'Creaking and groaning' New Zealand energy system poses risk to economy

Tuesday, 16 October 2018

Falling lake levels and gas supply problems pose an 'immediate risk' to New Zealand's economy, with warnings that energy prices could rise across the board.

John Kidd, an analyst at research firm Woodward Partners' wrote that while petrol prices - and the impact on households - were gaining significant attention, the energy system in New Zealand more generally was under 'significant stress' along the length of the country.

'While most of the recent attention has focused on consumer response to surging petrol pump prices, the reality is that the pain stretches far deeper and involves nearly every fuel type consumed domestically,' Kidd wrote.

While he did not estimate the impact on households, the added costs represented 'clear and present danger' to economic growth, as businesses tried to pass on costs to households.

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Benmore dam, part of the Waitaki hydroelectricity network. A combination of falling lake levels and problems at some of New Zealand's major gas fields has analysts warning that the energy system is 'stressed'.

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'The across the deck increases to domestic energy prices is clearly bringing pressure to operating margins. Where they can businesses will pass on higher costs to consumers which will serve to squeeze household disposable incomes.'

Kidd said the situation was serious, describing a sector that was 'creaking and groaning' across the country. 'In our view the extent of the levels of recent and current stress is of a magnitude that presents a direct and immediate risk to NZ's economic performance across many key measures.'

As well as the impact of petrol prices, from tax, product costs and a weaker New Zealand dollar, Kidd warned that New Zealand's gas production was being constrained by outages to some of New Zealand's major gas fields, while storage in all of New Zealand's hydroelectricity networks was now below average.

Two separate, unrelated outages in the past six months have approximately halved gas production from Pohokura, NZ's largest gas field, with problems at two other fields limiting how much gas could be exported, Kidd wrote.

Genesis, owner of the Huntly Power Station, has said it could import coal, amid a shortage of gas supplies.

Meanwhile, storage in hydroelectricity systems was around three quarters of the average level and at the lowest point for this time of year since 2010. Although lakes were not at is critical levels, it was already having an impact.

'While storage levels are nowhere near minimum security levels, operators are holding water back in a conscious effort to hedge against the repeat of yet another dry sequence. The result is a sizeable increase in the share of North Island generation as thermal is dispatched ahead of South Island hydro.'

The impact of a lower gas supply was 'more pronounced currently than it normally would be'. Usually when lake levels were below average, thermal electricity generation would rise, however the price of gas was preventing this from occurring. Genesis, electricity generator majority owned by the government, has said it could import coal because of the shortage.

A spokesman for Energy Minister Megan Woods - who is overseas travelling - said Woods was receiving 'frequent updates' on the situation.

'MBIE is currently monitoring issues with short-term supply disruptions of natural gas supply - a disruption of gas supply at Pohokura, operational issues in other gas fields, and remediation work on a section of the Maui pipeline and slightly lower than average hydro lake levels.'

The spokesman said the issue was not one related to New Zealand's gas reserves, which were estimated at around 10 years. 'The issue is one of infrastructure capacity at the moment due to outages.'