Dialogue: Energy row goes down to the wire

By RICHARD BRADDELL

What could a piece of fuse wire at Taupo have to do with Aucklanders? Possibly quite a lot, if they care about their power prices. Or so Keith Turner, the chief executive of New Zealand's largest electricity generator, Meridian Energy, would argue, since the fuse wire in question happens to be Transpower's transmission line that brings power from the South Island to Auckland.

Regardless of whether Aucklanders care or not, Mr Turner has two reasons of his own to worry. The first is that Meridian Energy is a hydro generator that accounts for nearly a third of New Zealand's electricity output. The second is that all Meridian's dams are in the South Island and it depends on Transpower to get its electricity north.

Unfortunately for Mr Turner, the transmission line around Taupo cannot handle as much electricity as he would like without burning out.

Transpower is also reluctant to foot the bill to upgrade the line and, until it does, some of Mr Turner's power will have to remain unused, even though Auckland spot prices may be high.

Mr Turner's public comments on his troubles with Transpower are rare, supposedly because he does not want to prejudice a legal dispute with Transpower that goes to court this week, over tens of millions of dollars in disputed payments for use of the Cook Strait transmission cable.

But that is another matter. And in spite of Mr Turner's public reticence, his views are well known, not least because he has expressed them unequivocally to Parliament's commerce select committee.

Nobody denies that the transmission capacity in the central North Island has its limits. Had Meridian been able to get more of its power north when Contact's Otahuhu B thermal station was out of action last year, spot market prices would have been less than a tenth of their peak. Furthermore, if Meridian sent more power north, then less greenhouse-gas-emitting thermal generation would be required.

Meridian's disagreement with Transpower exposes the complex pricing structures in the electricity industry. In the spot market, where generation not covered by long-term contracts is sold, there is a single North Island spot price. But that spot price varies at different distribution points (known as nodes) around the country, with nodal price reflecting transmission losses and incremental costs of transmitting electricity.

So when Otahuhu B was out of action, spot prices in Auckland went through the roof because of the high cost of getting additional supply from the south.

Surely, then, it would make sense for Transpower to upgrade its transmission line so that the cost of bringing power north falls? Perhaps. But one of the points of nodal pricing is that the price variations are intended to send signals to generators so they have an incentive to build capacity close to markets when there seems to be a need.

Furthermore, Transpower is reluctant to spend hundreds of millions of dollars upgrading transmission lines, only to find that they are not used.

It has good reason to be shy of building new capacity. Large energy projects such as the Clyde Dam were once the rule, but the present trend is towards distributed generation in the form of small local plants that may be called upon to fill demand only during peak periods.

For instance, the Clyde Dam has a 430MW capacity, and Otahuhu B is 390MW. But Transpower's argument is that peak demand might be better met by new technologies that offer efficient generation of, say, 10 or 15MW in particular localities.

While Mr Turner argues that fixing the Taupo constraint might avoid the need for another large thermal station near Auckland, Transpower says that if distributed generation is located close to the communities it serves, it could also avoid the need for costly transmission line upgrades as well as to local distribution spur lines.

Transpower also argues that its responsibility extends little further than ensuring the lights remain on, and beyond maintaining system security it has only a limited brief to ensure that the cheapest-cost producer has easy access to the market.

Its key argument is that even if it fixes the Taupo constraint, the problem will simply show up further north in other bottlenecks.

Not everybody, including Mr Turner, agrees that fixing additional bottlenecks will cost that much. While Transpower has suggested $1 billion as the cost if it were to upgrade the Auckland to Wellington link from 220kV capacity to 330kV, even it agrees that such gold-plating of the network is extreme.

Mr Turner suggests the cost could be considerably less. He cites a 109MW gain in transmission capacity between Aviemore and Livingstone that was achieved by relatively modest upgrading of that line at a cost of only $90,000.

Far from rebuilding the lines around Taupo, he argues that significant capacity improvements can be had at low cost through a number of modest measures such as retensioning lines, replacing conductors and introducing systems that trip out less-critical users as loads increase.

Meridian's argument is that such strategies might produce enormous gains for a few small investments of between $100,000 and $5 million.

Meanwhile, some in the industry question whether Transpower's nodal pricing is providing the signals to build the new capacity that the industry needs. Even with Otahuhu B operational and wholesale prices relatively low, there is still some question whether appropriate signals are being given because of the heavy input of hydro generation from a string of dams on the Waikato.

"With hydro systems you tend to have a surplus until you have a deficit," one industry analyst said, noting that "it's an awkward set of market signals at best."

Contact is applying for resource consents for a second thermal plant at Otahuhu, but it remains to be seen whether that and some other suggested projects will proceed.

The Taupo constraint also opens up possibilities for "gaming" by generators. It may, for instance, pay a generator to run inefficient plant near the constraint to bind it up so that it can use more efficient capacity closer to Auckland.

Of course that never happens, we are told, but even the most sanguine concede there is a risk.

Constraint or not, the question remains whether there is enough generation capacity further south to warrant upgrading the line. Murray Jackson, the chief executive of North Island thermal generator Genesis, says that if Mr Turner is arguing that getting rid of the constraints will remove the need for new generation, then he must be expecting to deliver sufficient capacity to substitute for the 400MW gas turbine that Genesis will commission in an upgrade to Huntly. But, he says, the second tailrace Meridian is commissioning at Manapouri will produce only a quarter of that.

In Meridian's view, to ask if there is surplus South Island power that could go north is the wrong approach. The company sees it as a question of using the water in its lakes at higher-value times, which would benefit not just Meridian, but Auckland power consumers as well.

Even if Mr Jackson is sceptical of Meridian's ability to send meaningful quantities of electricity north, in some respects he allies himself with Mr Turner. He questions whether distributed generation will ever be as important as Transpower suggests.

Even in places such as Whangarei and Marsden Point, he cannot get suitable fuel, and in the East Coast/Gisborne area, there is only enough to generate 15MW.

Mr Jackson also believes that at some point in the next 10 years, Transpower will be forced to upgrade the lines north of Taupo to 330kV and install duplicate capacity, in order to meet soaring demand in Auckland.

"What pricked my ears was that there was no plan for any system upgrade over a period of the next 10 years and I thought, gee, on normal growth rates you would think of doubling your capacity."