Bryan Leyland asks whether New Zealand's electricity market is heading for a crunch
In recent years there have been a number of studies telling us that, in spite of the fact that prices have risen rapidly with shortages in 2001, 2003, 2006 and 2008, the electricity market is working well - providing adequate generating capacity and reasonable prices.
A review of the electricity
market commissioned by the new Government suggested some "fixes" that, it was claimed, might make the market a bit more competitive. The fixes they suggested are in a bill that is before Parliament.
In November last year, the Electricity Commission released its 2009 security assessment that indicates whether or not we have sufficient generating plant to get us through a dry year without blackouts and shortages.
The report showed that from about 2012 onwards, there could be serious problems in providing sufficient energy during a dry year and also in finding sufficient generating plant to keep the lights on over peak demand periods - especially when the wind was not blowing.
The report includes a list of proposed power stations and assesses the probabilities that they will actually be completed. The list included several large wind farms that still need to get through the major hurdles of environmental approval and demonstrating economic benefit.
Close examination of the report revealed it used very optimistic assumptions about the amount of time thermal power stations such as the coal-fired station at Huntly, the three 400MW combined cycle plants and the open cycle gas turbines at Whirinaki and other locations would be able to operate at full output during a dry year.
When I recalculated this with more realistic assumptions the risk of shortages markedly increased. I therefore made a submission that recommended that the Electricity Commission revisit their assumptions about the availability of the thermal power stations and reissue the report using real-world availabilities.
My own assessment is that with real-world availabilities, our power supply could be at a steadily increasing risk of energy shortages in any dry year and blackouts during peak demand periods.
What can be done? Quite a lot. As a result of the structure of the electricity market and the electricity reforms, the commercial interests of generators and retailers have led them to do things that seriously disadvantage consumers and make it difficult to provide a secure supply.
But if the Government accepts that a risk exists and is prepared to take decisive action, there are a number of things it could do quite rapidly.
New Zealand was a world leader in managing peak demand 25 years ago using ripple relays to switch off domestic hot water and other loads.
As a result of the electricity reforms, there is little financial inducement to generators, retailers or lines companies to use this system even though it would limit demand and reduce costs to consumers.
If we used these systems as we did in the past, the risk of blackouts during peak demand periods would be reduced.
This was demonstrated last year when all the ripple control systems in the upper South Island were co-ordinated from Christchurch and reduced demand by more than 100MW. If this was done all over New Zealand, this winter's peak demand could probably be reduced by about 300MW (5 per cent).
South Island generators pay for the costs of the direct current link that brings surplus South Island power to the North Island in normal years and supplies power to the South Island in dry years.
The charges are based on the maximum generation and, it seems, the South Island generators withhold about 200MW of generation to minimise their transmission charges.
If the charging regime were changed, this generation would be made available. This would increase security, reduce the need to build expensive peaking plant and benefit the consumer.
Finally, in the "bad old days" the rule was that the hydro lakes should be close to full on April 1. In the shortage year of 2008, storage on April 1 was well below what the old Electricity Department would have considered to be prudent.
If it had been at a prudent level, the shortage would have been much less severe. Under the Government policy statement, the Electricity Commission has a mandate to manage hydro storage. Perhaps the Government could insist that it does just that.
In the longer term, what we need is more generation to meet load growth and to supply the thousands of energy efficient heat pumps that are being installed.
Where will it come from? What fuel will it use? What do we need to do to make sure it happens? The consumers of New Zealand are entitled to answers. The Government can no longer assume that "the market will provide".
In 1997, and again in 2000, I reported that, as a result of the structure of the electricity market, it could not ensure that we had sufficient generation to avoid shortages in a dry year.
Since then, many industry experts have insisted the market is working. Perhaps it is time for them to seriously consider the possibility that they were wrong.
* Bryan Leyland is an independent power industry consultant.
