Government was advised to consider power conservation campaign

Tuesday, 8 June 2021

Energy Minister Megan Woods told Parliament in April she was taking the situation in the electricity market very seriously.

Officials last month advised the Government to consider asking consumers to conserve electricity as one of two options to keep a lid on soaring wholesale electricity prices, documents released under the Official Information Act show.

But spokeswoman for Energy Minister Megan Woods indicated she believed there was no need for that at present.

Advice provided by the Ministry of Business, Innovation and Employment (MBIE) also warned that wholesale electricity prices could remain elevated for two years because of shortages of gas to use for electricity generation.

As well as directly impacting commercial power users, the ministry indicated higher wholesale prices could also be expected to feed through into the prices residential consumers paid for power.

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Ministry advised Government to consider two options; encouraging Methanex to stop using as much gas and a “mass market” power conservation campaign.

High electricity spot prices caused by low lake levels were likely to ease later this year assuming the lakes filled back up in spring, the ministry advised.

But it said forward prices for electricity might not drop as quickly, warning that it was those forward prices that would have the greater impact on the prices residential consumers paid for power.

“While retail prices are set through competition we generally expect retail prices to reflect underlying wholesale costs, on average over time,” it said.

The forward price of electricity had been sitting under $100 per megawatt-hour for most of last year, but had now risen to between $120 and $150, it said.

MBIE advised Woods consider two options to bring wholesale prices down.

One was to encourage the country’s largest gas user, Methanex, to cut back production to free-up more gas for electricity generation.

Methanex has subsequently done that by agreeing to suspend production at its Motunui facility for almost three months, but Woods’ spokeswoman said there had been no intervention by the minister.

The other option MBIE advised Woods consider was “facilitating electricity demand reductions from mass market consumers” who are on fixed-price contracts and not exposed to spot market prices.

But Woods’ spokeswoman indicated that would only happen if there was a 10 per cent risk of running out of controlled hydro shortage, which is the existing trigger for such action.

The MBIE document was not explicit as to whether MBIE was advising both options it put forward should be considered in parallel, or whether it was suggesting Woods pick one or the other.

The advice said Woods met directly with major power user NZ Steel in March, as well as with independent electricity retailers which have been squeezed by high wholesale prices.

Woods asked for the advice from MBIE that month, when it became apparent that some major industrial companies were being forced to cut production because of high wholesale electricity prices.

MBIE also said Woods could consider providing direct economic assistance to a major industrial electricity user, were power prices to push one out of business.

The spot market price of power was continuing to sitting above 30 cents a kilowatt-hour ($300/MWh) on Friday afternoon, about double its price at the same time last year, which was already above its historical average.