Troubled mill owner slams Contact-Manawa power play

Oji Fibre Solutions has written to the Commerce Commission to criticise a proposed electricity sector merger as it prepares to shutter its Penrose mill.
The company is closing its Penrose paper recycling mill, with chief executive Dr Jon Ryder pointing to “dramatically rising energy costs”, freight and labour costs being behind the closure.
The mill’s last day will be December 18, with 75 workers losing their jobs.
Other mills are facing the same pressures. Winstone Pulp International has confirmed it’s shutting down operations at the Karioi pulp mill and the Tangiwai sawmill in the central North Island, with hundreds of jobs to be lost. The Winstone mills had been non-operational for a month leading up to the announcement, with the blame put on unmanageable energy costs in non-competitive generating market.
Yet at the same time, gentailer Contact Energy has announced its $1.86 billion purchase of Manawa Energy (formerly Trustpower), in a deal that Contact’s chief executive Mike Fuge said would make it a stronger, more resilient electricity company.
In a submission this month to the Commerce Commission, Oji’s energy manager Darren Gilchrist warns that allowing the acquisition to proceed as proposed “seems likely to further consolidate market power, reduce competition, and ultimately be detrimental to the interests of consumers and the broader market”.
Gilchrist says Oji had electricity contracts with both companies – a longstanding retail supply contract with Manawa Energy, and a long-term power purchase agreement with Contact Energy.
“Oji Fibre Solutions is increasingly concerned about the competitiveness of the New Zealand electricity market, with continuing spot market and secondary market electricity prices well above what would be expected in a competitive market, and well above the levelised cost of energy for new generation projects.
“These continuing high prices are making it increasingly difficult to operate an energy intensive business, as illustrated by the recent closure of Winstone Pulp and the impending closure of the Penrose recycled paper mill.
He says the recent energy crisis shows that unless urgent measures are taken, supply uncertainty, rising prices and increasing market volatility will cause other energy intensive operations to close and make it impossible to attract overseas investment into manufacturing industries.
Gilchrist says the wholesale electricity market could be hit the hardest, because of a probable reduction in the availability of contracts, along with prices of any contracts “almost certain to be higher than in the case of the counterfactual”.
“From publicly available information, it appears as if Contact Energy has offered a significant premium on the current market value of Manawa Energy,” he observes.
Contact’s offer was at a 47.6 percent premium per share to Manawa’s closing price the day before the scheme was signed.
“While it would be a reasonable assumption that rationalisation of functions and reduced costs would justify part of this premium, it also seems reasonable to assume that Contact will seek to recover this premium through increasing profits in the electricity market, with higher spot prices and contract prices highly likely.
“Any higher electricity prices will impact consumers directly, with both industrial consumers and retail consumers facing further increases in costs.”
Associate Energy Minister Shane Jones, an advocate for local manufacturing, has also spoken out about the deal. In a Newsroom article dated September 18, Jones said he was “hoping and praying” the Commerce Commission would intervene to prevent further consolidation of the electricity generation market.
The merger application filed by Contact and Manawa said the transaction would combine complementary generation assets. Manawa’s North Island hydro assets perform best in winter, while inflows into Contact’s South Island hydro catchment are summer weighted.
The application said this provided a natural hedge for Contact’s existing assets, giving the gentailer greater certainty about generation over winter, meaning the combined entity would be able to sell a larger volume of long term hedge and physical supply contracts at a fixed price, while supporting decarbonisation goals and generally operating more efficiently.
Contact submitted that it wouldn’t be able to profitably raise prices by itself if the deal went ahead as Manawa didn’t sell directly to customers and it would still be competitively constrained in the wholesale spot market by Mercury, Genesis and Meridian.