Rudderless
New Zealand's energy system is a rudderless ship.
“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” - Sun Tzu - The Art of War
It’s been a hectic week in the news, and I have been struggling to keep up with it all. Every man and his dog is throwing their two cents into the energy debate. This comes as the gas situation gets evermore acute causing businesses a huge amount of uncertainty all over the “land of many road cones”.
It is increasingly obvious from this commentary that there isn’t a strategy, and no one is responsible, just suggestions of tactics being bandied about, sort of like rowers in a boat that have all got their timing off and trying to go in different directions. It’s a mess.
Let’s take a quick walk through some of these stories.
Last week the Gas Industry Company (GIC) issued their quarterly report which had the following commentary.
Average spot gas prices rose sharply in the first quarter of the year.
With more demand for gas than supply, markets are allocating gas to contracted consumers. Consumers with contracts expiring are either not being offered new contracts or are being offered contracts at significantly higher prices.
Prices have risen because of both supply and demand issues.
Gas production declined compared to last year as mature fields underperformed expectations, while a sharp decline in exploration and development activity over recent years has resulted in too little new gas entering the market to replace diminishing production.
Next the MEUG (Major Energy Users Group) took a jab at the big gen-tailers.
(MEUG represents the dairy, steel, forestry products, fertiliser, and meat processing industries)
The jab at gen-tailers was in response to industrial closures last winter, primarily in energy intensive forestry product businesses, the gen-tailers had said that it was the fault of the customers for not having hedged contracts. To which the MEUG spokesperson responded.
In response to industrial closures last winter, primarily in energy intensive forestry product businesses, the gen-tailers had said that “it was the fault of the customers for not having hedged contracts.” To which the MEUG spokesperson responded:
"Sustained high prices are not the fault of consumers, large or small. Problems with fuel security, sustained under-investment in new generation and lack of competition are all supply-side causes," says MEUG executive director Karen Boyes
"An argument that all businesses should be fully hedged is an argument that businesses should pay more for their electricity in the long run, not less."
Then Rod Drury waded into the debate with comments on the market structure.
Tech entrepreneur Rod Drury has put a radical reform of New Zealand’s electricity sector at the centre of an impassioned call for a "national vision".
He was advocating for the separation of infrastructure from retail services in the electricity sector in the same way that Telecom was split into Chorus and Spark more than a decade ago.
"At the moment, we have vertically integrated power companies trying to do both infrastructure and retail.
"That model just doesn’t support long-term infrastructure investment.
"Let’s do what we did with telecommunications — separate the generation and transmission assets into a dedicated infrastructure entity."
The government had shown foresight to build massive hydro-electric schemes decades ago, which meant 88% of the country’s electricity was generated from renewable sources.
However, New Zealand only had six weeks’ energy storage, creating a scarcity factor that led to "really high" electricity prices.
Building infrastructure for six months’ storage would give New Zealand "energy sovereignty".
Finally, the head of commerce commission got in on the conversation expressing skepticism that the market can solve these problems and illuded to the potential for something to happen.
Commerce Commission chair John Small is skeptical the electricity market can solve the current supply challenge and hopes a ministerial review will trigger "serious debate about what's going to happen next".
Small expects electricity supply to be tight over the next two years, requiring more thermal generation and cooperation between large companies - something that would be uncomfortable for the Commerce Commission and which it must make sure doesn't undermine market competition.
My take is that we are experiencing a market failure, and this is the general thrust of the comments above.
More importantly how have we arrived at this point and how do we get back on track?
All tactics and no strategy.
It may come as a surprise to some of you that there is no one entity overall responsible or accountable for New Zealand’s energy system and energy security. It surprised me when I first leant this a few years ago.
New Zealand’s energy system is made up of a several regulatory and industry entities with a disjointed relationship with to each other, none of them really have any levers to pull.
There is no single overarching entity solely responsible for energy security. Instead, responsibility is shared across multiple agencies, each with different roles relating to policy, regulation, infrastructure, and emergency response.
The resulting distributed governance model creates a rudderless ship with the sails all set in different directions.
Across the entire sector it’s all tactics and no strategy.
MBIE (Ministry of Business, Innovation and Employment) is the lead government agency, and to be fair they do develop a strategy which can be found here.
However, they do not have any levers to pull. MBIE does not have operational authority to compel the sector to implement the strategy.
They can of course roll up to Genesis or Mercury for example and excitedly say here’s the strategy! To which Genesis and Mercury can respond, that’s nice.
Let’s also be honest its also very high level, ideological and aspirational. It’s certainly not something you can operationalise with statements like this for example.
We are working with the Ministry for the Environment and the Energy Efficiency and Conservation Authority to reduce emissions from the industry sector and process heat through energy efficiency and fuel switching.
The how, when, who, what’s are all missing and in most cases the technology proposed doesn’t exist or if it does it has never been tried at scale.
Worse it’s all too often naive and at odds with reality, making it impossible for anyone to try and follow. For example, the “Electricity (Renewable Preference) Amendment Act 2008 which imposed a ten-year moratorium on new baseload fossil fuel electricity generation, which later the same year was repealed. This caused companies to depreciate their assets and not invest. Now seventeen years later we are using vast quantities of coal and it is of critical importance.
“Faith in future technology is not a substitute for present action.”— Vaclav Smil
In summary there is no real direction, and we are either doing nothing or going it alone.
Playing the hand they were dealt
I am somewhat sympathetic to the big gen-tailers, they are just playing the game they were set up to play. Success in their board rooms is measured to profits and losses. It is certainly not measured in terms of how much energy can be added to the system and how low prices can be driven.
Meanwhile outside the board room a lot of people are hurting. The anger and frustration is becoming increasing obvious. The criticism is and will always be directed at the gen-tailers.
The politicians feed into this, conveniently deflecting the blame onto the gen-tailers, when ultimately politicians established the playing field on which the gen-tailers play the game with their hands tied.
Meanwhile an angry mob is gathering. At the moment they are only throwing rotten tomatoes. But as more people are hurting either shutting their business due to soaring input costs or losing their jobs due to the shutting of businesses. These tomatoes risk becoming pitch forks.
We need a rudder.
Talk is cheap and it’s easy to point to what is wrong, its much harder to fix it.
I have spent far too much time critiquing the system and too little time offering up possible solutions. Solutions that I can only hope may plant a seed with those who have sufficient influence to initiate change.
Watch this space in the coming weeks for a strategy offering that could steer New Zealand away from the rocks.
Larry
IMO the issue is two fold - 1 is the gas ban and the way labour hs politicised fossil fuels so that no company can build decent sized baseload capacity.
2. The mass of intermittent renewables coming online rhst require both capacity and energy backup but which can only be supplied by hydro or flexible thermal like Huntly. Neither of which can be built.
This isn't a market failure. Even if we had a capacity market we would t get an efficient outcome because the energy sources we need are "out of bounds"., not allowed. This is a failure that can be laid squarely at the feet of Ardern and the Greems and Labour and the climate change idiocy.
Electricity is basic infrastructure and needs strategic network-wide planning and management of its supply and distribution over time.
A market is incapable of doing this because of short term time horizons and because market participants act selfishly.
So back to electricity as a basic public service?