KEY POINTS:
On the outskirts of Napier, Pan Pac paper mills gets a grandstand view of the squeeze on power.
From the sprawling site, workers can see heat waves from the neighbouring diesel-run Whirinaki power station when it kicks into life. And this year the taxpayer-owned plant has been in action more than usual, burning over seven million litres of diesel in the first three months.
For the third time in seven years, rain at the wrong time or in the wrong place has left the country facing the possibility of power shortages. So far we've got away with it - in previous years the rain has come, and a week to 10 days' rain in the southern hydro catchments could completely change this year's picture, but many in business are wondering when the luck will run out.
The graph shows prices have been higher and lakes were much lower before the disastrous 1992 when there were brownouts, but it's the Groundhog Day feel that is bothering businesses.
In the the Hawkes Bay, Pan Pac is not just an interested spectator to the expensive back-stop plant swinging into action at Whirinaki, it is a victim of the spot price spiral that has forced it to cut production to around 40 per cent of capacity.
The April benchmark average price for power on the spot market used by big industrials is double what it was in the same month a year ago. Directly related are levels of hydro lakes - responsible for supplying more than two thirds of our power - which were yesterday sitting at 64 per cent of average.
Pan Pac exports wood fibre to Japanese newsprint manufacturers and says the cut in production is costing it $100,000 a day. New Zealand Aluminium Smelters at Tiwai Point has cut production by about 5 per cent. More big users are likely to cut back this month if prices stay high.
Most of the country's customers have long-term contracts of two to four years but spot market players take the crunchie, high daily prices, with the smooth - low prices when dams are full in spring and power plentiful.
Pan Pac's managing director Doug Ducker is concerned some of the big profits enjoyed by the electricity sector has not gone back into a broader base of more electricity generation, which would help avoid sharp price fluctuations.
His company was responding to market signals but he was concerned there were no signals for domestic consumers to cut their use.
The Electricity Commission on Thursday said Whirinaki would be running almost constantly given low hydro storage levels. It burns up to a million litres of diesel a day and reserve stocks at lower prices are dwindling.
Ducker has no complaints although believes it could have been switched on late last year.
"It was put there as peak load support and that's what it's doing - the issue with that is whether it should have come on earlier to conserve water."
He says Pan Pac has deferred expanding the plant in the past decade because of lack of faith in the electricity system.
The last time there was a serious power shortage was in 1992.
Among measures taken that year, a power company paid large customers to use LPG and diesel, hot water ripple control was more severe, street lighting restricted and Comalco shut down part of its operation creating a 5 per cent national saving. The crisis was estimated to have cost 0.6 per cent of GDP - which if repeated today would amount to over $1 billion.
Since then the public have been asked to save power in 2001, 2003 and 2006 because of low lake levels but each time rain headed off any serious problems.
Constraints on interisland transmission, the closure of Contact's New Plymouth power station and restrictions on generating at Huntly in the peak of summer had exacerbated the tight situation this year.
Business New Zealand chief executive Phil O'Reilly says living with the threat of shortages has been the result of poor decisions by successive governments.
"I don't think you should ever have a case where companies have to turn things off. It's got really negative impacts. Overseas companies will be looking at things like that and thinking New Zealand doesn't even pass first base if we can't guarantee we can turn the lights on.
"You just can't run an economy like this. If we get through to the end of winter without blackouts - it was all done by the skin of our teeth and sellotape and string. I don't think that's a sensible proposition."
Energy Minister David Parker is urging caution but is not sweating about the lights going out.
"I would say it's always in everyone's interests to be careful with and not waste electricity and it's even more important to be prudent at the moment.
"There is no realistic prospect of the lights going out - that's not going to happen."
Business NZ and the Government agree on one thing - the electricity market is working - but have a different take on the underlying health of the power sector.
O'Reilly says he suspects more big industrials would be cutting back this month.
"That's got to be perverse. The market's working just fine, the problem we've got is because we've got too little supply."
Parker says new power generation is more than meeting the 175MW additional annual requirements and has little sympathy for those hit by high spot prices.
"If spot prices weren't high there'd be something wrong. Large industrial users have the benefit of tariffs which are lower than residential users most of the time because they're on the spot market and then when you have a year when have low hydro inflows and prices go up then that encourages them to use less," Parker says.
"There's no point in having increased prices (without) reduced demand."
The alternative would be to build overcapacity.
"If you do that you put up electricity prices for everyone overall because you have to fund extra electricity infrastructure. New Zealand hasn't had blackouts since the 1970s - I think our system has the right level of capacity."
The price of power has risen around five per cent a year for the past five years at retail level and "natural" rises of a similar magnitude are expected for the next few years to cover the cost of new generation and the $4.5 billion upgrade of the national grid.
O'Reilly says businesses understand the need for investment to ensure supply.
"What annoys the hell out of them is when you either have the price going up without effective investment and or the price goes up and then they say 'we can't supply' or price goes up to such an extent where they can't afford it."
The impact of the proposed emissions trading scheme due to be introduced in 2010 hangs over generators.
Parker says based on existing modelling, wholesale power prices will rise by between five and 10 per cent. The 10-year moratorium on new thermal generation, apart from meeting peak demand, has annoyed many in the industry who point to now relatively plentiful supplies of gas.
Parker acknowledges this, but as a fuel it remains outside the good books, unlike geothermal and wind power which he says generators already regard as being more cost effective, two years ahead of the emissions trading scheme.
Mighty River Power generates 22 per cent of the country's power and found itself on the wrong end of the dry summer and autumn until rain in mid-April replenished Lake Taupo.
Chief executive Doug Heffernan says his company has been running its gas turbine full-bore and at times has had to buy power on the wholesale market before the rain came.
New Zealand has some of the lowest prices in the developed world because of renewables but it does mean you have volatility in the market and you see spreads blow out in droughts, he says.
"We do that because we've got obligations to our customers - that's the price of keeping the lights on."
Mighty River figures show the four-year average spot price to 2007 was only $59/MWh while the forward three year contract price in January this year was just under $67/MWh, in the same range as over the previous few years.
"So those few people running on spot have had a free ride compared to those on contract, and should expect the pendulum would eventually recover the difference in a drought as is happening." Heffernan said there would be no investment occurring if returns were supported by just $59/MWh. Power prices to recover costs on most new projects ran to more than $70/MWh, consistent with what forward contract markets are indicating.
"So that's good news for most consumers - market prices commensurate with investment requirements. It's only those on spot whose exposure to true costs has been postponed until now."
HELP FOR BUSINESS
The Energy Efficiency and Conservation Authority offers the following services and funding towards making businesses more energy efficient:
Energy Achiever - An hour-long session to scope current energy usage. Free for businesses spending more than $500,000 a year on energy.
Energy audit - A comprehensive energy audit carried out by an independent consultant. Funding is available through the Emprove programme, which covers up to 50 per cent of the cost of an energy audit for businesses with energy bills of more than $100,000 a year.
Crown loans - Low-cost funding for energy efficiency projects available to public sector organisations.
Energy Intensive Business - Cash grants available for energy intensive industries and businesses where energy is more than 5 per cent of total business costs. Grants cover projects that increase energy efficiency, such as implementing new technology that can be replicated across various industries. Funding is available for up to 40 per cent of the cost of a project, capped at $100,000.
Wood Energy grants - The Wood Energy Grant Scheme offers funding and information to businesses interested in using wood residue as an energy source. Business grants for capital/demonstration projects may be up to 40 per cent of the capital cost of the project, with a minimum of $10,000 and maximum of $200,000.
POWER SAVING TIPS
* Turn off any equipment not in use.
* Pull up window shades to make the most of natural light.
* Turn off any non-essential lights in cupboards, toilets and foyers.
* Don't use heating or air conditioning if the windows and doors are open.
* Ask cleaners to make sure they turn the lights off after them.
* Only keep lights on that are needed for safety and security.
* Make sure fridge and freezer doors are closed.
* Can any semi-full fridges be emptied into another and turned off?
* If you can, use energy hungry equipment during off-peak hours. Talk to your energy supplier about off-peak rates and times.
* Fridges, freezers and chillers shouldn't be positioned in the sun or close to ovens.
* Timers on lights, hot water, air conditioners and heaters make sure energy isn't wasted, but it pays to check they're on the right setting.
* Heater thermostats should be set at 19C in offices, 16C in workshops, and 10-12C in stores.
* Air conditioners should be set at 25-27 degrees.
* Hot water cylinders should be set at 60C.
Source: Energy Efficiency and Conservation Authority www.eecabusiness.co.nz
