Expect up to 10pc more on power bills says Government

By BRIAN FALLOW

Residential power bills are set to rise 8 to 10 per cent over the next few years as new sources of generation replace cheap but dwindling supplies of Maui gas, the Government thinks.

The electricity industry is having to cope with two changes.

A surplus of generating capacity is giving way to tighter supply and the need to build more capacity.

And the era of cheap and plentiful natural gas from Maui, the fuel of choice for new thermal generation, is giving way to a tighter gas supply from smaller, more expensive fields.

At the rate demand is growing (making no allowance for the Government's energy efficiency and conservation strategy), New Zealand will need about 150MW of new generating capacity a year.

Generators have plans, both public and confidential, to build that amount of capacity, but wholesale power prices will have to rise to make that investment economic.

Energy Minister Pete Hodgson yesterday released the Ministry of Economic Development's best guess about the likely sequence and cost of new generation.

It estimates that about 170MW of additional capacity can be squeezed out of the existing hydro dams at prices between 4c and 5c/kWh.

The next big increment in generating capacity, at least three years away, is expected to be a gas-fired combined-cycle plant, built either by Genesis at Huntly or Contact at Otahuhu, depending on which can sew up the necessary gas supplies.

That would require an average wholesale electricity price around 6c/kWh, about 20 per cent more than current average wholesale market prices. That assumes a delivered gas price of $5 a gigajoule, compared with Maui's present delivered price of around $3.

Assuming no increase in line charges or power company margins, it would add around 8 per cent to residential consumers' power bills.

Business users, for whom the wholesale price is a larger percentage of the total price, would face a steeper increase, perhaps 15 per cent.

Meridian's Project Aqua, in the lower Waitaki, would add 570MW in two stages, producing from 2008 at the earliest, at prices of 4c to 4.5c, not counting any additional transmission costs. It has yet to go through the consents process.

If there are no early and significant gas discoveries, the ministry says, new generating capacity for the 15 years after about 2007 would be from wind power and geothermal sources, at prices of 6.2 to 6.5c/kWh.

But if significant gas discoveries are made which do not cost too much to develop, gas-fired generation would displace most alternatives, except Project Aqua.

From 2008, gas-fired generation will incur a carbon tax, which would push the threshold cost up to 7c/kWh.

But gas-fired plants are likely to have other advantages, such as site flexibility and speed of construction, which would give them the edge.

New coal-fired generation would require desulphurisation plant. Combined with a carbon tax, the cost of such power is likely to be 11.5c/kWh, the ministry estimates.

Maui has provided a lot of flexibility and security to the system, in that its output could be ramped up quickly in a dry year when hydro-electric power was short.

Hodgson said that after Maui, that flexibility in a dry year would have to come from a variety of factors.

One is a more rapid drop in demand, reflecting some transfer of risk from generators to consumers since last year's winter crisis.

Generators are writing contracts with their larger customers which trade off a lower average price for the fact that some of the consumer's demand is met at the spot market price.

Secondly, there would still be some flexibility in the new gas fields, just less than Maui's.

It might be possible to run the hydro system harder, resource consents permitting.

And the existing Huntly power station can run on coal as well as gas. A stockpile of coal there could free up gas during a crisis.