Mōrena. Long stories short; here’s my top six things to note in Aotearoa’s political economy around housing, climate and poverty on Wednesday, August 21:
Winstone announced yesterday it would close its pulp mill and sawmill near Ohakune permanently because wholesale electricity prices tripled since July 1, costing 230 jobs and escalating a nationwide manufacturing and exporting crisis.
New profit margin data published by the Electricity Authority shows the gentailers (including the big four of Contact, Genesis, Meridian and Mercury) made a combined $512.4 million in profits in the six weeks since July 1.
The gentailers, including the 51%-state-owned Genesis, Meridian and Mercury, paid out four dollars in dividends for every dollar in investment in new generation in the decades since the part-privatisation of those three gentailers in 2013, leaving the market short of electricity in a situation where gas supplies run short and a dry winter empties hydro lakes, as has happened this winter.
Aotearoa’s industrial power users last night begged households to turn off their lights, turn down their heat pumps and not charge their cars to help keep pressure off the system (and prices), while Contact and Mercury set dividend payouts of $508 million and said the market was working to solve the crisis.
A Goldman Sachs analysis of productivity has found New Zealand performed the worst of any developed economy in the last four years, per worker and per hour.
Sea temperatures in the Gulf of Mexico, where many hurricanes emanate, yesterday hit an all-time record high of 21% above averages for the last decade.
The Top Six short stories longer for August 21
1. Factories closing after electricity price shock
Pulp and timber mills shut after tripling of power prices in six weeks
The Malaysian-owned Winstone Pulp International (WPI) announced yesterday it would close its Karioi pulp mill and Tangiwai sawmill near Ohakune permanently because wholesale electricity prices have tripled to over $600/MWh since July 1, costing 230 jobs and escalating a nationwide manufacturing and exporting crisis.
“We can’t pass these increases on to our customers because this is an NZ issue, and we sell into a commodity market where the price is the price. For comparison, our overseas competitors are paying between NZ$60 to NZ$100/MWh this month. It’s a challenge we’ve been grappling with for years, but the mountain keeps getting higher.” WPI CEO Mike Ryan told BusinessDesk-$$$’s Oliver Lewis
This follows temporary closures by Japan’s Oji of its pulp plants at Whirinaki near Napier and in Auckland’s Penrose last week, and fears other large manufacturing and meat processing operations may close soon.
Unions fear a cascade of job losses.
“WPI have warned that around two hundred and thirty directly-employed jobs could be cut as a result of the possible closure, but there would be further job losses for adjacent staff like contractors and even bigger losses for the wider Ruapehu community, where these mills are the lifeblood of the local economy.” FIRST Union organiser Liam Malone statement.
2. While gentailer profits explode with prices
Profit margins total $512.4 million in just six weeks
This week the Electricity Authority began publishing weekly data on wholesale and retail revenues for the electricity gentailers, allowing it to calculate their individual and collective profit margins.
The initial data released showed revenues and margins for the six weeks from July 1, over a period when wholesale prices tripled to as high as $674/MWh, as gas shortages, low hydro lake levels and strong demand saw marginal prices explode. Marginal prices for marginal generation, often by coal, gas and diesel generation from ‘peaker’ plants, are then applied to all generation units, including from hydro and wind, which have no marginal costs.
The combined profit margins for the gentailers for the six weeks was $512.4 million.
3. So how did this happen?
Investors & finance ministers opted for dividends, rather than new plants
The gentailers, including the 51%-state-owned Genesis, Meridian and Mercury, paid out four dollars in dividends for every dollar in investment in new generation in the decades since the part-privatisation of those three gentailers in 2013, leaving the market short of electricity in a situation where gas supplies run short and a dry winter empties hydro lakes, as has happened this winter.
Both Labour and National Governments have benefited from the dividends paid for their 51% stakes in the gentailers, making the underinvestment and deliberately scarce supply situation a type of extra tax on consumers and producers, as detailed in this updated analysis by 350Aotearoa, NZ CTU and FIRST Union titled: Generating scarcity: how the gentailers hike electricity prices and halt carbonisation.
This is the key chart showing what happened. PPE stands for Plant and Property Expenditure, which is the gentailers’ description for investment and maintenance of plant, so this figure over-estimates investment in new generation as it includes maintenance of existing generators.
Meanwhile, Contact and Mercury published annual profit results on Monday and Tuesday, including combined dividend payouts of $508 million. Their CEOs said the electricity market was working fine and the Government shouldn’t intervene.
Commenting on strong profit results
“This year, under a market-led system, we have been able to manage that (reliable supply). Yes, spot prices have been high, but few have been exposed to those.” Mercury CEO Vince Hawksworth via BusinessDesk-$$$. He was referring to retail customers not paying the much higher wholesale prices. Yet.
“Our investments are paying dividends, but obviously, a volatile market requires a fair amount of hard work and creativity to navigate successfully.” Contact CEO Mike Fugue in Contact’s profit statement
Commenting on talk of price caps and Government intervention
“Politicians don't make necessarily well-reasoned, instantaneous market interventions and it's important that everyone just stays calm and lets the investment flow because that investment is what ultimately will solve this issue
“Unfortunately, power stations don't get built according to the electoral cycle. We're encouraging the politicians to keep their hands in their pockets. Don't fiddle with the market.” Mike Fuge via BusinessDesk-$$$ last Monday.
Contact made a profit of $15.4 million in the seven days before he made this comment, EA data showed.
4. Quote of the day
‘Please turn off the lights so we can keep the factories running’
“I suggest if there's any load that you don't need to use through peak, so the morning and the evenings if you can delay things - those who've got the ability to charge electric vehicles, or (use) the dishwasher later in the day to do that, keeping the temperatures of the heat pump at a reasonable sort of 21C to be healthy, keeping lights off in offices in places where you aren't. So ideally we want to avoid this because it's such an essential for homes and businesses to have electricity.” Major Energy Users Group (MEUG) director Karen Boyes via RNZ
5. Charts of the day
NZ productivity was worst in the world since 2019
6. Climate graphic/chart/pic of the day
Record high heat in the place hurricanes come from
The best of the rest
Top six scoops and deep dives for August 21
Housing scoop: Minister not seeking answers over where kids went after emergency motels. The Government celebrated a milestone of getting 1000 children out of emergency housing, but can’t say where one in five went to. Stuff’s Glen McConnell
Climate deep dive: Utter joke': Govt abandons building sector climate-change regulations BusinessDesk-$$$’s Cecile Meier
Health deep dive: Woman faces 14-hour round trips to doctor as shortage bites RNZ’s Peter de Graaf
Climate interview: Government moves to raise carbon price, says petrol will only rise 3c a litreRNZ’s Eloise Gibson
Health explainer: St John workers on strike: The funding fight around the ambulance service1News’ Anna Murray
Housing deep dive: Nine-year battle over whether Auckland house is a ‘boarding house’ Stuff’s Marty Sharpe
The Kākā’s Journal of Record for August 21
Climate: Climate Change Minister Simon Watts announced that the number of Emissions Trading Scheme units available between 2025 and 2029 will be reduced from 45 million to 21 million to push up the carbon price. ANZ said that since the changes were announced, the spot price for carbon had risen roughly $5.
Economy: The Commerce Commission recommended a suite of changes to increase competition in the banking sector after its market study characterised NZ's banking sector as a "two-tier oligopoly." Recommendations included Government actions to ensure open banking is fully operational by 2026 and that Kiwibank becomes a more disruptive competitor.
Economy: Nicola Willis & Andrew Bayly announced that the Government will act on all 14 of the Commerce Commission’s recommendations for the banking sector, and have asked Treasury to engage with Kiwibank's parent company over raising new capital. Willis says she will take the proposals to Cabinet no later than December. RNZ
Economy: The Electricity Authority began releasing weekly data on energy margins generators are making when selling into the wholesale market.
Health: University of Otago Wellington research published yesterday found 901 deaths, 1250 cancers, 29,282 hospitalisations, and 128,963 ACC claims were attributable to alcohol in 2018.
Housing: The Real Estate Institute of New Zealand reported that property sales increased to 5,806 in July, up 14.5% from July a year ago and up 19.7% from June. The median price fell 2.2% to $753,000 in July a year ago and the same amount month on month.
Back on track?
“There has been downward pressure on prices in most parts of the country this year and sales volumes have been lower than average as the cost of living, concerns around job security and interest rates challenge many people in New Zealand. However, it seems this sentiment is beginning to change. The slight decline in interest rates in July, and a belief that there are more to come, appears to have encouraged buyer activity, as reflected in the increase in sales.” REINZ CEO Jen Baird
Finally, some fun things
Cartoon of the day
‘No food & shallow breathing only’
Timeline-cleansing nature pic:
Land coral
Mā te wa
Bernard
An electricity crisis after a lost decade