Is a $4 billion hydro storage proposal in central Otago an outmoded "think big" solution or the only sustainable answer to our dry-year electricity needs? By George Driver.
In a year when wholesale electricity prices soared to record levels, coal imports surged and parts of the country were plunged into darkness in a power blackout, one government project has been touted as a solution to all our electricity woes. Could the Lake Onslow pumped-hydro storage proposal be the saviour of the country's power network?
In January this year, New Zealand's hydro lakes began to drain. Coal imports soon hit record levels as the Huntly Power Station fired up to see us through the dry. By April, lake levels had dipped to a historic seasonal low, and by May, wholesale power prices hit a record weekly high. Industry groups warned they were "seeing the lights go off in factories around the country" because of skyrocketing prices, and some sites began closing their doors for good. In June, Kawerau's paper mill announced it would shut, axing 160 jobs. It cited high power prices as a significant factor.
By August, the lakes had refilled. But then the lights went out. On August 9, as a cold snap swept up the North Island, electricity demand hit an all-time high. For several reasons, not enough supply was brought online and Transpower cut power to more than 34,000 customers on one of the coldest nights of the year.
Despite this drama, things could yet get worse. The Government wants to jettison coal- and gas-fired generation that gets us through these dry years by the end of the decade. Meanwhile, according to Transpower, electricity demand is expected to surge by up to 68 per cent over the next 30 years as transport and industry go electric. Wind and solar power – the cheapest forms of new generation – are likely to fill that demand, but they are also more temperamental. With more of the country dependent on stable and cheap electricity, the stakes for outages and price hikes will get much higher.
What will keep the lights on when the lakes are low, the wind doesn't blow and the sun doesn't shine? And how will we meet unprecedented demand without facing recurring blackouts and more price hikes?
Some experts argue there could be a $4 billion solution: the Lake Onslow pumped-hydro storage scheme.
When the Government announced it was spending $30 million to investigate the proposal, Energy and Resources Minister Megan Woods described Onslow as "a game changer for securing sustainable, cheaper, low-emissions electricity". Industry titan and former Meridian Energy boss Keith Turner says it's the only viable solution.
"Onslow leads you to a lower-cost, more flexible system and it provides a dry-year reserve and intermittency for wind and solar systems," he says. "No other mix of generation does that."
But opponents – including most of the country's gentailers, opposition parties and several market analysts – dispute this. Onslow will cost far more than expected, drive up power prices and deter investment in more innovative, efficient alternatives, they claim.
The storage solution
The concept of a pumped-hydro scheme at Lake Onslow was first conceived 16 years ago, but was originally designed to solve a very different problem. University of Waikato hydrology associate professor Earl Bardsley was looking for a way to move the country's hydro storage away from the southern scenic lakes to prevent erosion. He began searching for an alternative – a place that could store an enormous amount of water without the environmental damage. He soon discovered the large schist basin around Lake Onslow, formed 130 years ago high in the hills above Roxburgh, in Central Otago, by damming the Teviot River and Dismal Swamp.
"I was driven entirely by the environmental aspect – taking the storage impact away from the scenic lakes," Bardsley says. "Onslow is actually much better suited to the seasonal variation of water levels because it has a rock shoreline, as opposed to the likes of Tekapo and Pukaki, which are set in soft and glacial material that is prone to erosion."
In 2005, he published a six-page paper, outlining the possibility of building the world's largest pumped-hydro storage scheme. The project the Government is investigating, though smaller than that envisaged by Bardsley, could hold nearly twice the storage capacity of all the country's existing hydro lakes combined.
But Onslow would be unlike any other local hydro dam. It wouldn't be filled naturally, but via a pump, sucking water from the lake behind the Roxburgh dam on the Clutha River and pushing it up 600 vertical metres through a 20km tunnel. When power is needed, water would be released back down the tunnel, its pump becoming an electricity turbine.
Because it would use more power to pump water than it would generate, Onslow would be a net user of electricity. But that wouldn't make it inefficient, Bardsley says. This is because the pump would operate only when power prices were cheap and hydro lakes were full. When the lakes were low and power prices high, it would generate electricity.
In theory, Onslow's power could be cheaper than the gas and coal currently burnt during the dry times. It would also remove the risk of running out of power in a dry year. Similar schemes operate around the world, but none with storage on this scale. "The critical thing about Onslow operating in the market is that it will make generation from fossil fuels uneconomic because the price would never go high enough to justify starting up Huntly or the gas-fired power stations," Bardsley says. "The way the electricity market works, if you don't have that small increment of fossil-fuel power then the price of electricity drops down because it's the marginal price of generation that actually determines the price of all the electricity, including the renewables."
After the paper was published, Bardsley says, "nothing happened at all". He tried to get some research funding, but none was forthcoming. "So, effectively, it went nowhere."
More than a decade later, he supervised a PhD thesis that delved further into the benefits of pumped hydro at Onslow. Published in 2019, it found that Onslow could act as a cost-effective buffer for hydroelectricity in dry years. It could also act as a buffer for wind and solar generation, removing the need for fast-start gas generation. The timing of this discovery couldn't have been better.
The rise of Onslow
In 2017, the Green Party reached an agreement with Labour to have a target of 100 per cent renewable electricity by 2035. The following year, the Government asked the newly created Interim Climate Change Committee to investigate how it could reach the goal. The committee recommended the Government ditch the target, because using existing sources such as wind and solar would be prohibitively expensive.
It estimated residential power prices could increase by 14 per cent and industrial prices by 39 per cent, putting the electrification of the country's bigger greenhouse gas emitters – transport and industry – at risk. Renewable generation would likely increase from the current 82 per cent to 93 per cent by 2035 anyway, because renewables were the cheapest form of new generation. But reaching 100 per cent would require building far more generation than you would normally need, and emissions could be reduced far more efficiently by encouraging the electrification of industry and transport, even if some of that power came from coal and gas.
But it also said Onslow could provide a solution. The committee didn't include Onslow in its main modelling and didn't look at the project in any detail, but suggested pumped hydro had potential. "A pumped-hydro scheme at a scale that could solve New Zealand's dry-year problem shows promise," it said. "Such a scheme could also help manage demand peaks and increased levels of intermittency."
Its second recommendation (there were only two addressing the 100 per cent renewables target) is that the Government "investigates the potential for pumped-hydro storage to eliminate the use of fossil fuels in the electricity system".
When the committee's report was released in mid-2019, Woods said she was "confident new technologies would be developed" to help reach the Government's target affordably, but it would also be "pragmatic" about meeting the goal. "We won't die in a ditch over the last couple of percent if it places unreasonable costs on households and puts security of supply at risk," she said. No announcement on Onslow was made.
The following year, however, it doubled down on the target and, in a move that shocked the industry, backed Onslow. In July last year, Woods announced the Government would spend $30 million investigating the scheme and other storage options, dubbed the NZ Battery Project. Two months later, Prime Minister Jacinda Ardern announced Labour would bring forward its 100 per cent renewable-electricity target by five years if re-elected. Onslow had become the lynchpin of this fast-tracked renewable-electricity target.
The investigation into pumped hydro is ongoing and is due to report to the Government next April or May. Although the project will look at other possible dry-year storage solutions, experts claim Onslow is currently the only viable option if the Government sticks with its renewables target. But its exact design and cost are unclear. It is also unknown who will own it and how it will be paid for. In the meantime, opinion is divided on whether Onslow will be the saviour of an energy system under strain, or a "think big" style intervention that is doomed to fail.
Criticism of the potential project soon followed its July announcement. In a pre-election debate last year, National Party leader Judith Collins raised concerns about higher power prices. Think tank the New Zealand Initiative raised the same concerns, and said the Government had contradicted the interim committee's advice. In fact, the committee's report looked at the impact of overbuilding wind and solar on power prices, not the impact of Onslow. But if Onslow could be viable, why didn't the committee include it in its price modelling and look into the scheme in detail?
Keith Turner was the only member of the committee with experience in the electricity industry (although chair David Prentice is now chief executive of Trustpower). Turner has worked in the industry for nearly 50 years, including a decade for the former Electricity Department, planning power stations and transmission for the whole country, and nine years as chief executive of Meridian, the country's largest generator.
Without his advocacy, we probably wouldn't be debating Onslow at all – at least not for now. He says he discovered the potential of the Onslow scheme a month or so before the ICCC's report was due, after visiting a pumped-hydro project in New South Wales and being pointed towards Bardsley's 2005 paper. Unfortunately, the ICCC didn't have time to look at it in any depth, he says.
"But it became immediately apparent that the system utility would improve if you have a pumped-storage system included in the renewables scenario."
Turner has since investigated the scheme further and is convinced it's the only feasible solution to the country's dry-year problems, regardless of the 100 per cent renewables target.
"My motivation to push for Onslow is not to get to 100 per cent renewable electricity, it is to solve the problem of New Zealand's hydro dependency," Turner says. "For the past 45 years, we've solved that with a big stockpile of coal at Huntly, but Huntly is nearing the end of its life.
"Now, whether we want to go after carbon-zero or not, we have a fundamental problem to overcome somewhere in the next 10 years. Sure, Onslow takes you to 100 per cent renewable and, yes, it will reduce electricity prices at the same time, but the primary motive is to solve the dry-year risk problem. We've just seen what that does to the country."
Onslow's role is greater than just a dry-year storage lake, he says. In a system with more intermittent renewables, such as wind and solar, it could help make the entire network more efficient and secure.
"That improves the incentive to invest in renewables, which doesn't exist right now."
Turner has proposed it be funded via a premium on electricity consumption at about $5-$7.50 per megawatt hour. That equates to about $50 a year for the average household. But, he says, the price of electricity would drop by twice that amount as it would displace more expensive fossil-fuel generation and remove the risk premium charged during dry periods.
"If it lowers prices as well, that's a massive economic benefit to the country."
Messing with the market
Energy analyst John Kidd isn't convinced. Even if Onslow delivers cheaper prices once it comes online, that could come at a cost over the next decade, he believes.
"Onslow has the potential of drowning the market and in doing so it probably will have the impact of reducing prices by removing volatility from the market. It would essentially bring a ceiling price to the market. Now, as attractive as that may be in concept, the uncertainty that comes with it, given it's 10 years away, is potentially severe."
That's because the country needs more fast-start generation – traditionally gas-powered generation – to avoid the kinds of blackouts the country experienced in August. But if Onslow will provide that service in 10 years' time, what happens in the meantime? "Nobody is going to build that generation and we absolutely need that generation over this decade."
Kidd is also sceptical about the $4 billion price tag. "This has got a potential to double or triple by the time it arrives. The question becomes, "Who pays for that?" For the capacity it provides, it's extremely expensive. For $4 billion, $8 billion, $12 billion, you could do so much with probably far smarter solutions."
Mercury Energy chief executive Vince Hawksworth agrees. Although he concedes that Onslow could bring down prices if it is delivered for $4 billion, he believes that's unlikely. It would be better, he says, for the private sector to take the risk of investing in new storage and generation.
"These big civil projects generally run over cost and over time," Hawksworth says. "Why wouldn't you rather have that money spent somewhere else and let private capital take the risks?"
Turner is adamant it can be delivered on budget. "I built the second tunnel at Manapouri. I've got a pretty good idea of what tunnelling costs might be. We have a pretty good skill set and knowledge of the cost of building dams, and power plants are very standard stuff. I think those who seek to discredit the scheme are doing so with something that you cannot prove to be wrong."
Regardless of whether Onslow is built, New Zealand will face an enormous challenge to meet the expected increase in demand for electricity. The question becomes, if not Onslow, then what? The cheapest form of new generation is wind and solar, but without Onslow, or the unlikely scenario of a big hydro scheme in an ecologically prized area, the country would require ongoing gas, and possibly coal, generation.
The Climate Change Commission's recent report on how the country should meet the Government's net-zero-emissions target recommends the Huntly Power Station continue burning coal for another five years or more. Gas generation, which produces about half the emissions of coal, would continue until at least 2035. It warns that the NZ Battery Project could cost billions of dollars and "come at the expense of lower-cost emissions reductions elsewhere in the economy". It would prefer to see the Government ditch the 100% renewables goal and focus on having 50 per cent of all of the country's energy needs – transport, industry and electricity – met by renewables by 2035.
Hawksworth agrees it is better to continue to expand renewable generation, but hold off on the last few percent until new technology – such as batteries and demand-management systems – provide better solutions.
"I find it difficult to believe that, in the absence of Onslow, there won't be some other innovative solutions come along," he says. "Fifteen years ago, nobody would have believed you could build wind farms at the price you can now. The price of batteries is coming down, solar is being invested in, there are behind-the-meter technologies being looked at to manage demand. Something else might [provide storage and buffering for renewable generation] as well."
Kidd agrees, calling Onslow "last century's solution to this century's problem".
"The next decade is going to be so exciting with the development of new technologies, and we should be taking a much deeper look at the options that are becoming available. We should be taking a holistic view, not hitching our wagon to one option that's being championed by the Government."
But Turner says the alternatives to Onslow don't stack up. Batteries are currently far too expensive to provide storage for a dry year, and he says gas would also be more expensive than Onslow. "For a dry year and intermittency you'd need a lot of plant sitting around basically idle. For a dry year, it might be sitting around for five or 10 years doing very little, and having enough gas in reserve to run 1000 megawatts like Huntly is a very expensive exercise."