Fast-rising power prices give big businesses a jolt

By CHRIS DANIELS energy writer

Some of New Zealand's biggest electricity users are considering moving overseas to avoid looming power price increases.

The price rises and concerns for the future of the energy industry are outlined by a report of the Growth and Innovation Advisory Board, set up by the Government after the last election.

It is backed by a survey of 47 major businesses and three business lobby groups.

A survey, conducted for the board by the Infometrics consultancy, said infrastructure bottlenecks, mainly in transport and energy, were restricting growth and innovation.

Energy accounted for a higher proportion of total costs in the firms interviewed than for the economy as a whole (3.4 per cent to 2 per cent).

The three biggest concerns of the companies surveyed were:

* The volatility of peak-period energy prices, which they said was making it increasingly difficult for businesses exposed to spot prices to plan and optimise operations.

* The long-term increase in the cost of energy, which was eroding a significant competitive advantage for export businesses such as aluminium, forestry and methanol.

* The reliability and security of energy supplies.

Some companies said that in the long term they would have to abandon some of their more energy intensive activities to stay competitive in the face of higher energy costs.

This would mean importing their products or moving processing operations overseas.

"Businesses face a permanent and significant lift in the cost of energy," the report said.

"The current crisis masks a longer-term change in New Zealand's energy market.

"The first signs of the change were already being felt by firms facing higher contract power prices, and the long-term effect on the economy was likely to be substantial.

"The rising cost of energy will compel energy-intensive businesses to re-evaluate their medium to long-term strategies - several companies noted such pressures.

"Many of the country's largest export businesses are heavy energy users. Higher energy costs will erode their competitiveness, with significant long-term consequences for the New Zealand economy."

Several large primary product processors had said this issue would affect investment in New Zealand, the report said.

Electricity prices were relatively stable until about 1999. Since then, the underlying cost of electricity has become more volatile and the rate of price increases has accelerated from around 0.7 per cent a year between 1994 and 1998 to 2.3 per cent between 1999 and now.

Companies say they face double-digit annual increases in the cost of power.

A shortage of other fuels - influenced mainly by the quicker-than-expected decline in the Maui gas field, meant the structural change in energy costs was "turning out to be quite rapid", the report said.

The Infometrics survey said disruptions in power supply affected companies in different ways.

A company in a film-related industry had said any power cuts would set back or possibly destroy the international reputation New Zealand firms had been building over the past 10 years.

"Deadlines in the film industry are often tight and commercially crucial," it said.

Responses to increasing power prices from companies in the survey show a variety of methods used to cope with fluctuating prices. Consumption was often reduced at key times, when spot prices were high.

In round-the-clock operations, the most common way of doing this was by scheduling maintenance shutdowns to coincide with peak demand.

At least two big companies said they had to shut down production because of surges in electricity prices.

Another response to price rises and fluctuations is a move by companies to try to get more energy supplies on contract, rather than by buying on the spot market.

This has been a bone of contention between big power users and the big generator/retailers.

The big consumers say it is impossible to get reasonable electricity contracts, and they are pushed into buying too much of their energy on the volatile spot market.

Energy saving is not high on the list of ways of dealing with high prices.

"A number of companies have adopted energy saving schemes with their businesses," the survey says.

"Some have sought outside energy audits to direct energy savings effort."

The infrastructure report says New Zealand businesses have enjoyed cheap electricity in the past.

But figures from the International Energy Agency showed New Zealand's wholesale prices had risen more quickly over the past 10 years than those of any of its main trading partners.

A World Competitiveness Yearbook for last year ranked New Zealand's electricity costs for industrial users fourth to lowest, out of 48 countries.

Infometrics expects this ranking to change, because it was based on figures from 2001, when power prices were low, and the New Zealand dollar was also low relative to the US dollar.

Big price rises from the electricity retailers have arrived, and residential consumers are also being hit.

Meridian's Christchurch customers have been told of average price rises of 15 per cent. The bills of low power users are going up even more.

An index of fixed-contract prices, collated and published by M-Co - which runs the wholesale power market - shows some fluctuation, but a recent increase in agreed prices. In the past month the price of a one-year power contract has increased from 6.3c a kilowatt hour to 7.47c a unit.

Big users are hoping that the newly established Electricity Commission, which will have the job of contracting for dry year reserve generation, will act as a dampener on the volatile market.

So far industrial users are accepting the impending increases in power prices.

But it will be up to the Government and its new commission to ensure that they do not rise so high that our biggest companies pack up and go overseas.