Exit interview.

Nova energy's boss resigns and gives a candid interview with many insights as to the plight of our energy system.

Todd Energy, part of the larger Todd Corporation is restructuring, moving its electricity and gas business Nova Energy to a retail only operation.

The electricity generation assets of the business will be transferred to a boarder operations team combining the oil and gas production activities.

Babu Bahirathan who has been heading up Nova for 26 years announced his resignation last week. The departure, on good terms, comes at the end of an impressive career that has seen a lot of changes in the New Zealand energy landscape. On the day of announcing his resignation Bahirathan gave a lengthy and candid interview to Newsroom which can be found here.

There are several interesting comments in the interview that are worthy of our attention.

Can our economy survive?

Bahirathan warns that consumers face unsustainable price rises, because New Zealand leaders haven’t grasped the nettle to finance new electricity generation, whether gas or renewable.

“I don’t think our economy can survive with that kind of power price rises,” he says. “I feel worried for the country, and I think the only way to solve it is to have plenty of generation. I haven’t seen a single country that’s poor when it’s had cheap energy.”

I agree, but there are nuances here.

Has there actually been a failure to finance new electricity generation?

Not entirely. There has been quite a lot of intermittent renewable generation added in the form of wind and solar. Where the failure resides is a lack of large-scale dispatchable and baseload generation.

The only generation added that meets these criteria in recent times is geothermal, much of it already contracted to data centers and as such not providing the firming capacity to support a grid that is increasingly weather dependent.

We simply haven’t built any new hydro dams, nuclear plants, or enough geothermal.

Baseload dispatchable power is capital intensive, and since the fracturing of our electrical generation system into smaller privatized entities during the Bradford reforms in 1998, none of the generators are big enough to self-finance this kind of investment.

This situation is made worse by our rapidly depleting natural gas supplies, which essentially means that we are progressively losing large scale dispatchable capacity.

Bahirathan goes on to lament New Zealand’s depleting gas supply issues and how this influenced Nova’s decisions not to build further peaking capacity, highlighting the dispatchable generation bind we find ourselves in as a country.

More peaker plants?

Nova holds a consent to build a 360MW gas peaker plant at Otorohanga but chose not to proceed with the project in 2021.

“At the moment, we can’t even meet the existing (gas) demand, right? So, there’s no point in building a new plant. If there was line of sight to having adequate gas to meet that demand, then I suspect the country needs another peaker, at least. And we need to find a way of solving that.”

Peakers are power plants that can fire up quickly, when the grid needs them. That’s invaluable as the country moves to more volatile solar and wind renewables; the gas peakers owned by Todd and Contact Energy can fill gaps when the sun goes behind the cloud and the wind drops away.

This statement gives us two insights, firstly our current lack of energy security as our fuel choices dimmish, and secondly the true cost of intermittency which has to include the requirement for back up.

The scarcity mindset, picking winners and losers.

Bahirathan then goes on to comment on the composition of the New Zealand gas market, specifically the role Methanex plays.

New Zealand still needs gas. Bahirathan is adamant about that. Fast-peaking gas plants for those still, cloudy days and nights are the only way we can bridge the gulf to a renewable energy future.

Yet, extraordinarily, when there’s a real structural shortage of gas in New Zealand, we’re exporting much of what we do produce. “So people who actually need the gas molecules are going without or paying exorbitant prices.”

New Zealand gas producers – including Todd Corporation – are exporting gas by selling about 45 percent of it to the multinational Methanex Corporation, which produces methanol for export from its big plant in Taranaki. That’s used by heavy industry around the world.

At the same time, New Zealand is filling the gap by importing dirty Indonesian coal and is looking to set up, at great expensive, an import terminal into which it can ship (import) LNG (liquefied natural gas).

Last year in August, with great fanfare, Methanex announced it would shutter its operations and sell its gas to Genesis (3.2 PJ) and Contact (3.5 PJ) to enable them to generate electricity to get through that year’s energy shortages. That worked out nicely for Methanex, which sold its gas when prices were at their peak; it worked out less well for New Zealand consumers who continued paying peak prices even as the hydro dams began delivering at capacity again.

Then, on November 1 last year when gas prices had moderated, Methanex quietly resumed production.

Bahirathan says Methanex has locked up half the supply, paying only about $6/gigajoule. Meanwhile households and small businesses that need gas have to pay up to $30 a gigajoule, or sometimes can’t get gas at all. “To me, it doesn’t make any sense that we exporting gas at the lowest possible price, while somebody who can pay and needs the gas molecules, can’t get it. So I feel worried about that.

“Some people say we’re barking mad as a country, to keep doing this. Look, I’m not personally having a go at Methanex – they contracted back in the day, right? But at the moment, given how fast the gas fields have declined, given how unsuccessful the drilling has been, this is a problem for the country.”

This is a particularly interesting comment.

On face value this would appear to be an entirely reasonable position to take, and one that I expect would generally be well supported by the public, especially those struggling to secure or pay for the natural gas required to run their businesses.

However, there are some flaws in this line of thinking.

Firstly, we are not exporting gas, we are exporting methanol, of which gas is both a raw material and an energy source. The is a value-added export product and we have been doing this since 1986. The downstream effects of this large-scale industrial activity over the past 39 years have supported countless businesses and families in New Zealand. This is conceptually no different to exporting milk powder which also requires gas to produce.

Secondly, we would not have the little remaining gas that we do if it was not for large scale domestic industries like methanol production providing the investment confidence for gas field development, essentially underwriting these projects by providing a stable market and long-term sales agreements. A recent example being the development of the Pohokura gas field in 2005.

Most significantly though, this is picking winners in a free market, which is a fast-track way to only having losers. What is the moral framework for deciding which businesses have a right to exist?

This is a scarcity mentality. It is a psychological framework that occurs when resources are limited and insufficient. This mindset fosters competition, fear, envy, and a zero-sum worldview. If someone else gains, it must mean I lose.

This is a race to the last man standing, a man who will quickly find that by destroying the market there are no resources remaining for him either.

This is not a criticism of Bahirathan, this is an observation of the human condition and our fundamental biological infrastructure. This has evolutionary roots that are grounded in the Maximum Power Principle.

Developed by ecologist Howard Odum, the Maximum Power Principle suggests that natural selection favors organisms and systems that maximize energy acquisition and utilization—not just efficiency, but power, defined as energy per unit time.

As such like all other biological organism’s people, businesses and societies self organise to compete for energy.

We have evolved in environments of periodic scarcity, ice ages, droughts, famines. As a result, we have developed cognitive biases.

• Loss aversion: fear of losing something is stronger than the pleasure of gaining it.

• In-group preferences: limited resources led to tribal thinking.

• Short-term focus: we prioritize immediate rewards because, evolutionarily, survival in the present was paramount.

These instincts once served survival but now underpin modern scarcity thinking and conflict. This mental model is entirely understandable but particularly destructive at a time when collaboration is required the most.

The only pathway out of this predicament is adopting an abundance mentality which encourages industrial cooperation and trust. This is necessary to encourage bringing more gas into the market, while simultaneously managing the current sub-optimal supply conditions to ensure everyone makes it through.

Blockers to more generation

Bahirathan also offers an explanation as to why we do not see large scale additions of dispatchable generation to the grid.

He admits that the existing system doesn’t incentivise gentailers to build more plants – because every time they “over-build”, the additional generation capacity inevitably drives down the price of the electricity they sell. Their boards and executives are making a rational decision to wait until the last possible minute before building new power plants.

They’re applying a “just in time” approach to delivering power to market; that’s why big generation projects sit consented, and not yet built.

Ultimately, I think this is the unintended consequence of the Bradford reforms as mentioned earlier.

Prior to the breaking up and privatization of the electrical generation network New Zealand was clearly capable of building at scale and in excess. Which is the single biggest pre-requisite for economic growth and prosperity.

Essentially all our large-scale dispatchable energy infrastructure was built prior to these reforms, and we have added little since. We even had plans for a 1GW nuclear power station in Northland once.

Exacerbating this issue we now have ideological guard rails that significantly narrow our generation choices making this a much harder engineering and logistical problem.

Bahirathan suggests that an all of government long term power purchase agreement system could be a possible solution to assist generators to secure the finance required build extra generation capacity.

I would also suggest that given the government retains a 51% controlling stake in Meridian, Genesis and Mercury. The dividends paid to the government by these entities could, and should, be reinvested into dispatchable generation infrastructure in the interests of energy security.

In conclusion, I wish Mr Bahirathan all the best for his future endeavors and thank him for these candid and important insights regarding the energy state of play in New Zealand.

Thanks for reading folks.

Larry