A dairy processing head is warning that milk prices this season are under real threat of being pushed downwards thanks to surging energy prices swamping the country.

Open Country Dairy CEO Mark de Lautour told Farmers Weekly dairy processors are unable to continue to absorb the increases coming at them from all key energy suppliers.

While his company is relatively insulated for now from electricity price contracts, these will eventually end.

“We are fully aware of what is coming. We are in a tunnel with a big light coming down it.” 

The squeeze of energy costs on the primary sector’s processors is already being felt. 

Ruapehu District mayor Weston Kirton has signalled the closure of two timber mills in the Central North Island as they grapple with a 600% increase in electricity costs since 2021. 

The mills’ closure will put 300 people out of work. Kirton said it is vital that the government top up such significant employers in the regions until a solid energy plan is formulated.

“We are not experts on the electricity market and how you can resolve the issue. But we are on the receiving end of its outcomes, which are bringing grief to our communities,” he said.

Electricity spot price increases have continued unabated this week, up 33% on average, a further leap on the 50% increase on the spot market a week earlier.  Most industry users are reporting power prices that are double what they were 18  months ago.

The major energy cost surges are coming as the dairy industry gears up for peak spring milk flow, and farmers start to rebalance budgets after two years of double-digit on farm inflation.

De Lautour said the fact the price surge extends across electricity and gas supplies indicates the problems causing it go beyond any seasonal volatility in hydro lake levels. They reflect, he said, a major flaw in New Zealand’s ability to adequately plan for its energy needs.

“There is a bigger issue at play here. We have moved from coal to gas and electricity. We have increased demand for gas and electricity, and we have not got alternative sources in place. We have taken a big slug of stored energy out of the system by stopping coal use.”

Fonterra chief operating officer, Anna Palairet, said concerns about NZ’s lack of energy resilience have been raised by the co-op for some time. Fonterra runs a mix of energy types in its boilers. 

“We are concerned that the high wholesale electricity prices and uncertainty in the gas market are impacting New Zealand’s export competitiveness.”

In the meat processing sector ANZCO Foods and Silver Fern Farms (SFF) have experienced a doubling of their electricity costs in the past 12 months, while also working to reduce reliance upon coal as an energy source.

SFF has managed to negotiate cheaper rates for the coming season that will still be materially higher than 2022 rates, and both it and ANZCO have doubled down on energy saving steps where possible.

Energy expert Jonathan Pooch of consultants DETA has warned NZ will have to adapt to what is going to be a “new normal” of high energy costs, with little in the pipeline of new supply to suggest they will be coming down any time soon. 

He said the country is paying the price for failing to have a broad energy strategy, and any reactive response is going to cost significantly more than having planned ahead when also decarbonising the energy supply.

“This is really just indicative of the lack of infrastructure investment in general.”
He said whatever approach the government takes to rectify the problem, large amounts of money will need to be spent.

Open Country Dairy CEO Mark de Lautour describes surging energy costs as the light of a big train in a dark tunnel heading for the dairy processing industry, and New Zealand as a nation.

While Open Country Dairy (OCD) is insulated from the rapid rises at present thanks to contracts already in place, he said he and his executive team are fully aware of what is coming once those contracts end. 

And, rather than simply being the result of volatile hydro lake levels, he said, there are much bigger issues at play impacting the energy market and costs.

“As coal and fossil fuels became unacceptable, NZ moved away to electricity and gas, or switched from coal to electricity as we have done.

“But the increased demand for gas and increased demand for electricity is what has caused this, not just what’s in the hydro lakes. Demand has increased and NZ has not got alternative sources in place.”

Removing coal from high energy uses like dairy factory boilers and replacing it with electricity meant a big slug of stored energy has been removed from the system. 

He agreed with OCD’s chair Laurie Margrain, who has described NZ as having “sleepwalked” into this crisis.

OCD has commissioned a new electric boiler in its Southland Awarua plant, with two more being installed.

“But we are retaining our coal boilers as required to do so by the electricity companies as back-up.”  

Despite having the new assets, the company will be operating coal in the high-cost electricity environment, and wearing the Emissions Trading Scheme charges that go with that.

While it is easy to start getting political about the issue, de Lautour said, the country badly needs a long-term energy strategy that takes politics out of it.

“We may have electricity prices locked in for now, but we certainly do not feel insulated in any way shape or form.” 

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In the immediate future gas prices are of even greater concern to him, with the company’s Horotiu and Whanganui sites having gas supply that cannot, unlike coal boilers, be converted to the likes of biofuel.

“In some ways we do have one advantage, we own biofuel company Nature’s Flame that supplies wood fuel pellets for our Waharoa plant. But we are having our hand forced, to spend capital that should be instead spent on the likes of a new cheese plant, which actually adds value.”

De Lautour said it was inevitable the high energy costs will remain for some time, and they will put downward pressure on market prices for milk solids this season.

Fonterra’s chief operating officer, Anna Palairet, said Fonterra has been raising concerns about the lack of energy resilience and cost effectiveness in the energy sector for some time. 

It has been concerned the high wholesale electricity prices and uncertainty in the gas market are impacting NZ’s export competitiveness.

“We are confident that energy remains available to process milk over the coming seasonal peak, but the current situation is adding significant cost to both the co-op and our shareholders as we cannot simply pause operations,” she told Farmers Weekly.

Linda Mulvihill, Fonterra’s GM for energy and climate, confirmed the co-op runs sites on a mix of gas, coal, electricity and wood biomass. 

She said when moving out of coal, the cost implications both of the build, ongoing running costs and surety of fuel supply are key considerations.

Antony Heywood, general manager of Vegetables NZ, said South Island hot house growers do not have gas as a fuel option, with coal or waste oil often the main choices. 

Biofuel replacements are being used or considered by some, but these are proving problematic due to a lack of scale, and there is a need for more wood waste to be pelletised to be suitable as an economic fuel source.

In Focus Podcast | Power prices hit rural pockets

Skyrocketing power prices are hitting farmers and processors hard. Senior reporter Richard Rennie says it looks like a challenge that will be here for some time as there’s no obvious fix on the horizon.

Meat and dairy processors, orchardists and irrigators are all grappling with the problem and many are looking for efficiencies and ways to trim costs in other areas.

Investment in sustainable water management is proving a saving grace for hundreds of Canterbury farmers amid soaring electricity prices.

With spot energy prices skyrocketing more than 50% this month in the South Island as hydro lakes and alpine rivers run low, irrigation companies are weighing up the value of future-proofing investment.

“It really has been a case of taking away the risk of the ups and downs and insulating from the increase in energy prices for most of our farmers,” Ashburton Lyndhurst Irrigation Ltd (ALIL) scheme chair Colin Glass said.

Based out of Mid Canterbury, ALIL is a farmer-owned co-operative that delivers water through a network of pressurised pipes to 240 shareholders irrigating more than 30,000 hectares of farmland.

“As we collectively pave our way toward a sustainable, locally grown future, our scheme has adopted modern telemetry that aids us in achieving efficient water use and delivery via pressurised pipelines.

“There’s no disputing electricity is a big issue but we have moved to above-surface metering, operating with smaller pumps, on non-half hourly hubs under different pricing contracts, many of which roll out two- to three-year cycles taking away the pricing ups and downs.”

Glass is also chief executive of Dairy Holdings, Fonterra’s largest milk supplier, with 70 farms across the South Island, a large number of which come into Canterbury irrigation schemes.

“It has become important for Dairy Holdings and ALIL as because of the pressurised pipelines and gravity we are mostly insulated from increases in energy charges.”

Several other large schemes across Canterbury are also gravity pressurised, including Central Plains Water, lessening the exposure to increasing electricity prices.

“There’s been quite an investment by irrigation companies to future-proof for anticipated rising electricity prices.

“With these big projects complete we are looking more closely at interest rates, being more exposed now to changes in interest rates rather than electricity prices.”

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Glass said the same goes for Dairy Holdings.

“We moved away from deep ground water to surface water takes, which considerably lowers electricity costs and leaves us less vulnerable to energy increases. 

“I’d like to think it is all less of a risk over time.

“Electricity has been rising greater than the rate of inflation over the past two decades and the reality is New Zealand’s economy and population have continued to grow and we have been slower investing in electricity generation.

“We [irrigation companies] know our electricity prices will increase but we hope with our future-proofing investment it will not have a major impact on our businesses.”

Ashburton-based Ruralco Energy, which lines up power contracts for farmers looking to fix irrigation electricity farm costs, encourages farmers exposed to spot pricing or renewing contracts into the future to look at options.

“While spot pricing is the highest it’s been for some time it will not really impact anyone locked in fixed price variable volume contracts,” Ruralco Energy key account manager Glenn McWhinnie said.

“When market prices are this high, we would not be looking at locking in longer term contracts. Wait for the downward; while the forecast is for prices to remain high, it will drop at some point, I just don’t have a crystal ball to say when.”

McWhinnie said farmers renewing contracts over the past two weeks are paying 50-60% increases in what they are coming off, but retailers are flexible and can do shorter term to ride out the high.

Glass believes the greater risk facing irrigators right now is water availability with very little water in the hydro lakes and alpine rivers.

Environment Canterbury surface water science manager Elaine Moriarty said lakes and rivers throughout Canterbury are at record low levels and there’s no saying when this will improve.

In Focus Podcast | Power prices hit rural pockets

Skyrocketing power prices are hitting farmers and processors hard. Senior reporter Richard Rennie says it looks like a challenge that will be here for some time as there’s no obvious fix on the horizon. Meat and dairy processors, orchardists and irrigators are all grappling with the problem and many are looking for efficiencies and ways to trim costs in other areas.

Electricity prices paid by meat companies are on track to double in just one year.

ANZCO Foods and Silver Fern Farms have both warned their electricity costs have doubled, although SFF has negotiated cheaper rates for the coming season.

ANZCO chief executive Peter Conley said rates have increased significantly over the past two years and it is closely watching its electricity use and seeking savings where possible while still operating all sites.

“We are managing our assets and production capability as normal and haven’t reduced production as a result of the higher electricity costs,” Conley said.

Brenda Talacek, the chief operating officer at SFF, said rates doubled between 2022 and 2023 but the company has negotiated lower charges for 2024. However, these are still materially higher than in 2022.

She said the company has focused on reducing electricity use.

As part of its Streamline programme to improve its business operations, SFF has introduced initiatives to reduce electricity use which include putting freezers into sleep mode during weekends and other periods of non-use.

This alone saved $172,000 in electricity costs this year at its Te Aroha site.

“We’ve also been replacing sterilisers with more energy efficient ones at our Belfast site, which has saved over $80,000 in the past year from heating water for processing.”

SFF has a policy of halving coal emissions over the next two years and exiting the use of coal completely by 2030.

In 2022-23 it installed heat pumps at three South Island plants.

While it replaces coal furnaces, the new system uses waste heat from its refrigeration units to heat water, a task previously performed by coal.

Wayne Shaw, manager of processing and safety at Alliance Group, said the co-operative is not impacted as it has long-term supply contracts.

Disclaimer: This article was first published on Friday, August 16, as a teaser for the Power in Crisis special report.

In Focus Podcast | Power prices hit rural pockets

Skyrocketing power prices are hitting farmers and processors hard. Senior reporter Richard Rennie says it looks like a challenge that will be here for some time as there’s no obvious fix on the horizon. Meat and dairy processors, orchardists and irrigators are all grappling with the problem and many are looking for efficiencies and ways to trim costs in other areas.

The mayor of Ruapehu District Council is pushing government ministers to step in with a support package to keep processing businesses in his region afloat as they grapple with soaring electricity costs.

Earlier this month mayor Weston Kirton drew attention to a rapidly emerging national crisis, highlighting two timber processing factories in his district that are facing closure due to exorbitant increases in their energy costs.

 The Tangiwai and Karioi mills on State Highway 48 between Ohakune and Tangiwai are critical employment sources for the region with almost 300 staff between them. Many of these people either live in Ohakune or travel from as far afield as Taumarunui.

Winstone CEO Mike Ryan had told Stuff the plants are no longer viable, having suffered a 600% increase in their electricity prices since 2021.

“We simply need to put the call out to [Associate Energy Minister] Shane Jones and the government. We are not experts on the electricity market and how you can resolve the issue, but we are on the receiving end of its outcomes which are bringing grief to our communities that will need to be propped up as a result of this,” said Kirton.

He said regardless of which government is responsible for the position the energy market is now in, it was up to the current government to deal with it.

“We need a Band-Aid to deal with this, and we need it now.

“We now have some of the highest electricity prices in the western world, we are not in a good place and options are limited.  I understand government is talking about importing liquid natural gas, but that would be at least six months away.”
Jones told Radio NZ the Electricity Authority is a “chocolate teapot” when it comes to enforcing generator-retailer pricing behaviour.
Kirton and his council are supposed to be meeting this week with their local MP Barbara Kuriger, who was in discussion with Finance Minister Nicola Willis.

“We are hoping to get some sense of where they are heading, but as we see it there is only one way and that is to prop it up until a longer-term solution is found. The ‘do nothing’ option is far worse.”

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Meantime in the background the energy sector is in discussion on how to avoid blackouts in coming months, including how to free up more water from the hydro lakes for generation. 

These are themselves compromised, running at only 50% of their long-term average for this time of year, while gas supplies remain constrained. 

The lakes now sit at the bottom 5% of their historic recorded levels.

This winter has also been particularly calm, reducing wind generation’s contribution.

“There is some irony here in a country with so much water, while wind is not doing it. Sustainables are not enough. From what I understand NZ needs to double its electricity supply to meet future needs. Things are biting us now,” said Kirton.

The Ruapehu district has been hit hard in recent years with the financial issues that struck the operator of the Whakapapa ski field. A $7 million grant was made  in March to Ruapehu Alpine Lifts, also by Jones and cited by him as the last the field would get.

An additional $3.05m has been pledged in equity and loan funding to enable the sale of Turoa ski field.

In Focus Podcast | Power prices hit rural pockets

Skyrocketing power prices are hitting farmers and processors hard. Senior reporter Richard Rennie says it looks like a challenge that will be here for some time as there’s no obvious fix on the horizon. Meat and dairy processors, orchardists and irrigators are all grappling with the problem and many are looking for efficiencies and ways to trim costs in other areas.

An energy expert has warned that there is unlikely to be any significant relief in New Zealand’s electricity prices any time soon as processors roll off old contracts onto new ones that are more than double what they were paying three years ago.

Jonathan Pooch, the managing director of energy consulting firm DETA in Christchurch, warned that the current environment is likely to be the new normal, and New Zealand is paying the price for not having a clear national strategy on energy generation and use.

His caution came as the latest spot energy prices leapt over 50% in a week while South Island hydro lake storage continues to shrink to less than 50% of the five-year average. 

The surge in prices comes as primary sector processors are poised to enter their peak energy demand period for milk and meat processing.

“There is nothing fundamentally in the market that will see prices fall in the next 18 months,” Pooch said. 

He emphasised the power cost surge goes deeper than simply a dry winter depressing hydro lake levels and is more like “the holes in the Swiss cheese lining up”.
Those “holes” comprise the move to not go ahead with the giant Onslow hydro battery project, a lack of gas supply, lower lakes, and the Tiwai aluminium smelter continuing operations.

If anything, gas shortages are underpinning the strong price rises that are unlikely to abate.

“The gas shortage is setting the price as it is the incremental energy source. We have always expected, and had, hydro lake volatility, but this is not that.” 

He said the last Labour government’s decision to ban gas and oil exploration had had some effect on that shortage, but even without that exploration NZ’s existing reserves had proven to be over-estimated.

Data provided by the Ministry for Business Innovation and Employment show there was a 20% reduction in NZ’s proven and probable reserves in the past year; 30% of that was due to reserves being downgraded, and others removed altogether as companies better understood that they held less than expected.

To rectify that there have been discussions about NZ importing containerised liquid natural gas, which would cap the price of natural gas.

“It would still be more expensive but could be one response. Another longer term one is to build an LNG terminal, but that of course takes time.”
Biogas generated through crop, food and landfill waste is also a viable option, but dependent on location.

Bioenergy Association director Brian Cox said estimates are that biogas could supply about 10% of NZ’s renewable energy and could be easily piped into the national gas grid. He said estimates are ultimately that, by 2050, 40% of NZ’s fossil fuels could be replaced by biogas.

Biofuel has been a go-to option for some large processors as they move out of coal, but even this has lacked a clear direction, and consolidation among suppliers to help bring down the cost of the fuel sources.

“So it becomes a bit of a chicken and egg situation,” said Pooch.

He said biogas and biofuels have suffered from the country’s lack of clear strategy. 

There are, however, processors who took a riskier position when securing their electricity contracts and who were now getting profile for the impact it is having on them.

Politically the high electricity prices will start to have an impression if processors have to lay off staff. Pooch noted that responses to crises can often be better than planning ahead, but NZ’s reactive response to this one will always cost more than being proactive years earlier.

“This is really just indicative of the lack of infrastructure investment in general.”

Large amounts of money are going to have to be spent to get NZ in a better position.

“Whether that is third party finance, private public partnerships, overseas investment, there are good options, but none can be done without good vision and foresight.”

Greater generation capacity, more storage to enhance the limited hydro storage, and a more interactive market where pricing reflects users higher or lower daily load demands are all components of a revised system, he said.

In Focus Podcast | Power prices hit rural pockets

Skyrocketing power prices are hitting farmers and processors hard. Senior reporter Richard Rennie says it looks like a challenge that will be here for some time as there’s no obvious fix on the horizon.

Meat and dairy processors, orchardists and irrigators are all grappling with the problem and many are looking for efficiencies and ways to trim costs in other areas.