A Credit Injection to the Electricity Grid Would Boost New Zealand’s Economy
What would New Zealand’s version of the Hoover Dam look like?
New Zealand’s economy due to the Covid-19 pandemic is heading towards a recession that will be worse than the global financial crisis by some margin. The government in an effort to sustain the economy is quite rightly borrowing to invest in ‘shovel ready’ projects. Another option along this theme would be if state-owned enterprises had their debt limits raised so they could invest too.
This paper recommends Transpower be given the power to issue bonds or debt like housing authority Kainga Ora has been. The purpose being to invest in the electricity grid in order to better transmit and store electricity.
The economic activity of building various civil works would provide the short-term benefit which the economy needs. When the projects are completed there would be long-term benefits as some of the flaws in the electricity market would be addressed.
New Zealand’s free market reforms to the electricity industry since the 1990’s have overall been successful. New generation has come on stream when needed and this supply has been the lowest cost provider.
Less positively residential electricity consumers have experienced significant real price increases (inflation adjusted).
An examination of New Zealand’s electricity industry shows that Transpower investing in better systems for transmitting and storing electricity could help better regulate the electricity market, especially as the industry heads towards its goal of 100% renewable electricity supply.
The Huntly Power Station is the biggest carbon dioxide greenhouse gas emitter in New Zealand’s electricity system.
If Huntly is permanently mothballed this will be a big step towards New Zealand achieving its 100% renewable electricity by 2035 goal. New Zealand will only terminate Huntly when it is confident it has enough generation and stored capacity so that it can produce 100% of its electricity from renewable sources regardless of adverse conditions.
The Huntly Power station is operated by Genesis Energy Limited (currently 51% owned by the New Zealand Government). It is capable of supplying over 31% of the country’s electricity needs.
Huntly is the largest electricity generation facility in New Zealand by capacity. It is made up of two modern gas fired and two gas/coal fired generating units. The power station has access to energy in the form of coal and gas supplies that are not affected by adverse weather conditions. Huntly is therefore frequently the electricity supplier of last resort.
Genesis has announced a plan that from 2025 it will only use coal thermal generation in abnormal market conditions. Probably meaning some combination of high demand and low supply, so a fairly meaningless statement, as that is what they currently do. Genesis further announced that they intend to stop using coal completely from 2030. Genesis has made no announcement about discontinuing the use of gas fired generation.
In other words, Genesis is not planning on stopping its Huntly Power Station greenhouse gas emissions, but it will transition over the next ten years to a less emitting option (gas).
Will the electricity market deliver more renewable generation? Yes. New wind power generation only costs $60 per MWh versus $200 for gas.
Electricity market analyst Neville Gluyas -author of Market delivers the power and cuts carbon for the NZ Herald -states that renewable generation now makes up 84% of generation compared to 71% 20 years ago. He notes that wind and geothermal power are much cheaper than 10 years ago and much cheaper than the current forward wholesale price of electricity. It is predicted that renewable generation will increase to over 93% by 2035 in a business as usual scenario by the Interim Climate Change Committee.
The way the electricity generation market works in New Zealand, the marginal provider -the last most expensive generation bid needed to meet demand -in every half-hour period, sets the wholesale price for all generators for that period.
Whenever demand for electricity is high and supply is low, then the high wholesale prices are likely to have been set by thermal generators, such as Huntly. At other times, when prices have been low, it is likely to have been set by renewable generation.
Eventually, over time wholesale prices filters through to the retail price.
Since the market was deregulated in the 1990’s it is estimated that $10 billion has been invested in new generation, mostly in renewables. The electricity market has successfully matched supply with demand. When demand has increased supply has followed. When demand settles so has supply. In the coming decades there will be tens of $billions of further capital investment into renewable power generation.
The electricity market has effectively allocated resources for new generation capacity and is likely to continue doing so. Unfortunately the market is less effective at allocating resources for transmitting and storing electricity.
Older readers may remember the anger about the five weeks in 1998 when Auckland’s central business district lost power. At that time there was a more laissez faire attitude to the electricity market. Since then electricity retailers and government transmission provider -Transpower have been more diligent about ensuring transmission infrastructure is maintained and upgraded.
Transmission costs are set nationally and users are charged equally regardless of distance and cost of supply. Some users such as Rio Tinto argue this is unfair as they are paying for the transmission capital costs of New Zealand’s expanding population. In reality it is residential consumers who are paying the most and energy efficiency efforts have minimised demand growth in recent years, so the issue is not as unfair to Rio Tinto as it makes out.
Rio Tinto has threatened to close down its aluminum smelter at Tiwai Point unless they get cheaper power. There would be economic and environmental costs for closing down a clean energy aluminum smelter but there would also be gains.
The smelter uses 13% of New Zealand’s electricity supply and if this was released onto the market, electricity prices would fall for residential users, especially in the South Island. This will require a grid upgrade which is currently being undertaken. Potentially other industrial users could also utilise this energy to become less polluting -such as replacing Fonterra’s coal fired milk dryers -if they had secure access to lower priced electricity. An international commentator has said that drying milk using coal is insane.
There is a policy making effort by the Electricity Authority to move to a more free market users pays system for allocating transmission costs, but the issue is hotly contested, even among the big industrial major energy user group.
Storage capacity is another flaw in New Zealand’s electricity market. Existing generators have little incentive to increase storage capacity because that would lead to lower prices for the electricity they supply.
New Zealand doesn’t have high electricity prices compared to many OECD countries but Norway the country most like New Zealand from a electricity perspective has much cheaper prices.
Norway uses a similar marginal pricing market model to New Zealand and it has a high proportion of its generation capacity as hydro power too. The main difference between the two countries is Norway has many months of stored generation capacity and New Zealand has a little over a month i.e. if the feeder rivers dry up, the hydro lakes in New Zealand would be empty in about 5 weeks versus many months in Norway.
Hydro power stored energy can be calculated by multiplying the stored water volume by the height difference between the storage lake and the outlet power generator. Many of Norway’s hydro lakes are high up in the mountains with long tunnels between their lakes and power turbine generators. It is this height difference in particular which gives Norway the advantage of greater energy storage.
Norway’s greater storage capacity means electricity supply is more stable and so is its marginal prices.
It has been suggested that Norway’s hydro-electrical system could be Europe’s battery that could soak up the continents excess wind and solar power and release it on demand. The article -Norway could be Europe’s green battery -interestingly describes this opportunity, while others, say Norway Can’t Become Europe’s Battery Pack.
Norway is in the fortunate position where its large store of energy in its hydro lakes means it can cover the country’s natural variation of supply and demand for electricity. It can even consider extending this cover to neighbouring countries.
Low electricity prices, high gasoline prices and generous support for buying electric vehicles mean that over half of Norway’s car sales in 2019 have been plug-in electric.
The effect of New Zealand’s lack of lake storage capacity can be seen on its wholesale spot prices in the above and below graphs.
The sudden increase in hydro energy storage at the end of March 2019 is an example of how storage affects marginal wholesale prices, as it led to a quick price drop to around $120 per MWh. In other words, if electricity storage had been at 3,200 GWh from the start of March then prices would have been $80 per MWh cheaper.
There was also an environmental effect because it meant more coal-fired power generation. In the two weeks prior to the flood events the rate of coal burning at the Huntly Power Station was never less than 7,000 MWh per day.
Note in this scenario, if a carbon tax was implemented, then the coal might not have been burnt but the electricity price would have been even higher, and some consumers would have been priced out.
New Zealand does have the option of moving towards the Norway situation by building more hydro storage capacity.
Pumped hydro storage schemes can significantly increase storage capacity by pumping water to a sufficiently large and/or sufficiently high new storage lake when there is a surplus of generating capacity (and low prices) and reversing the pump to generate electricity when there is a shortage of electricity supply in the grid (when prices are high).
A proposed pumped hydro storage scheme in Lake Onslow, Central Otago near Roxburgh has a realisable potential energy in excess of 5,000 gigawatt hours that could buffer the country’s electricity system during a dry year.
The Lake Onslow scheme could also address intermittency for new North Island wind generation, such as Turitea Wind Farm, that may be required for growing North Island demand. But that would necessitate an upgrade of the Inter-Island HVDC link. Smaller backup ‘peaking’ generators near the wind generation sites, such as, battery storage or smaller local pumped storage schemes may be the better option for the intermittency issue, as the scale of the required backup generation for wind power is much less than for the ‘dry year’ hydro problem.
If these transmission and storage issues were addressed then low cost renewable generators would receive a good price even when there is a ‘surplus’ of electricity generation because that additional supply can be stored. This will lower entry costs for new electricity suppliers thus enabling a more competitive market.
With an estimated capital cost of around $4 billion, the Lake Onslow project has a strong economic case, due to its low kilowatt per hour capital costs for storing energy. It would be large ‘battery’ that is more competitive than any of the other storage options, especially for long-term storage, at the scale New Zealand needs. The economic competitiveness of the Lake Onslow scheme is acknowledged by the April 2019, Interim Climate Change, Dry Year Storage Options Analysis report.
Within the energy industry it is widely known that pumped hydro is the only viable option for storing the amount of terawatt-hours that New Zealand needs to cover its unique dry year risk. There is unfortunately in public circles a lack of technological understanding of the problem. Meaning that conversations about solutions are easily diverted toward illusions like seasonal hydrogen storage, electric battery storage, over building of renewable generation plant or dry year closure of industrial plants such as Tiwai Point Aluminum smelter.
A close examination of the options, such as Transpower has undertaken shows the only real choice is sticking with the status quo of using gas peaking plants which emits carbon or building pumped hydro which might have difficulty getting consent. All other options are more expensive.
The consent issue essentially hinges on public support. Further discussion of this issue is in the paper Build the Dam -Save the Planet.
The capital cost efficiency of New Zealand using pumped hydro to store energy is illustrated by New Zealand’s Lake Onslow scheme compared to Australia’s Snowy 2.0 scheme which is part of Australia’s ‘battery of the nation’ initiative. The schemes are roughly the same in terms of construction cost, but at 5 TWh the Onslow scheme would have 14 times more energy storage capacity than Snowy 2.0.
Tasmania is forecasting that the combination of low-cost wind and solar energy backed by flexible hydro power will be the lowest cost form of energy available to consumers in the future. They believe investing in pumped hydro will trigger a big growth phase that would mean more regional jobs and more investment. Feasibility studies involving community consultation have already started and a decision about which pump hydro scheme to commence is expected to be made by the end of 2020.
Pumped hydro storage has low operating costs. The round trip efficiency rate of pumped hydro is considered to be about 75%. The Lake Onslow scheme would be more efficient because it would allow the existing hydro storage lakes in the Waitaki river system to run at lower lake levels so they can store more water during flood events. The net effect of Lake Onslow coupled with improved Waitaki flood storage options could mean the round trip efficiency of Onslow is in excess of 100%. Prof Bardsley further describes these hydrological considerations in his Extended Comment paper.
For ease of demonstration this paper assumes that Onslow pumped hydro scheme is 80% round trip efficient. Meaning once Lake Onslow was operational, electricity could be purchased for $60 MWh from a wind power generator when they have surplus power and later sold for $75 MWh when grid power supply is short. This would be the pricing that breaks-even when considering only the ‘energy loss’ factor. Note $75 MWh is much cheaper than $200 MWh that thermal gas generators would charge for backup electricity supply.
Potentially the pumped hydro storage option could provide a transition to 100% renewable electricity whilst delivering lower and more stable electricity prices than the business as usual option.
As discussed earlier, it is unlikely that any existing generator will build dry year energy storage because it devalues their future revenue by lowering wholesale electricity spot prices.
For this reason, Transpower should build and operate energy storage schemes. If the state-owned enterprise borrowed the capital costs it could repay the debt by either adding a ‘security of supply’ line charge for electricity users, or it could increase the spread between the scheme’s electricity buying and selling prices to cover capital as well as operating costs.
For ease of demonstrating the approximate size of the cost to electricity users, if only New Zealand’s 1.5 million households (so not the industrial and commercial users) paid $4.5 billion in capital costs for Lake Onslow and transmission line upgrades and the debt was repaid over 35 years at an interest rate of 1% (low because of the economic recession) then the cost per household would be less than $10 a month.
In exchange for this higher line charge, per unit household electricity charges would be lower and more stable, as wholesale electricity spot prices would not rise above $75MWh, possibly even lower if renewable generation costs continues to fall.
If the economic downturn becomes more extreme then Transpower directly accessing Reserve Bank credit to stimulate the real economy should be considered as explained by a recent Interest.co.nz article -Raf Manji urges the RBNZ not to make the mistake of previous overseas QE programmes by focusing entirely on supporting the financial markets. Reserve Bank credit could be extended until inflation becomes more concerning than the costs of the economic downturn. Dr Geoff Bertram also discusses the issues surrounding these government financial arrangements here. Geoff is a Senior Associate in the Institute for Governance and Policy Studies at Victoria University.
Greater investment by Transpower in the transmission network and security of supply may end the thirty year above inflation rise in electricity prices for residential households as it will allow greater entry into the market by lower cost generators. In the coming decades tens of $billion will be invested in renewable generation. Meaning Transpower investment in security of electricity supply and the national grid will provide a significant stimulatory effect to the economy.
Lower electricity prices and more stable supply will lead to a faster ‘electrification’ of the economy, for example by the greater uptake of electric vehicles, as seen in Norway or by big industrial users, such as Fonterra converting from fossil fuels to renewable electricity.
Transpower in its recent report described this ‘electrification’ of the economy. They already see evidence of this occurring. Their prediction is it will continue to ‘ramp’, especially from 2025. Transpower also commented that managing dry year risk (P.75) is the energy industry’s biggest challenge which could jeopardise the electrification process.
Transpower further stated in the past, such as 1992, 2001, 2003 and 2008, dry years have been severe enough for New Zealand consumers to be asked to conserve electricity. As New Zealand transitions to a decarbonised economy, this risk increases and requires much greater focus to manage. Drivers for this increasing risk are growing peak and energy demands, combined with retirement of baseload gas capacity and growth in weather-dependent renewables.
Transpower clearly describes that New Zealand needs to make a decisive decision on how to manage the dry year risk.
The dry year risk is a unique and significant challenge that has the potential to disrupt our journey towards a decarbonised economy and materially set it back. This is the biggest challenge we face. It requires clear and decisive ownership of the decision around what New Zealand must do to address it (P.76).
$4 billion in capital costs for the Lake Onslow storage scheme may seem like a lot of money but if it is evenly spread across New Zealand’s roughly 1.5 million households it is less than $3000 per household. Because such a large-scale energy storage project would be an inter-generational piece of infrastructure, it should be considered like a mortgage that is paid off over many years. This means the cost for transitioning to 100% renewable electricity is not significant in any one budgetary year and the costs even in the near term will be much less than the benefits.
For those vulnerable New Zealanders who might not use a lot of electricity (so not benefiting as much from lower per unit prices) the approximately $100 per year in extra line charges could be mitigated by increasing the winter energy payment grant.
For the government having a SOE capable of independently planning and implementing a large public infrastructure programme takes the pressure off the Infrastructure Reference Group having to manage the process, which is useful given the pressure they will be under managing stimulatory infrastructure provision elsewhere in the economy.
Before Transpower can plan and implement this work programme a more in-depth study on pumped hydro from a technical, economic, cultural, environmental and social perspective as recommended by the Interim Climate Change Committee (ICCC) needs to be completed. This study should be progressed with urgency.
This paper is part of a fuller report titled Pumped Hydro Report: April 2020 which has the following contents.
- Pumped Hydro: Introduction by Brendon Harré
2. A Credit Injection to the Electricity Grid Would Boost New Zealand’s Economy by Brendon Harré
3. Build the Dam -Save the Planet by Brendon Harré
- Further Reading
4. Pumped Hydro: Extended Comment by Prof Bardsley
- A Pumped Storage Scheme at Onslow
- Onslow and Otago Hydrology
- Onslow and Existing Otago Hydro Power
- Onslow and Emissions Reduction
- The Transmission Issue
- Onslow Economics
- Other Pumped Storage
- Cited Works