Energy crunch: can the same three cards be played again?

Saturday, 17 August 2024

The cards the power industry has been playing could get them out of the doghouse for now, but that may be all.

ANALYSIS: Three big cards are in the process of being played to keep the country’s lights on as New Zealand’s hydro lakes levels continue to drop and gas supplies splutter.

The drawback is that, once played, some of those cards need to go to the bottom of the pack and can’t so easily be used again, meaning they could only delay rather than prevent a crisis.

What game are we playing again?

Keeping the lights on, while turning off as little industrial production as possible.

The latest information from Transpower is that, on Thursday, the country’s hydro storage was just 53% of the average level for this time of year, down from nearly 55% the week prior.

North Island hydro lakes were holding less than 24% the average amount of usable water.

Meanwhile, tapering gas production has meant not all of the country’s gas generation can be turned on.

Lake levels should start to rise again from October, as snow melts, “charging up” the lakes so they are in better position to cope with the winter hump in demand.

If the lakes were as empty as they are now in March we’d be in deep trouble.

But the possibility of shortages appears serious enough to have sent wholesale power prices soaring.

Transpower reported spot market power prices averaged about $781 a megawatt-hour last week, about six times their price in the same week last year.

Businesses seeking to hedge their power prices over the next few years and finding they are having to pay about $250MW to do so and some factories are choosing to shut up shop or suspend production instead.

Card One: the Tiwai smelter

The first big card was played by Meridian Energy and Contact Energy in July, when they asked mining giant Rio Tinto to slash production at its Tiwai Point aluminium smelter by a third.

Rio Tinto began ramping down production at the smelter at the end of July.

It will start restoring production from September 25, though it will be April next year before its three main potlines are fully back online.

There is a long ‘stand down’ before power generators can again demand the same sacrifice from Rio Tinto.

The move has freed up about 4% of the country’s electricity supply for other power users, which has been helpful in containing the crisis.

The generators’ request was made possible as a result of the new power supply agreement they announced with the smelter in May.

But, under that contract, the generators can only call on the smelter to cut its production to that degree a maximum of four times in the life of their 20-year agreement.

A “stand down” period also applies, so the generators can’t count on being able to obtain anything near the same production cut from the smelter again before April 2026.

That card gets put back well down the pack.

It’s not ideal of course that a trump card has been played so very soon in what is expected to be a multi-decade energy transition.

Card Two: Methanex

The country’s biggest gas user, Canadian methanol manufacturer Methanex, announced last week that it would temporary suspend all its manufacturing in New Zealand until the end of October.

It will sell the gas it was contracted to receive at a higher price than it was paying for it to Contact Energy and Genesis, to allow them to operate their gas-fired power stations at closer to full capacity.

Methanex had previously been running its operations at only about 50% capacity.

So what contribution might it be able to make to balancing supply and demand if energy remains short after that?

Methanex New Zealand managing director Stuart McCall says while the company expects its plant to restart in November, its operating rate will be “subject to gas supply availability at the time and any continued support required by the electricity sector”.

Methanex appears willing to continue to forgo gas, at a price.

The suspension of its operations now won’t necessarily impact its ability to provide further demand response in the year ahead, McCall told The Post.

“We have provided demand response during periods of high electricity demand in each of the last three years by shutting down a plant to support the broader energy market,” he notes.

McCall says the company is keen to see new sources of gas come on stream so it doesn’t need to flex production so much.

“That being said, we will continue to work with the wider energy sector to ensure we continue to play this important demand response role,” he says.

Reducing Methanex’ production is a card the country may be able to keep playing for several years — at a price to economic activity and exports of course.

Generators have no automatic contractual right to call on Methanex’ gas in the same way that they can call on the smelter to reduce its production, so it’s also a card that could get more costly each time it is played.

Card Three: lake levels

Electricity system operator Transpower is currently consulting on playing the third card, which is the joker in the pack.

This is about the least troubling time for lake levels to be so low, but there are fears they may not refill before next winter (file photo).

It has been seeking submissions on a move that could make it easier for it to give generators the green light to draw down lakes Pūkaki, Tekapo and Hawea to levels that are not normally allowed, during the month of September.

That would mean they could squeeze more electricity generation out of the lakes.

But one downside is that they would then take longer to refill, increasing the risk of a further or worse energy crunch next year, when Transpower is already signalling a heightened risk of an energy shortage.

Transpower executive general manager Chantelle Bramley says bringing forward access to hydro “contingent storage” would help the industry manage the current dry period and keep New Zealanders supplied with electricity.

“It is necessary to give the industry flexibility to respond to imminent system security risks,” she says.

But Bramley makes clear there are trade-offs.

“We anticipate that inflows into hydro catchments will increase in spring, as they typically do, but we will be watching this closely with an eye to security of supply risks into 2025 and beyond,” she says.

“Our electricity risk curves have been signalling a heightened risk of an energy shortage next year for some time,” she says.

“This is primarily due to gas production issues and the underlying assumption that industrial gas users who have currently reduced demand will increase production.”

One card that hasn’t yet been played

Industry sources suggest there are two key periods when — depending on the weather — the energy crunch might be most likely to bounce back in the form of fully-fledged crisis; the first being January next year and the bigger worry being next winter.

That gives the industry and the Government little time and only a few options to plan for that contingency.

The Post’s sources now suggest it is too late for the industry organise a supply of imported liquified natural gas (LNG) that could be piped to generators in time to help address a power crunch next winter, as that might only be possible by late next year.

Importing LNG in containers and trucking it to power plants and other customers is a card the industry could play at short notice.

But it’s pricey option that generators will be desperate to keep up their sleeve if they can.