Hope is not a strategy.

Fonterra's methane problems continue, but this time it's an imminent lack of methane.

Fonterra is important to New Zealand as a significant contributor to our economy. The flow on effect of dairy exports contributes to household incomes across the length and breadth of the country.

I recently recall seeing an estimate that Fonterra’s contribution to the NZ economy equated to around $12,000 per household annually. It is for this reason, and in part because I grew up on a dairy farm, that I pay close attention to what’s happening at Fonterra.

On my recent travels through the internet, I came across a Fonterra submission to the commerce commission on the Gas DPP4 (Default Price-Quality Path 4).

The Commerce Commission’s DPP is a regulatory framework that was established to set the maximum revenues and minimum service quality standards for the gas distribution network. There is an equivalent for electricity also, which determines your fixed line charges.

Inside the Fonterra submission on the gas DPP4 amendments are a few key insights to the challenges NZ Inc. faces due to our rapidly declining natural gas supplies, and the even more crazy alternatives proposed.

Distribution Network Implications:

First let’s deal with what the dwindling gas supplies mean for the distribution network from Fonterra’s perspective.

It makes sense that as gas volumes distributed through the network decline, the per unit cost to maintain the network will rise.

It also makes sense that unless we can maintain or grow the volumes of gas in the network, that parts of the network may be decommissioned, stranding existing industrial and residential customers assets.

The Fonterra submission confirms that this is the case and that there is a very real risk that we will lose the distribution network, or at least sections of it, in the near future.

For a bit of context, in 2022 when the Commerce Commission produced the DPP3 framework the commission was expecting net-zero policies and electrification would reduce gas demand by 2050.

As a result, they included accelerated depreciation for the owners of the gas distribution network to avoid stranded assets as the demand for natural gas declined.

Note - I have already commented previously on how absurdly optimistic the projection that we would have a gas supply by 2050 was based on gas reserve profiles at the time, so I won’t dwell on that further. If you want to know more refer to Hopium.

For DPP4 the commission is retaining the accelerated depreciation settings to mitigate the risk of under-recovery caused, not by declining demand, but instead by declining supply, which shortens network asset lives.

This in effect essentially allows pipeline owners higher revenues within a shorter period, given the risk of asset stranding.

Ok, so what this all means is that the pipeline distribution network owners are worried about declining gas supplies and want to depreciate their assets faster because they don’t want an expensive asset on their books that can’t generate any revenue.

Fonterra’s position:

Fonterra opposes the accelerated depreciation of existing assets, because - well - it needs the gas and doesn’t want to see the distribution network decommissioned.

There are thousands of other businesses across the country that no doubt feel the same way.

To quote Fonterra (with emphasis by me).

Fonterra is a dairy co-operative owned by over 8,000 New Zealand farming families with 27 manufacturing sites across the country, making us the country’s largest exporter and a major supplier of dairy products to the domestic market.

With manufacturing operations spread throughout New Zealand, Fonterra is a major energy user and participant in the North Island gas market, and we rely on stable and affordable access to gas. Ensuring the continued viability of the gas pipeline network is critical, not just for our operations but for the resilience of New Zealand’s industrial sector.

Fonterra has over 70 gas boilers and process air heaters installed across multiple sites in the North Island from Kauri in the north to Pahiatua in the south, totally over 750MW of capacity. The capital cost to replace this capacity with biomass or electric boilers would be several billions, therefore it is important that the existing gas equipment and pipelines can be retained in operation for the foreseeable future and the use of drop-in renewable gases like biomethane or synthetic methane can be enabled and encouraged.

We are concerned that the Commerce Commission’s current approach prioritises pipeline owners’ interests over long-term consumer outcomes. We believe this contradicts the intent of section 52A of the Act and risks undermining energy affordability, security and consumer confidence.

The approach contrasts with the situation facing end users – residential, commercial and industrial - who cannot rely on a regulatory framework to protect them from asset stranding risks driven by rising carbon costs, gas scarcity, or escalating pipeline charges under DPP4.

Wow! There is a lot in there!

So, we have already covered off on the distribution network implications, but let’s unpack some of these other insights.

The first is the billions it will cost to convert 70 gas fired units across the country to electrical or biomass alternatives.

Eye watering costs that will cripple the co-operative’s farmers aside, the impossibility of this is evident for the readers of this Substack to see.

Finding the equivalent of 750MW of energy between the grid electricity and biomass (wood pellets), would be a herculean task.

For a start with Huntly and Fonterra both wanting wood pellets we would not have enough energy to produce them all let alone the rail and road networks necessary for the endless fleet of trucks and trains required to distribute them.

Secondly there is the current lack of dispatchable baseload in the electrical system to support even half of the 750MW of continuous load that Fonterra claim would be required in the cold and dark months of August.

Clearly Fonterra sees this as completely impractical too, otherwise they would not be submitting to the Commerce Commission to request intervention in the gas network.

Hope and desperation:

The part that really shocked me was that Fonterra believes there will be “drop-in renewable gases like biomethane or synthetic methane”.

To achieve this, they would need to replace around 6.3 PJ of natural gas (after their current electrification projects are completed) with biomethane and/or synthetic methane, which is a lot of gas.

I fear that this hope is wildly misplaced and here’s why.

Biomethane

Biomethane is essentially produced by decomposing organic matter such as animal manure, food waste, and sewage sludge in an oxygen free (anerobic) environment to produce biogas. Yes, that does ironically sound a lot like what happens to the grass in a cow’s stomach.

The biogas which has a composition of about 50-70% methane must then be scrubbed, by one of a several equally complicated of methods, to remove the residual CO2 and H2S.

It can finally then be compressed and distributed into the pipeline.

If you are thinking it sounds quite slow, and fairly energy intensive, to go collect and consolidate all the feed stock then digest it, you are right. It will have an EROI somewhere in the range of 2:1 to 8:1 depending on the feed stocks and export pressures required.

There is a whole feasibility study on it here that as usual makes a lot of heroic assumptions.

I found it particularly amusing that they propose that dairy effluent could be used as feed stock, and that they could charge a gate fee for reception of the wastes, then they could sell the digestate as a fertilizer.

I’m certain that farmers won’t be lining up to pay to have their effluent taken away, to then turn around and buy it back as fertiliser, when they could just put it directly onto their pasture as they currently do.

Further this all sounds very diesel intensive. Can you imagine tanker loads of effluent being trucked all over the country next to tanker loads of milk, and this being cheap?

The on-farm logistics required to load out the effluent to get it to the digestion plant would require a major capital investment by farmers and ultimately leave them needing to buy in replacement fertiliser.

The food waste and pig manure feed stocks amused me too. You can generally have one or the other but not both.

So, in summary I think it’s safe to say that the chances of biomethane being sufficiently scalable or cheap enough to replace natural gas can be filed in the “mate, you’re dreaming” folder.

Synthetic methane

The synthetic methane idea is very much getting into Rube Goldberg machine territory.

The idea here is that you use renewable energy in the form of excess solar, wind or hydro - and “excess” is important for reasons I will explain soon - to produce hydrogen via electrolysis, which is then combined with CO2 captured from the atmosphere, in a process called methanation to produce CH4 (methane). Which is chemically identical to the methane component of natural gas.

This is a very complex process with a number of energy transformations, as such it has a very low EROI which will likely be less than 1. It’s a bit hard to say for sure as a lot of the technology like atmospheric carbon capture is still largely experimental. But none the less there is a very high probability that there is less energy produced in the form of methane than electricity supplied at the front end.

There are also some nuances regarding the practicalities of doing this.

The reason that “excess” electricity is important is because the EROI is so low. It would not be commercial to use electricity that can otherwise be sold to the market. If the electricity for the synthetic methane process had to be purchased at market rates, the sales price of the end product synthetic methane would be so high no one could afford it.

Further complicating things, adding cost, and lowering the EROI, is the fact that the synthetic methane process is fundamentally incompatible with intermittent excess electricity. The hydrogen electrolysers will be able to ramp up and down to some extent but the methanation stage utilises process heat and requires stable pressures and temperatures. The CO2 direct air capture is also not very tollerant of ramping up and down. As such the whole process does not pair well with an intermittent supply of electricity and storage for buffering would be required, further lowering the already low EROI.

In the case of Fonterra there is also the seasonality issue. Their gas usage profile is not linear, they use most of their gas on a seasonal basis in sync with grass growth during spring and summer. The start of which coincides with our winter peak electricity demand.

So, in summary I think it’s safe to say that the chances of synthetic methane being sufficiently scalable and cheap enough to replace natural gas can also be filed in the “mate, you’re dreaming” folder.

Hope is not a strategy.

The natural gas supply is declining fast and there is not a lot of drilling on the horizon to boost supplies. The time is clearly ticking for industrial gas users and gas security in the next 5 years has to be at the top of many boards threat registers.

For the sake of New Zealand Inc. Fonterra surely can’t realistically be hoping that bio methane and synthetic methane will replace their current natural gas supply?

Is the viability of the New Zealand dairy industry really dependent on these two pipe dreams?

Perhaps there is an opportunity to convert LNG carriers with their in-build refrigeration systems to allow bulk exports of raw milk to other countries that have cheap domestic natural gas for processing?

I know, now I’m just being silly, but no more so than what I just read about gas substitution in Fonterra’s submission to the Commerce Commission.

Larry