KEY POINTS:
It looks like the winter power scare has passed. What a relief.
We also learned this week that consumer electricity prices have risen 6.6 per cent over the past year. Over the past five years the average increase has been 5.5 per cent.
But evidently these relentless rising
power bills have not brought us a more secure electricity supply.
We go through this drama just about every other year: 2001, 2003, 2006 and again this year.
A distant observer, perhaps one contemplating investment in New Zealand, could be forgiven for thinking the electricity supply hangs by a thread.
Energy Minister David Parker says it is ridiculous to describe the recent rains which have replenished the hydro lakes (though they remain well below average) as lucky.
"We don't criticise farmers for planting crops in the expectation of rain and sunshine. Likewise we do expect rain to fall and fill our hydro lakes on a yearly basis," he said.
"This has been an unusually dry year. By early June inflows to the hydro lakes were the lowest since 1947."
The tight energy situation had been well managed, he said, and the outcome should be seen as proof the system was robust, rather than the reverse.
But the Electricity Commission has for some time now been consulting with the industry about whether our "energy only" market can be relied on to keep the lights on.
The wholesale market pays generators only for the electricity they produce. There is no separate payment for capacity (investing in generating plant) or for ensuring it is available to generate when required.
But then, why should there be? A restaurant does not expect to be paid separately just for being open. It is expected to recover those costs if it can in what it charges for the meals it actually provides.
Why should the electricity market be different?
The concern, the commission says, is that resources which are needed only very infrequently or on a very certain basis may be under-provided.
Generators may not be sufficiently confident that they will recover their costs, capital and operational expenses during short periods of high spot prices.
Strictly speaking there are two separate problems here.
One is ensuring there is enough spare capacity to meet peak demand if things go wrong, the other is "dry year" risk. One is about ensuring there are enough turbines and a free-flowing national grid, the other is about where there is enough energy to keep the turbines spinning.
But that is speaking too strictly. The issues are as closely related as conjoined twins.
This winter's problems have not been just about drought. They also arose from a double whammy on the capacity side, with the unexpected closure of the New Plymouth station when asbestos was discovered there, and the closure of one pole of the Cook Strait link, also on insurance grounds. Both have been partially reversed.
Historically the same feature of the New Zealand system that makes it vulnerable to dry-year risk - the heavy reliance on hydro generation - has given it a decent margin for dealing with short-lived spikes in demand.
That is because there is much less hydro storage in our system, relative to annual demand, than in other hydro-reliant countries like Norway or Brazil. Our more hand-to-mouth system means more turbines in the hydro schemes, relative to the amount of energy stored in the lakes.
It is like having a 3-litre engine but an undersized petrol tank. It needs frequent refills but if a short burst of acceleration is needed, no problem.
The Maui gas field, now nearing exhaustion, has also been a source of flexibility. Its output could be ramped up and then throttled back to a degree not possible with its smaller successor fields.
Looking forward, however, hydro's share of generation is expected to fall, while that of "must-run" thermal power stations and wind farms increases. That trend is expected to reduce the "capacity margin" of the system.
This is not just a theoretical problem. On June 19 last year the system came close to what the commission calls "involuntary demand shedding" but the rest of us would call it blackout.
So the question is whether the ordinary workings of the spot market in electricity are adequate to ensure such incidents don't become more frequent.
In principle they should be adequate, but only if generators can be confident spot prices will be allowed to spike to the levels that would allow then to recover the costs of building or maintaining "peaking" plant and the costs of running it when needed.
Unfortunately the New Zealand market does not provide that assurance. It is not a true "energy only" market.
The reason is Whirinaki and the way the commission has been running it this winter.
Whirinaki is a diesel-burning peaking plant built in the wake of the 2003 winter crisis. The Government had lost confidence in the ability of the invisible hand of the market alone to keep the lights on.
The rules for cranking up Whirinaki, we were assured, would be tight enough to ensure it did not subvert the market.
But this winter the commission has been offering power from Whirinaki into the market at $289 a megawatt/hour, well below what would be needed to recover the cost of the fuel it burns, never mind the capital cost of the plant itself.
It now wants to levy the industry, and indirectly the consumer, for something between $50 million and $100 million to recoup the extra cost of that fuel. This is exactly the sort of market-tampering behaviour, effectively a price cap, which would deter private investment in reserve or peaking plant. It encourages calls for a separate funding mechanism, a capacity payment, to ensure such plant is available.
Genesis Energy, we may assume, would quite like the rest of the industry to cover the cost, apparently about $100 million a year, of maintaining its 1000MW coal-fired plant at Huntly in a reserve role.
With carbon emissions about to be priced that may well be a better role for it than its current baseload one, assuming the heavy lifting it now does can be replaced.
But the Major Electricity Users Group is dubious about a move to separate capacity payments, suspecting they will become just another revenue stream for generators and an opportunity for them to "game" the regulator.
As it is, Contact Energy's plans for a 200MW gas-fired "peaking" plant have raised eyebrows. Other industry players note that the announced capital cost per megawatt of the plant differs very little from a full combined-cycle gas turbine plant designed for baseload operation.
How can Contact expect to recover that cost, they wonder, if the plant operates only infrequently? Might the "peaking" label merely be a means of getting around the Government's ban on new baseload thermal plant?
The Government's decision to build Whirinaki effectively abandoned the market model and we keep slithering further down that slippery slope. So far security is the last thing it has delivered.
