Genesis Energy has unveiled its new strategy.
Nine months into his job at the helm of Genesis Energy, Malcolm Johns — former chief executive of Christchurch Airport — says the level of risk inherent in New Zealand’s electricity system would not be tolerated in the aviation world.
“I think that one of the big learnings that I have had has been that system risk, as managed in electricity, is very different to aviation, and aviation would not tolerate the system risk that is sitting in electricity at the moment,” Johns tells the Herald in an interview.
“That’s the big challenge.”
Johns’ comment comes amid concerns that the current El Nino weather pattern may mean dry spells next year, affecting the hydro lakes on which the system heavily depends.
“You could have a small levy on every megawatt produced to cover those risks, and I worry that without covering those risks, we will have years that are really, really challenging because we will have dry years, and back-to-back dry years,” says Johns.
At the company’s annual meeting in October, Johns and chairwoman Barbara Chapman were quizzed on the company’s share price, which has lagged the other power generators.
At the time, Chapman put that relative underperformance down to the company’s fossil-fuel use and the trend towards environmental, social and governance (ESG) investing.
The power generator and retailer owns and operates the coal- and gas-fired Huntly power station, which backs up or “firms” the national grid when the lakes are low and the wind stops blowing.
It also offers “peaking” generation when there is an expected demand spike, such as an unusually cold snap, or an outage somewhere in the system.
As well as Huntly, Genesis also has extensive hydro-power capacity in the central North Island and in the South Island, plus a 46 per cent share in the Kupe gas field.
Noting the investment trend towards taking ESG (environmental, social and governance) factors into account, Johns says Genesis’ share price has been discounted because of its coal and gas use.
He expects the company’s new strategy — which will use profits from the Kupe gas field to support a $1.1 billion programme to build renewable generation and grid-scale battery storage between now and 2030 — to go some way towards rectifying that.
Ironically, Mercury and Meridian Energy, which have extensive renewable generating assets, have called for more thermal peaking capacity to be built into the system.
While it may not be the flavour of the month from an ESG perspective, the 51 per cent Government-owned Genesis plays a vital part in supporting the grid.
“If we look at the coal that’s been burned at Huntly in the last five years — 90 per cent of it has been burned to cover dry-year hydro and a major gas field outage and there was no other fuel to keep the lights on,” says Johns.
“Genesis copped 100 per cent of the carbon, the ESG discount and the working capital cost of providing the insurance for the system.”
Johns says the interplay between fossil fuel-driven thermal generation and hydro power is already on show.
Grid operator Transpower has warned that the electricity system may come under pressure next year, particularly if El Nino brings dry conditions, as many expect.
As it stands, gas backs up the electricity grid, mostly through Genesis Energy’s coal- and gas-fired Huntly power station and Contact Energy’s fast-start “peaker” plants in Taranaki.
Genesis Energy’s gas-fired turbine — Unit 5 — at Huntly has been out of action since June after one of its three circuit breakers failed.
The turbine, which pumps out continuous, or baseload, electricity to supply up to 400,000 households, is due back online in late January.
In September, Contact Energy announced the failure of one of its gas-fired, fast-start peaking units, which supply power to the grid when the system is stressed.
That unit — GT22 — is not expected back in business until February or March in 2025.
Johns says there appears to be a “genuine level of nervousness” among people experienced in the sector that a dry period leading into winter will challenge the system’s capacity.
He notes that futures market prices have been rising over February, March, April and May next year, with the shift becoming more pronounced over the past month or so, reflecting the level of hydro lakes.
“We had a wet summer when we all gorged ourselves on hydro-electricity and that was of great benefit to many people.
“Then we had the Unit 5 outage and then that Contact issue in Taranaki caused us to draw on water faster.
Now, says Johns, the country is going into summer with lake levels lower than everyone had expected.
“The challenge here is that there have been no signals from either the capital markets, the regulators, or the policymakers around investment in new thermal generation — in fact it’s been quite the opposite.
“And so it’s very difficult to mount a case for investment in new kit if there is no market reward for it.
“We are seeing the effect of no signals to invest in backup generation, and I think the system risk overall is not being adequately addressed in New Zealand at the moment.”
As thermal generation disappears from the mix, he says there is no sector-wide requirement for backup to cover those risks.
“If we are short next year, it won’t be because we didn’t know about the risk of a dry year, it will be because as a system we are not covering those risks adequately.”
Both major political parties have committed to reaching net zero emissions of long-lived, climate-warming gases by 2050 and the previous Labour Government had an aspirational target of the country producing 100 per cent renewable electricity by 2030.
Johns says aviation has “muscle” to navigate long-term policy frameworks with Governments that are frequently moving from the left to the right.
He says that’s a muscle the electricity sector is beginning to build.
“Over the next 25 years, we will have National-led and Labour-led coalition Governments and nobody is saying at the moment that they’re willing to repeal the Zero Carbon 2050 Act.
“So that is law in New Zealand and that’s the destination that you need to land on.
“And all the modelling I’ve been shown shows that you need to electrify more of your lives to achieve that.
“That means you step back and go, as a country, where does the risk in that journey sit? My assessment, nine months in, is that risk sits on the demand side.
“If we miss our zero-carbon target, it won’t be because we didn’t build enough renewable energy, it’ll be because we didn’t build enough renewable energy demand.”
Johns says that comes down to heating, hot water, cooking and transport for homes and businesses. “We’re not transitioning that anywhere near fast enough.”
He says New Zealand has set an “exceptionally high bar” for itself.
Johns expects to see an evolution of ESG philosophies, a change in the way the market looks at the electricity industry over the next decade or so, and for the discount that applies to Genesis to diminish over time.
“The reality is if you want to take wind and solar to around a quarter to a third of NZ’s total generation, it’s going to create an unbelievably dynamic grid across a minute, hour, day, week etcetera, and we’re going to play a very big role in stepping in to back that up.”
For the June year just finished, Huntly stepped into the system more than 180 times to back up wind generation.
“If you take Huntly out of the equation, you have to take wind out of the equation, because you end up with blackouts.
“So are you better to have more solar and wind and be 95 per cent renewable, and accept that for 3-5 per cent of the time you need some gas to back things up, or is everyone prepared to accept rolling blackouts because you’re ruling out different solutions?”
Meridian and Mercury have talked about the need for more thermal assets to back up the system, as more wind and solar generation is built.
The market for peaking and firming is estimated to be about 1100 MW this decade, and 2000 MW or so by the end of the 2030s.
“To put that into context, Huntly will offer around 1400 MW of firming and peaking by next decade. So Huntly will be the largest generation site in New Zealand, but it won’t be big enough to back up solar, wind and hydro by the time you get to the back end of the 2030s.”
Meridian chief executive Neal Barclay is on record talking about the need for more investment in gas peakers.
“Neal’s comment is driven by Meridian’s desire to keep building wind farms, and wind and solar is intermittent, and we all know if the lights go out, the regulators and the politicians come in.
“So he’s right about the need for more firming and peaking in the system.
“The reality is, the technology we have available today relies on gas as a fuel ... If we don’t rely on gas, we’ll have to rely on coal.”
There is some potential to use biomass — things such as wood, crops or waste — which Genesis is investigating, but Johns says it’s not realistic to produce biomass at the scale needed to replicate gas and coal, so a mix of fuels will be needed.
“If you don’t achieve that, you can’t have the ambition of adding all that solar and wind into the grid, because the lights will go out. That’s just a mathematical reality.”
Whether it’s biomass, gas, batteries or hydrogen in the future, the system will need backup.
“That means we need more peaking and firming, and if we hang ourselves up on that last 5 per cent we’ll miss the opportunity of the 95 per cent.”
Gas, which has half the carbon footprint of coal, is seen as the transition fuel.
“You either accept blackouts, and I haven’t met a New Zealander who is up for cold showers by candlelight yet, or you accept that you have to burn some fossil fuel to keep the lights on as you move to a higher renewable grid.”
Johns’ contribution to aviation was recognised with the Sir Jack Newman Award for his contribution to tourism.
Beyond aviation, he has also been the chief executive of bus operator InterCity and been on the boards of the Tourism Industry Association and Tourism NZ.
He is a founding member of the Climate Leaders Coalition Steering Group and chairs the Apec Business Advisory Council’s climate leadership taskforce.
For Johns, the big issue facing New Zealand is the opportunity that an almost totally renewable power source affords.
“There is an opportunity for New Zealand to go beyond net zero, where secure renewable energy at 95 per cent underpins economic growth.
“We could become horribly internally focused on trying to get from 95 per cent to 100 per cent, or we could get ambitiously focused on how we use a 95 per cent renewable grid to drive real economic growth — data centres, green manufacturing, green molecules [gases], that could give us an economic platform that rivals the agriculture sector in the future,” he says.
“At the moment, it feels like we are being way too hard on ourselves in terms of that last 5 per cent.”
Johns says that over the next 12 months, Genesis will be bringing to the market a range of products for other generators to cover their positions in terms of solar, wind and hydro.
“We really want to lean into ambition beyond net zero 2050,” he says.
And, he says, the company will be “very much focused on removing that ESG discount from our shares”.
Legacy gas assets will give way to a focus on solar electricity generation.