8 Oct 2020

Energy sector grapples with fallout from low demand

11:06 am on 8 October 2020

A gradual retreat or withdrawal of major power users is raising questions about future power costs and long-term asset requirements.

Tiwai Point has signalled it plans to close next year. Photo:

The Tiwai Point aluminium smelter has signalled it planned to close next year, although it may yet be persuaded against shutting up shop by a new government. Its closure however, would likely spell the end of the gas and coal back-up plant at Huntly.

In addition there are question marks over other major users such as the Glenbrook steel mill in Auckland, which was downsizing, as was the Marsden Point refinery. The Taranaki-based methanol maker Methanex also faced challenges due to gas shortages.

Enerlytica head of research John Kidd said a crisis was brewing.

"What that does do is leave behind a sector which is smaller and the costs of servicing that sector do not change.

"The usage over which the costs of operation is spread, is thinner. So it becomes a problem for those who are left behind."

Kidd said it was in the country's best interest for these users to remain viable, at least in the short-term.

"We've got a much shorter timeframe - almost crisis in a way - to look at, which is the threat that these major energy users have facing them to remain viable and the demand profiles that are held out there in the market around how dramatically electricity demand might increase... none of those tend to account for the risk of demand destruction.

"There's a real balancing act you need to think about here. Yes, the long term story of demand growth is absolutely there, but the shorter term story around the risk of demand destruction is also absolutely there."

Kidd said policy shocks for the sector, including the ban on oil and gas exploration, and now the prospect of a near term glut, worked against investment in renewable projects.

"The most obvious one is Tauhara."

Contact Energy had planned to develop a new geothermal site at Tauhara, but that was now on hold while the company got a better idea of consumer demand.

Meridian Energy had also shelved the construction of a major windfarm in Hawke's Bay for the same reason.

"Suppliers are looking for reasons to bring [renewable] energy to market but it becomes very difficult when there is widespread demand destruction."

He said the investment was necessary to cater for the predicted long-term demand for electricity, with the push to electrify transport, process heat and dairy factories.

He said government and the sector needed to formulate a solution together.

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