Are electricity prices really to blame for mill closures?

Scott Irwin says his gut dropped as he listened to managers begin to speak yesterday at the staff meeting at Karioi pulp mill, near Raetihi. Even the mill boss delivering the news was in tears.
“There was a lot of tears, yeah. A lot of young families crying,” the father-of-three says. “Me, I thought I was gonna be there until I retired. Yeah.”
At the meeting, Winstone Pulp International Ltd broke the news to employees that it proposes to shut down operations at its pulp mill and nearby Tangiwai sawmill, blaming unsustainable energy prices. In a town of barely 1000 people, 230 will lose their jobs.
Irwin, 38, blames the power companies. He doesn’t think they were selling the electricity at reasonable rates. “Hell no. They’re not even trying to lift the finger to help us. They were just trying to collect the cheque.
“It is just the power,” he explains. “I’ve been watching the sites and all the graphs at work and, yeah, they’re just not doing nothing for us. Now, we’re just waiting for our house power to go up.”
It comes soon after the district was plunged into uncertainty by ski field operator Ruapehu Alpine Lifts going into receivership. “If the Government can bail out a ski field, surely they can bail out a mill? Just let us have our jobs back, man. Give us a better deal or something. They own 51 percent of the bloody power companies around here. They got to be able to do something for us. Give us a break.”
Newsroom has confirmed that Winstone’s main power supplier was Mercury, which operates most of the North Island’s hydro dams as well as geothermal plants. The company published its annual results yesterday: its net profit for 2023/24 was $290 million, up 159 percent on the previous year. It earnings before  interest, tax and depreciation were $877m, a 4 percent bump that the company says is a better representation of its trading.
Winstone Pulp chief executive Mike Ryan emails Newsroom one of the graphs that his workers at the mill have been poring over – a chart showing showing cost escalation of electricity futures since 2021/22.
He says energy prices have risen from $100/MWhr at this point in 2021, to a futures price expected to average over $500/MWhr for the month of August this year.
For the company, that means its electricity costs have risen from 15 percent of costs, to more than 40 percent at the point the company made the decision to close its mills. “These sorts of increases cannot be passed on to our customers,” he says. “For comparison, our overseas competitors are paying between $60 to $100/MWhr.”
But Mercury chief executive Vince Hawksworth rejects blame for the company’s difficulties. In an interview with Newsroom – one of the last interviews he’s giving before he retires this month – he says it’s Winstone’s business choice to attribute blame to whatever it says has caused them to make a decision. “I would rather that the jobs remained,” he adds.
“Look, I buy the fact that if you chose to be on the spot market, these high energy prices are extremely stressful, and I worry about the de-industrialisation of New Zealand, if that’s the case.
“But I would also say that many of our customers who are in similar types of businesses have taken long-term contracts with us that look through these short-term things.”
He says Winstone buys about 50 percent of its power from Mercury, and the rest probably on the wholesale market. “We have continued to supply them, and they have contracts with us,” he says. “I don’t know what their exposure is to power prices because of deals they have or haven’t done with anybody else. All I know is the deals that we have done, over a long period of time, fix their power price.
“The prices that we’ve charged them, for the fixed price stuff, are within a very close range of what we have charged the smelter. They don’t reflect spot prices at all.”
But he acknowledges some of the contracts were signed off in the past few months, as power prices were soaring.
Winstone has been a longtime critic of how New Zealand’s electricity market works. Hawksworth doesn’t agree with the criticisms.
“They’re entitled to their view,” the Mercury boss says. “But anybody that takes long-term spot exposure should understand that the spot prices will respond to the whole scarcity situation. I don’t know how much of their business was exposed to those prices, but I do know how much we’ve sold them and at what price. And as I say, that is very reflective of what we’ve done with the smelter.”
Back in 2021, in a submission to the Electricity Authority, Winstone’s managing director David Anderson called for government intervention to assist new entrants to the power generation market build new renewables, as well as a strategy that used gas as a transitional fuel.
Every year, he said, the pulp mill produced over 220,000 tonnes of high grade mechanical pulp for export; its adjacent sawmill produced more than 120,000 cubic metres of sawn timber for export and the domestic market. The business generated more than $200m revenue a year.
It was a price taker in the international pulp market so, to stay internationally competitive, it had to aggressively manage its operating costs. “Energy is a major component of our input costs,” he said. “We currently use around 240,000 MWh/year electricity. We typically hedge around 80 percent of our demand, but this does not protect us from underlying spot price trends, and since 2019 our average forward price has doubled. It is not rational for us to hedge at prices that are unstainable for our business.”
Nearly three years later, chief executive Mike Ryan says little has changed: Power prices have soared on the spot market, other input costs remain high, and market prices for pulp and timber are relatively low and under pressure.
The business has invested tens of millions of dollars to improve production and energy efficiency in recent years, significantly improving production capacity while reducing energy use by 20-30 percent for every tonne produced.
Winstone has continued a high level of energy price hedging to help manage the risk of power price increases and volatility – but it’s not been enough. “As these arrangements have come up for renewal, the cost of replacing them has been unaffordable in the context of remaining globally competitive.”
Realistically, he says, no hedging policy or future efficiency improvements will offset the structural increase in energy costs. “Ultimately, the step change in energy pricing needed to make New Zealand manufacturing internationally competitive long-term will require a significant increase in generation capacity. The lead time on that is years or even decades.”
He argues that officials and the generation companies have been aware of the risks associated with the rising cost of energy for some time now. Winstone has raised the issue independently, and as part of industry groups, with successive governments. “It is a shame that hard working New Zealanders potentially must lose their jobs before the issue is taken seriously,’’ Ryan says.
The Karioi and Tangiwai staff will remain on full pay during the consultation period, Ryan says. Based on current time frames, Winstone Pulp International expected to announce a final decision by September 9. It is, he says, a proposal the company had done everything to avoid.
Ruapehu mayor Weston Kirton last night echoed Scott Irwin’s call for the Government to step in to the electricity market, to save jobs – not just at Winstone but across the country.
The announcement of the end of Winstone operations is a devastating blow to the Ruapehu District and the wider central North Island economy, he says, and this closure is just the tip of the iceberg.
“The closure of Winstone Pulp International underscores the urgent need for government intervention,” Kirton says. “Fixing the New Zealand electricity market must be the government’s number one priority.
“We are at a critical juncture. The timeline for a potential solution and whether it will make New Zealand energy costs internationally competitive are the key issues. If we fail to act now, the repercussions will be felt across all sectors of our economy.”
As for Irwin, his partner Kim and their three kids? “Shit, it’s survival of the fittest pretty much at the moment,” Irwin says. “I’ve got to try and find another job, and that’ll be lucky, especially around here. It’s going to be pretty hard. I can’t go into the bush because the Tangiwai Sawmill’s been shut down as well.”
The couple have two intermediate-aged daughters, Narissa and Paige, and their three-year-old son SJ. The family are Tuwharetoa, born and bred.
“I’ve told the kids, thing’s are gonna be a bit tight for a little while until I can find something for us to do, or for me to do, just to survive,” he says.
“Pretty much this is all we know here, Raetihi. Half of Raetihi will have to relocate. The central North Island’s pretty much screwed with these two mills down.
“If I can’t find anything around here, I’ll have to move, or even have to go overseas by myself. It will be a pretty hard thing to leave this place, that’s for sure.”
He says there are about two weeks for the Government to decide whether to intervene, but he’s not hopeful. “Going off what the bosses were saying, the government wasn’t even interested in what they want to say to them.”