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Elevate Magazine
August 14, 2024

NZ’s Looming Power Shortage Crisis – How Did We Get Here?

power lines

Photo by Fré Sonneveld on Unsplash

We are amidst a power shortage crisis in New Zealand, with wholesale electricity prices rising to more than $900 per megawatt hour on Wednesday, having doubled in the past three weeks. To put that in context, at this time of year, in 2021, the price of wholesale electricity was $100 per megawatt hour.

The manufacturing sector has been the first to feel the hit, with production plants up and down the country being forced to halt production, finding it cheaper to shut down operations than stay open.

Pan Pac Forest Products in Hawke’s Bay, for example, has been forced to halt pulp production. They found that the financial burden of shutting down is now easier to bear than staying in operation while electricity prices are this high.

In Penrose, Auckland, a shift electrician at Oji Fibre Solutions returned to work recently after a routine maintenance shutdown. His employer told him that his plant may have to close “because of the cost of doing business.

And it’s not just businesses that will be feeling it. Electricity supplier Octopus Energy’s chief financial officer Margaret Cooney stated last week that “You can expect probably a 25 percent to 40 percent increase in your total bill depending on how much energy you use and where you are.

Furthermore, an impending ripple effect will soon be felt in the community as widespread manufacturing closures disrupt supply chains. As Tony Clifford of Pan Pac Forest Products points out, “Normally we would be producing – with the mill going at full capacity – upwards of 700 dried tonnes a day of pulp, and that represents on a weekly basis, millions of dollars.

New Zealand’s looming power shortage crisis perhaps isn’t looming anymore. As electricity prices hit all-time highs causing manufacturing plants to continue to face closures and the economic hurt to spill out into the community, one in five Kiwis are now seriously concerned they may not be able to afford their power bills this year.

So, how did we get here?

In short, our current power shortage crisis can be attributed (put simply at least) to two correlated factors:

  • Global supply chain constraints.
  • Labour’s 2018 ban on domestic oil and gas exploration, coupled with low lake levels causing hydroelectric dams to underperform this year, has exacerbated the impact of the supply constraints on our energy security.

How have global supply constraints impacted NZ electricity prices and contributed to our current power shortage?

As borders opened up in the aftermath of the COVID-19 pandemic, a sudden surge in the demand for natural resources caused prices to climb.

Then, in February 2022, Russia invaded Ukraine. By March, a combination of global sanctions on Russian coal, a subsequent scarcity of coal coupled with a spike in demand for gas, and a general fear of supply chain disruption caused the prices of oil, gas and coal to reach historic highs.

To break it down, Brent crude oil prices in March 2022 were the highest they had been since the 2008 financial crisis at $139.90 US per barrel. They have subsided somewhat since then but still remain elevated compared to pre-war prices.

Global gas prices have risen by 180% since the start of the conflict, primarily due to European markets that relied heavily on Russian gas, whose supply has been cut amidst ongoing sanctions, increasing global demand.

Coal has also seen a 96% increase over the same period, also due to sanctions increasing global demand and disrupting supply chains.

With fossil fuel prices surging over the past two years, the world has been feeling the squeeze. Countries without a domestic supply of natural resources who are entirely at the mercy of the market have been feeling it the worst. Unfortunately, it looks like New Zealand is joining that boat.

How has the 2018 ban on domestic gas and oil exploration had an impact on current electricity prices?

In 2018, the Labour Administration banned domestic oil and gas exploration as part of its wider effort to transition New Zealand to a carbon-zero economy. The ban was met with criticism of its economic ramifications and speculation as to whether it would reduce our national carbon footprint at all.

With regard to the current power shortage, while it is unfair to suggest that Labour could have foreseen COVID-19 or the Russia-Ukraine war, the timing of the ban couldn’t have been much worse. New Zealand produces a substantial amount of renewable energy by global standards, but not enough to sustain itself without some reliance on fossil fuels. So by banning oil and gas exploration and allowing our domestic reserves to quickly be depleted, we are now at the mercy of the extortionate and volatile global market.

Ultimately, as Resources Minister Shane Jones argues, the 2018 ban not only halted exploration to identify new sources but also shrank investment in further development of fields that sustained current levels of use. This necessitated a reliance on importation and has exacerbated the domestic impact of global supply chain disruptions.

How much oil and gas did we produce before the ban?

At peak production levels in 2007, our crude oil fields were producing 72,000 barrels per day. As of March this year, we are producing just 6,000 barrels per day, a drop in production of over 90%. That number has been in slow decline since 2008 due to depleting oil reserves, and without the prospect of new oil reserve exploration, it will only drop further.

It is not surprising, therefore, to learn that primary imports of primary fuels and lubricants, which primarily cover crude oil, had more than doubled in 2021 compared to our pre-ban levels of importation.

Furthermore, the Marsden Point Refinery closed in 2022 when shareholders decided it was no longer economically viable to compete with modern refineries in Asia that benefit from economies of scale and access to cheaper energy sources. Following the Marsden point closure, we now import 100% of our refined oil.

Gas production has also been in steady decline since 2019. Between January 2023 and January 2024, gas reserves fell by 335 petajoules (Pj) from 1,635 Pj to 1,300 Pj.

nz gas production dropping

Image courtesy of Scoop

Notes on this graph:

  • As of 1 January 2024, 2P Reserves hold 1,300 PJ and 2C contingent resources hold 1,827 PJ
  • 2P Reserves are an estimate of the amount of gas which permit or licence holders expect to produce commercially from any field.
  • 2C Contingent Resources are an estimate of the amount of gas which permit or licence holders estimate they could produce, but choose not to as it is not commercially viable.
  • A petajoule (PJ) is a measurement of the amount of energy contained in a fuel, and is a useful way of measuring how much gas is produced or consumed on an annual basis.

For the past three years, we have used 150 Pj of natural gas per year. For the next three years, our oil fields are predicted to produce only 140 Pj per year and will fall to 77 Pj by 2032.

nz gas production predicted shortfall

Image courtesy of Scoop

The 10 Pj deficit between supply and demand means that we will have to start importing liquified natural gas (LNG) unless we find new gas reserves on our shores.

How much oil and gas do we import now? Where does it come from? How much does it cost?

The closure of the Marsden Refinery has led to a complete dependence on imported refined fuels, as we now import 100% of our refined oil.

By April this year, we had imported $1.17 billion NZD worth of refined oil.

In 2022, we imported a total of $5.4 billion NZD worth of refined oil.

The majority of New Zealand’s refined imports come from (for 2022):

  • South Korea: $2.11 billion
  • Singapore: $1.94 billion
  • Malaysia: $516 million
  • Japan: $383 million
  • Chinese Taipei: $107 million

Being 100% dependent on imported refined oil has had a number of serious repercussions for our energy security and economy:

  • We are entirely dependent on the global market, which is susceptible to price fluctuations and supply chain disruptions.
  • We have lost investment in our domestic oil fields and refined oil production.
  • We haven’t become less dependent on oil for our energy supply; rather, we now import what we need. Experts suggest this may have had a greater impact on the environment than if we had kept our own oil production afloat.

With regard to gas importation, with gas production levels forecasted below demand over the next three years, the import of LNG is being considered a viable option. Energy experts, including John Kidd from Enerlytica, emphasise that LNG imports should not be ruled out as they can provide significant volumes of energy quickly, which is crucial given the current supply constraints. Meridian Energy’s CEO, Neal Barclay, also noted that importing LNG could be a commercially viable option to supplement declining local gas output.

Australia is a significant producer of LNG and will likely be our primary trading partner if we were to start importing LNG.

The cost of establishing the facilities required to import LNG is estimated to be between $200 million and $700 million, depending on the infrastructure required.

While we don’t have a clear estimate of how much LNG we would need to import, the projected shortfall of 10 Pj of gas per year is a good baseline estimate. To make up for the shortfall using just LNG, we would need to import approximately $100 million worth of LNG per year.

Where does this leave us?

Ultimately, having become so dependent on gas and oil imports in the past five years, it was only a matter of time before cracks in our energy security began to show. We have been unfortunate this year to experience low lake levels, which have dramatically impacted the effectiveness of our hydroelectric dams. This, coupled with volatile global markets and a shortage of domestic gas supply, has caused electricity prices to soar. While their heart may have been in the right place from an environmental standpoint, it would seem Labour’s 2018 ban on domestic oil and gas exploration was short-sighted.

The current administration has responded with a number of short-term solutions, the principal one being its agreement with Methanex to redirect gas supplies to power generators, allowing power companies like Genesis and Contact Energy to maintain operations at key plants. The government has also stated that it will reverse the 2018 ban and reopen domestic gas and oil exploration.

In the long term, however, we need to find a more viable solution to the transition to renewable energy. Gas and oil reserves won’t last forever, and even less so the planet if we continue to rely on fossil fuels. However, the solution, as has been proved this year and by the ongoing power shortage crisis, was not to outright ban domestic exploration, leaving us exposed to fluctuating prices in the global market. A more nuanced approach is needed.