Genesis Energy's Huntly Power Station. Photo / NZME
“It’s been a hell of a year, to be honest.”
That’s how Genesis Energy chief executive Malcolm Johns describes 2024 - a year in which the energy gods conspired to put extreme pressure on the national grid - thrusting the company into the spotlight in its essential back-up role.
A dry winter, slight wind, and a gas shortage helped drive spot power prices over $800 per megawatt an hour in August, putting extreme pressure on those big power users with exposure to the spot market and playing a part in the closure of energy-hungry mills.
Johns, the former Christchurch Airport chief executive, said there has not been a dull moment since his appointment to the power generator and retailer in 2023.
“Let’s just say that for the first 18 months, the seat belt sign was on most of the time.”
Johns told the Herald not long after his appointment that the risks inherent in the power game would not be tolerated in the aviation world.
His views haven’t changed.
As he sees it, the winter episode should serve as wake-up call for New Zealand energy security, which he says is the equivalent of “sending a plane from Auckland to Los Angeles with just enough fuel to get there and hoping that it does”.
”We just wouldn’t do that, and so to not to have energy storage required in the electricity system to me seems a very foreign concept in risk management, particularly given that as a country we have chosen a market-based economy, we have chosen a market-based energy transition and we run a market-based electricity system.
“The regulations need to ensure that there are sufficient reserves across the system to back it up.”
Genesis Energy’s coal and gas-fuelled Huntly Power Station may not have the same picture postcard image that many of the country’s hydro lakes enjoy, but it plays a vital back-up role for the system when renewable energy falls short.
After the year’s extraordinary events, much of the responsibiity to keep the lights on fell to Genesis and Contact Energy, which runs soon-to-be-retired Taranaki Combined Cycle plan and two gas-fired, fast-start, peakers near Stratford.
Johns says it was a year full of challenges.
He recalls that at the start of 2024, Genesis had just launched its new strategy and was deep into restructuring the business.
Then, the talk was about what to do with the 900,000 tonnes of coal the company had on the ground at Huntly.
“We were trying to work out whether we could export it back overseas or sell it to some other users or how were we going to ever monetise it because we just couldn’t see a pathway that we would ever burn it.
“And now here we’re sitting at the end of the year and not only have we burnt it all, but we’ve almost re-imported it all as well, and so that’s well over a million tonnes of coal in terms of the changes across the year.
“There are two things that really drove that - one was the gas market and the gas situation that caught everybody by surprise - a 20% reduction in gas supply - so suddenly the market became very tight.
“Then we rolled into a record dry period and we also learned that the same weather systems that bring no rain also bring no wind as well, so it was a rain drought and a wind drought.
“What we have learned from the meteorologists was that it is quite a common occurrence and that it will happen again in the future.
“In essence, ourselves and Contact have had to move heaven and earth to replace that generation that dropped out of hydro.”
In August, both Genesis and Contact were able to secure - at a cost - gas from methanol exporter Methanex, which temporarily idled its manufacturing operations to accommodate the needs of the power grid.
The deal allowed Genesis’ gas-fired Unit 5 at Huntly to return to full capacity - enough to power 400,000 households at full tilt.
Huntly is normally staffed to operate two 240MW coal and gas-fired Rankine units, but Johns says the station’s team had to pull out all stops to make all three units available.
At full load, Huntly delivers 1200MW - the most of any generation site in the country - and enough to power around 1.2 million homes.
The dry period saw about 30% of hydro capacity fall out of the system over the winter months, while thermal generation was up 28-29%.
“So we were running at full capacity - we had no spare capacity in the system at all.
“And that I think is a wake-up call for New Zealand energy security,” he said.
Johns points out that it is a regulatory requirement for New Zealand to hold enough petrol and diesel in reserve for 28 days.
“There is no requirement for an energy reserve in the electricity system, and yet we’re going to electrify our economy, so it’s the largest source of energy over the next 25 years.
“And so I think energy security, electricity security, really rests in our ability to store energy, and we need deep storage for the dry years.”
.Johns says that it’s also critical there are no “free riders” - generators who offer renewable power to the system but who can offer nothing when supply is tight, leaving players like Genesis to pick up the tab.
“When we look to other jurisdictions like Canada and Australia, they’re starting to bring in a requirement for solar generation in particular to hold credits in the firming sector.
“So in other words, if you bring new intermittent generation into the system, you have to bring new firming in with you, and you have to pay for that.
“And I think that is the most critical element coming out of the winter is that we need a much more secure energy storage system for the electricity sector.”
Johns says Genesis has carried a disproportionate amount of the responsibility for supporting the system.
“And we’ve been very clear that we won’t do that going forward.
“We will maintain enough fuel to run our portfolio, but if the system wants an energy reserve that’s bigger than that, it’s going to have to pay for it.
“And we’re really comfortable that if the system doesn’t want to pay for it, then it won’t be there.
“If you look at the winter coming up, we were fortunate because we over-ordered coal in 2021 and it rained in 2022 that we had an extra 300,000 tonnes of coal sitting on the ground in 2024.
“Now, going forward we’ve been clear that we won’t be maintaining a coal stockpile that high and so those reserves just won’t fortunately be on the ground in the future.”
As it turned out, the system dodged a bullet over 2024.
No sooner had the Methanex deals been put in place, it started raining heavily in the South Island, replenishing the all-important hydro lakes.
Johns says the cost of the Methanex deal was not shared with the other big players.
“We will not do a Methanex deal again in the future in the structure that we did it.
“We will make our generating capacity available to the market, but it will be on a bring-your-own gas basis.
“And we’ve been very clear with regulators and policymakers that we stepped into the breach and took one for the team this year in terms of that Methanex gas, but that was because we didn’t have time to arrange proper energy security in the market.
“We’ll make our generating capacity available, but the sector will have to pay for that gas.”
Similar problems
Johns says what happened in New Zealand in 2024 has played out in various other countries looking to minimise their carbon footprint.
Inevitably, energy transition will come with some volatility attached, he says.
At the start of August, wholesale prices were over $800MWh but by end of the month, after the rain, they were under $10MWh.
“And so we’ve had some of the cheapest electricity on the planet for three or four months, and, you know, the system has remained stable from a user perspective through that time.
“You could argue that the market has functioned exactly as it should.
“When it has abundance, the price reflects that. When it has scarcity, the price reflects that too.
“What we discovered through the August period is that whilst the market might be free and unlimited, the appetite for the market to operate is not.
“And therefore, you know, we now have a quasi-price ceiling in the electricity market for dry years.
“We know that $800/megawatt hour now is where people start to believe that action needs to be taken.
“So if you’re planning investment in assets and fuels that will get New Zealand through dry years in the future, you now essentially have a quasi-price ceiling in the market that you have to contemplate.”
He says that for all the criticism aimed at the sector, the lights did not go out and most homes and businesses were protected from that volatility.
“And I think that’s the way the system was designed to work.
“If we begin the process of redesigning the system, we need to understand the consequences of that redesign.”
Stones Thrown
Still, stones were thrown at the sector, particularly from those big consumers who were exposed to the extremely volatile spot market.
“First of all, you know the power system has a wide range of products available - fixed price contracts, hedges, et cetera.
“If you choose to run naked through winter and there’s a frost, you are going to get frostbite.
“That’s a personal risk decision that any business can make.
“Now whether you extrapolate that out of the system is broken as it is an entirely different thing.”
But Johns says the trouble is that the system neither rewards nor incentivises energy storage or energy security.
If there had been more energy in reserve, prices wouldn’t have gone that high, he says.
“To have more energy in reserve you need a requirement for energy reserves in the market and the market needs to pay for that.
“So there needs to be an incentive and a reward system for that to occur.
“And because dry years are asymmetric, they only come around every four or five years - then you can’t recover everything you need across those generation assets and those fuels in that one year to carry them across that four-year period.
“That’s it. That’s the challenge. You need energy reserves.”
To the criticism that events of 2024 pointed to a lack of enough competition, Johns says no amount of competition would have added the energy reserves to the system.
“Over the winter, there was 1400MW of installed wind generation we dropped to as low as 50 megawatts of actual generation from that.
“So you would have to overbuild wind by a factor of 28 to have kept for wind to be a solution in winter 2024.”
2050 approaches
New Zealand has enshrined in law the goal of becoming net carbon neutral by 2050.
Genesis’ ‘GEN35″ strategy aims to capitalise on its unique position in the sector, with its large customer base.
The company wants to expand its renewables generation fleet to increase margin.
Genesis’ Lauriston solar project in Canterbury began commissioning in November and is due to go to full generation in early 2025.
Johns says that for New Zealand to reach net zero by 2050, 60% of New Zealand’s energy needs to come from electricity, up from around 38% today.
At least 95% of that electricity needs to be renewable, up from around 80% today, and it will need to be practically available 100% of the time.
This includes winter peaks, periods of low wind, and dry years.
“This is the first principle of our operating context for the next 25 years: 60 – 95 – 100.
“The challenging elements of the 60-95-100 scenario will be advancing the demand-side transition to electrification and maintaining 100% energy security while we do so,” he said. “We have to have 100% availability and it has to be affordable.”
And in order to do that, you need to smooth the cost of energy security out over the whole sector and across all of the years.
“In other words, like they’re doing in Australia, for example, if you’re bringing new intermittent generation into the system, you need to be bringing new firming in with it so that electricity is available 100% of the time.
“Once you stand up that type of regulatory framework that can be relied on over long periods of time, the market will solve this and it will solve this in a really economic and efficient way.
“And so I just go back to the first principles of 60, 95, 100 plus, and you need to build a regulatory framework that is enduring around delivering those three outcomes. And if you do, then the market will deliver for it.”
Not broken
While the system came through 2024 battered and bruised, Johns says it’s not broken.
“I mean, we just went through one of the toughest dry winters that we’ve had for a long time, and 98 to 99% of Kiwi homes and businesses were protected through that. And so that was largely managed by well-financed large companies.”
He says the more fragmentation you have in the system, the more that gets passed to the front line.
Johns is also quick to dispel the idea that the big power companies were price gouging.
The next round of half-year results will be “really telling” for the big power companies about how much pain there really was through July and August.
“And so I think we’ve got to be cognisant of the fact that the market worked as it was designed to do and the market structures meant that 99% of Kiwi homes and businesses were protected from that volatility.
“Whether it’s broken or not depends on your problem definition.
“What I would say is what we’re experiencing now is what just about every other developed country in the world is experiencing in the energy transition.
“And that is we still need a large portion of legacy assets.
“I’ve listened to many many colleagues from around the world over the last 12 months and everyone is grappling with exactly the same issues in terms of the energy transition.
“Everybody wants to be in that future state but the reality is we’re not and as a result of that we need to hold on to some of our legacy stuff for as long as we need to to ensure that we smooth out the bumps of that transition.
“We are very clear that we will continue to invest in flexible generation and energy storage.“
Genesis has hopes that biomass may one day be the feedstock for Huntly, displacing coal and gas.
He says the discussion around competition, and capital and energy security are all eminently solvable.
“Those are problems we choose to have or choose not to have.
“They’re well within our control to deal with it.
“Energy strategy is critical to that, and electricity is not a political ideology, it’s an economic necessity.
“Therefore we need long-term bipartisan swim lanes that we can all operate in, that are renewable electricity, as an energy platform for economic development and the prosperity of future generations.
“And I think that’s the real challenge.”
Looking ahead, hydro will continue to play a big part, but with a lot more wind and solar generation, there will be quite a few more batteries in the system.
He says the supply and the demand side will be radically different as 2050 approaches, shaped by new technology.
“For example my induction cooktop that I bought 18 months ago I can now buy with a battery in it and that allows me to charge it off-peak, so when I’m cooking my dinner in the evening the electricity is coming from the battery not from the grid and that helps smooth the peak.
“At some point that battery will be connected to the internet and once it’s connected to the internet then companies like Genesis will be able to use that battery at different times for storage and discharge, and so what happens on the distributed energy side is really, really exciting.”
Genesis has high hopes for biomass, and the potential of forestry to fill the energy storage gap.
For biomass, pine trees only need to grow for eight to 10 years.
“So you think about it, the first third of their life they’re growing biomass and the last two thirds they’re growing lumber or timber.
“And so we don’t need the timber, we only need the biomass.”
As Johns reflects on a turbulent 2024, will his seatbelt sign turn off in 2025?
“I’m sure it will be.”
- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Some relief that the US markets weren’t weaker after a healthy correction the day before.