gas? How will that help the crisis that we're facing now.
Well, one of the big constraints we've got at the moment that's exacerbating the crisis is we just don't have a lot of gas available now. Methods has acted very responsibly in ceasing manufacturing of methanol for a few months and just basically selling their gas directly to genesis and contact to make electricity with. But you know that's not a long term future for Method X because then they're not actually making any product, So they can't do that indefinitely.
And until we can unlock more of the gas that we know is in our existing gas fields, we need sort of a short term solution, and so the government's decision will just make it a lot quicker and easier for us to bring ships in with LNG and put that into our existing system.
LNG liquefied natural gas is hailed as the magic solution to a lot of our problems. In Europe that's getting much less gas from Russia. It's supposed to keep the lights on. In Asia, it's supposed to do away with dirty coal, and in the US katar in Australia, where most of the stuff is coming from. It's supposed to make a lot of people a lot of money. When all a said and done, LNG remains a fossil fuel. If we are serious about slowing climate change, we need
to dig it. The sooner the better, and every terminal we build makes that harder.
The government's blamed a lot of this crisis on labor for canceling oil and gas exploration. Labor has responded by saying that the part privatization of Gen Taylor's under Sir John keyes National, either of them or both of them.
Right, If we take the first one, the offshore oil and gas band, I think that's been a contributing factor. It essentially scared off investment and maintenance into our existing fields. So because we haven't had that maintenance and we haven't had sort of the fresh exploration of existing fields, So not even talking about finding new ones, but just ongoing
exploration of our existing fields. The question around the impact of the partial privatization of three of the Gen tailors, as I mentioned earlier, you know, the Commerce Commission found there were issues with excess pricing in two thousand and nine before the partial privatization happened. So I don't think we can be as clear cut on the partial privatization question.
Having said that, though the independent work that the Major Electricity Users Group commissioned a couple of years ago into the levels of excess economic profit certainly showed in one case that the level of economic profit being earned certainly started to pick up quite dramatically following the partial privatization but that's just looking at one generator, not across the whole market, So I think that's still a bit more open to debate.
And John, with winter ending, is this crisis likely going to come to an end for the foreseeable future and what can be done in the next twelve months to stop this happening next winter. I suppose that's a conversation we have every year.
I think it's really important that we recognize that the current crisis we're in hopefully sort of the level of crisis diminishes, but we're stuck in this situation for a while. This is not a short term issue, so the risk of rapidly escalating household prices, for instance, is one hundred percent still there. And I think, you know, the announcements to the government made this week will certainly help in
the longer term. You know, if we can secure a ready supply of gas to supplement our own domestic production of gas to make electricity with, that will help, giving distribution companies the ability to also generate how tricity. That just means potentially we've got more electricity being made. That will take some of the pressure off, though that's a longer term thing. If we can get the market settings right, that will certainly help restore confidence in the market, because
the confidence is really low. But there's a really crucial state that we're in with the electricity system as a whole. It's essentially the transition to sort of a lower emissions future. And what I mean by that is as we become more and more reliant on renewable electricity, particularly wind and solar, which is what most of the new generation being built is, we have to recognize that they are both highly intermittent
sources of generation. So an efficient wind farm is making electricity about forty percent of the time, and solar generation is making electricity even less so for all the time when the sun's not shining and the wind's not blowing, you need other sources of electricity to fill in the
gaps for want of a better term. Now, usually we rely on the hydro lakes, but often the hydro lakes, you know, it seems like every couple of year, every two or three years, the hydro lakes are a bit low, and so you don't have a lot of options to fall back on, which is why we're going to continue to need gas and coal for the foreseeable future. I think we all hope that we use less and less of it, but we're still going to need it. The point I make there is the cost of becoming more
reliant on wind and solder is massive. And that's not to say that the cost of building that generation is expensive, because it's not relatively speaking. It's all the work you have to do to the infrastructure around distribution and the rest of it that's really really expensive, because you need to shore up all that wind and solar with other forms of generation that you have to build, and you
need the infrastructure to move all the electrons around. So there's a real trade off that we're going to have to make at some point around affordability and how renewable we actually become. And that's in the context of New Zealand is either the second or third most renewable electricity generation in the world already, so you know, we're all ready a world leader. So I don't think we need
to sort of castigate ourselves too harshly. We're doing a pretty good job, so we can always obviously do better. There's a balance to be reached about how renewable we go and how much sort of thermal firming or peaking we keep in the system, and I don't know if we've got a really clear picture on that yet, but that's a debate or a trade off that's rapidly coming towards us, and until we get an answer to that, then that's just going to get worse, not better.
Thanks for joining us, John. That's it for this episode of The Front Page. You can read more about today's stories and extensive news coverage at zat herold dot co dot z. The Front Page is produced by Ethan Seals with sound engineer Patty Fox. I'm Chelsea Daniels. Subscribe to The Front Page on iHeartRadio or wherever you get your podcasts, and tune in tomorrow for another look behind the headlines.