New Zealand’s energy markets have been in focus in recent months, after low gas production and low hydro lake levels combined to force prices higher. The recent threatening of an energy crisis seems to have been avoided – for now – with prices normalising somewhat.

But how could higher energy costs affect different parts of the New Zealand economy? In our September 2024 Chart of the Month, we detail how important energy costs are to different industries, finding that manufacturing is particularly exposed.

Electricity spot prices started to noticeably rise through July 2024, moving from the low-$200s/MWh at the Haywards reference point in early July through to the high-$300s/MWh in late July. On 7 August, prices went berserk, with the daily average for Haywards rising to $878/MWh! Electricity prices then bounced around the $350-$500/MWh range the next two weeks, before plummeting to only a few dollars at the start of September, as higher rainfall increased hydro lake levels.

It also seems that we’ve averted a full-blown energy crisis, given prices have dropped back so dramatically. However, drier conditions later in the year could well raise electricity cost risks again further.

More importantly, of the reactions to the energy cost spike was to close down manufacturing:

• Methanex has shuttered its Taranaki plants from mid-August until the end of October.
• New Zealand Aluminium Smelter has reduced electricity consumption by over 200MW, by reducing aluminium production at Tiwai Point.
• Pan Pac has put its Napier pulp production plant on hold.
• Oji Fibre Solutions has closed its paper recycling mill in Penrose, Auckland, in part due to higher electricity costs.
• Winstone Pulp International has closed its two mills in Ruapehu District.

Lower near-term electricity prices are partly due to lower demand from industry, meaning that electricity supply is more balanced with electricity demand. But this lower production does mean that lower energy costs are at the expense of economic activity and jobs, at least in the short term. Longer-term, more energy production is expected to align supply and demand requirements.

As Chart 1 shows, manufacturing activity is most exposed to higher energy costs. Primary metal and metal product manufacturing is most exposed, with 17% of total input costs for this industry being energy. This industry includes aluminium manufacturing, hence why the reduced output from the Tiwai smelter has such an impact on freeing up energy supply. Chemical manufacturing is the second larger, with nearly 14% of total costs coming from energy (this time, from gas) – hence the Methanex closure. We estimate dairy product manufacturing is next, with around 10% of total costs coming from energy, then pulp and paper manufacturing, with 6.6% of costs being energy.

Supermarkets have a surprisingly high proportion of their cost base being energy costs, with around 5%, with the remaining 15 industries charted showing energy cost exposure of between 1.4-3.4% of total costs.

We have excluded the electricity and gas supply industry from our above analysis, as funnily enough this industry requires a fair bit of energy as an input to its business operations!

Higher energy costs present a clear economic worry throughout the rest of 2024 and into 2025. Lower production at present is helping keep energy prices at a more affordable level across the market, but lower production is costing the economy and leaving some without jobs. Further energy price spikes, before more energy production can be brought online, could mean less production through higher prices limiting output – either as a rational business choice when prices are high, or through deliberately curtailing production to limit price rises across the economy – for a fee, of course.