Lack of backing for new generators raises fears of capacity shortfall by 2011
A dearth of new investment in electricity generation is raising concerns about security of supply.
The Electricity Commission's annual security assessment, released on Monday, says that "a significant amount of new generation investment will be needed to maintain security margins from 2013 onwards".
Because of the lead times involved generators
will need to commit to some investments within the next 12 months, the commission says, but despite the need for new generation, investment appears to be slowing.
More than 600MW of new generation that was rated as a medium probability or higher for this year or next year in the previous annual assessment has since been deferred until at least 2013 or cancelled.
The commission speaks with a unique authority in this matter because it is able to talk on a commercially confidential basis with all the generators about their investment plans and, just as important, their plans to retire existing capacity.
Energy Minister Gerry Brownlee has every confidence, however.
When questioned about this in the House last week by Labour's Charles Chauvel, he said he thought the commission had overstated its concerns and took a swipe at the Labour Government's ban on new thermal generation.
But the commission is not alone in its concerns. Indeed the biggest lines company, Vector, in a submission on a draft of the assessment report, says the commission should be more concerned than it appears to be about the risk of a capacity shortfall by 2011 and a potential energy shortage by 2012 or 2013, if new generation is not committed.
The capacity issue is a matter of not having enough turbines available to be called on at times of peak demand; the energy issue is a matter of not having enough stuff - fuel or water in the hydro lakes - to make them spin.
The commission's bleak conclusion is that the traditional view that New Zealand has plenty of generating plant but is at risk of running short of energy in dry years is out of date and that the country is now "potentially subject to both energy and capacity constraints".
But the Major Electricity Users Group says that for the commission to talk of "serious concerns about peak security during winter 2012" is an overstatement.
It also believes the industry reforms under way will improve how dry-year risks are managed from next year on, including more focus on "demand side response" or commercial arrangements that allow load to be shed when conditions get tight - an industrial scale version of ripple control on domestic hot water.
MEUG executive director Ralph Matthes believes most large industrial power users will have arrangements in place by late next year.
And he supports the change, flowing from last year's ministerial review, to switch from having a reserve generation plant at Whirinaki funded by a levy on the whole industry, to a scarcity pricing model where uncapped wholesale prices in periods of shortage provide the opportunity for generators to recoup the cost of specialised peaking plant, of the kind they have started to build.
But he warns events can change the picture dramatically: "An unexpected six-week extreme dry spell, coupled with key transmission outages, would lead to a high risk to security of supply."
Right now the lakes are below average for this time of year but well above any danger zone, and wholesale market prices are only slightly elevated.
The problem is that in the wake of the global financial crisis business investment has imploded across the board, and the electricity sector is no exception.
Even though we are now trudging up the other side of recession gully, a new factor is the prospect of wide-ranging changes to the electricity sector arising from government action.
They include the emissions trading scheme imposing a cost on the carbon content of fuels from July 1, physical and virtual asset swaps among the State-owned generators, changes to the reserve energy arrangements from those set up after the 2003 dry year to a scarcity pricing model, pressure to establish a liquid hedge market, and the need for arrangements to secure the commercial future of at least half of Huntly's capacity.
On top of that there is the ongoing challenge of dealing with a legacy of underinvestment in the national grid, including the crucial interisland link.
This amounts to a critical mass of uncertainty and distraction, liable to lead the generators' boards to defer chunky investment commitments until the lie of the land beyond all this upheaval is clearer. The Bradford reforms of the late 1990s, admittedly more radical, were followed by several years when generation investment dried up until the new industry structure had bedded down.
This year 350MW of new generating capacity comes on line, mainly Mighty River Power's geothermal scheme at Nga Awa Purua and Contact's new gas-fired plant at Stratford, designed specifically to be a peaking plant.
But less than 100MW of new capacity is committed for next year, and beyond that, while there is an impressively long list of projects in planning and consenting, only one - a 50MW geothermal plant - is rated as a high probability.
The commission's estimates for how much peak demand will increase over the next four years averages 140MW a year.
While this year looks okay, the commission says that "even with all committed, high, medium and low probability generation, capacity margins are projected to fall close to the security threshold in 2011 and below it in 2012 and 2013".
The security threshold is the commission's self-imposed safety margin of about 800MW, essentially an allowance for Murphy's law. Falling below that does not mean the lights go out but it is the point at which we have to hope nothing serious goes wrong.
Turning from the question of whether there will be enough peak generating capacity to whether there will be enough energy, the commission's projections are somewhat more reassuring.
Generation investment already committed should be enough to keep above the energy security margin over the 2010-12 period, it concludes.
But beyond that it will require projects the commission rates as medium probability to go ahead to stay above the security threshold over the next 10 years.
That will not happen by magic. Given the lead times between green-lighting a project and ordering the necessary kit and when it starts generating, and given the high level of regulatory uncertainty at the moment, it may be prudent for the Government to nudge them towards committing to new investment.
Right now the risk meter's arrow is not pointing to the klaxon-blaring alarm zone, or to the "she'll be right" complacency zone. It is somewhere in between, in the "bit of a worry and time is marching on" zone.
