Nation-building is back!
Updated September 2020
The Green Grid has become an election issue. The Labour party have announced they are bringing forward the 100% renewable electricity system commitment five years to 2030 and they will invest a further $70m in detailed design and engineering work on the Onslow pumped hydro scheme based on the findings of the $30m business case that was announced earlier by the government in July.
Judith Collins the opposition leader of the National Party has claimed that the 100% renewable electricity system goal and pumped hydro will increase electricity prices. The media have fact checked these statements and found them to be mostly false.
Internationally the most similar pumped hydro scheme to Onslow is the Saurdal pumped hydro scheme. There is a good video titled Ulla-Førre -Norway’s power storehouse describing the larger hydro-electric scheme that Saurdal is part of. Several decades ago Norway built the very large Saurdal pumped hydro scheme. Norway’s electricity system is 99% renewable. These facts have not stopped Norway having some of the cheapest electricity prices in the world.
Readers will know I have been advocating for New Zealand to build pumped hydro for some time now. Back in May I wrote the article -Electrifying the Recovery published in the Greater Auckland website that described how electrification could be a boost to the economy. I also wrote Rebuilding New Zealand by Reinventing Public Works which had a similar theme. Pumped hydro was a key practical component of these papers.
The significance of pumped hydro for the urbanism topic which I usually write about is that it helps secure the needed low-cost renewable electricity supply required to meet the expected ramp of demand coming for vehicle electrification.
Since writing those papers, I have compiled a detailed report on pumped hydro, including a very popular extended comment on the proposed Onslow pumped hydro scheme written by hydrologist Prof Earl Bardsley. In particular it details how the environmental effects can be mitigated against.
At the end of July the government announced it will fund a $30 million business case that addresses New Zealand’s dry year storage problem. This will mostly investigate the pumped hydro storage project at Lake Onslow in Central Otago but it will also assess smaller pumped storage options in the North Island, as well as other alternative technologies.
Brian Fallow from the NZ Herald reported that Lake Onslow hydro storage scheme is no pipe dream, it “may well be an idea whose time has come”.
If the Onslow pumped hydro business case is successful it is estimated construction would take about four to five years to complete, plus two further years to fill the reservoir. There would need to be a one-off energy input of around 2,000 GWh to pump up to a minimum operating level, and perhaps a further 2,500 GWh to increment up to mean operating level. In this sense, closure of Tiwai is helpful if Manapouri power can get across to Onslow.
During the construction phase an estimated 10,000 direct and indirect jobs will be created. It will be a multi-billion-dollar project, perhaps as much as $5bn if the costs of electrical grid upgrades are included. It would be New Zealand’s largest single infrastructure project since the 1980s.
The Onslow pumped hydro project can remedy ‘dry year’ risk, when for example, a 15 percent reduction in water inflow into the southern hydro lakes translates into a deficit of 5,000 Gwh over a six month period. Onslow offers multi-year storage that could provide 5,000 Gwh of dry-year energy as well as intermittency support for any amount of wind and solar expansion.
On the whole, the announcement has received good feedback. The few disagreeing voices have either been vested interests or they have not understood the capital cost of the project will be offset by savings from lower wholesale electricity prices.
Both the current and a former co-leader of the Green Party -James Shaw and Russel Norman -support the pumped hydro business case announcement. They believe the environmental benefits to climate change will outweigh local environment effects. Although they do believe the local environment effects need to be fully mitigated against.
Possible mitigations suggested in Prof Bardsley’s extended comment include -creating floating wetlands to replace flooded swamps, a large predator free wildlife sanctuary around Lake Onslow, and returning lake level variability in the other southern hydro lakes to more historic patterns which will be helpful for a number of reasons, not least that the more erosion prone hydro lakes will be better protected.
Vector, New Zealand’s largest distributor of electricity, has welcomed the government’s announcement. They state, “as fossil fuelled generation plants retire, pumped hydro would provide a smooth and reliable transition to a 100% renewable system alongside customer investments in solar and other technologies.”
Business journalist Rod Oram spoke about the wider climate change and economic picture in an RNZ interview. While in another RNZ interview Prof Bardsley the originator of the Lake Onslow project gave a good summary of the proposed scheme.
Onslow + grid upgrades + smaller North Island pumped hydro can collectively be called the ‘Green Grid’ as a short-hand description.
In the coming years, the Green Grid will be important to a Jacinda Ardern government because it gives practical intent to the statement “climate change is my generations nuclear free moment”.
When the Green Grid is built, Huntly and other peaking coal and gas electricity generation plants will close. Pumped hydro will provide lower cost peaking electricity generation. New Zealand will achieve 100% renewable electricity. The green electricity economy will not suffer the approximate 1-in-10 dry winter risk that would otherwise close down the renewable energy economy. The Green Grid will provide a secure supply of low-cost renewable electricity. In a sense it is like insurance that protects the electricity system against variable rainfall i.e. the dry year risk, and against the intermittency of wind and sun.
Pumped hydro will buy electricity for storage when wholesale electricity prices are low and sell electricity for generation when prices are high. The effect of this arbitrage buying and selling is it decreases the variability of electricity wholesale prices (seen in the every 30 minute electricity spot market). The floor price will be higher, the ceiling price lower and the average price will be lower because the ‘dry-year’ risk premium built into the market will be gone. This will make wind and in the near future solar electricity generation more financially viable. Thus, it brings forward investment in renewable electricity to match the coming ‘ramp’ of demand.
If the Onslow scheme proceeds it will give electricity generation constructing firms the certainty and confidence to invest in renewable energy projects on a larger nation-wide basis. Therefore this decision will boost construction employment more broadly than that directly or indirectly associated with constructing the Central Otago scheme.
If the New Zealand governments commits itself to Green Grid investments this might have a similar catalyst effect as New South Wales government’s plan to establish a renewable energy zone which received a “phenomenal” response, attracting 113 registrations of interest for projects totalling a massive 27 gigawatts and valued at $38 billion.
The Green Grid puts New Zealand on a pathway towards a zero-carbon economy. The Green Grid would be a significant start to a national energy plan covering the next 30 years that the Climate Change Commissioner Rod Carr says New Zealand needs. The Green Grid will provide a positive example to the rest of the world for what is possible.
Being an early starter in electrifying the economy will give New Zealand firms and workers an advantage in creating and selling globally the products and services needed to maintain the electrified economy.
If New Zealand genuinely embraced the 100% Pure brand with practical initiatives, such as the Green Grid, this could reward the country handsomely.
The government can borrow at exceptionally low cost. Currently New Zealand 10-year Government Bonds have a 0.750% yield. Therefore a $5bn price tag for the Green Grid is not as expensive as it appears. If the government debt funded the entire project at a 1% interest rate, then the interest cost is only $50m a year. If the debt was repaid over a 50-year period in equal instalments, then the capital repayments would only be $100m a year. Note the business case will give a better accounting of these financial costs.
In comparison Transmission Gully will cost the country $125m per year over a 20-year period due to the public private partnership arrangement that the previous government signed the country up to. I believe the benefits to New Zealand from pumped hydro far exceeds Wellington’s motorway project. For a quite modest cost the country gets a clear pathway to a carbon-zero economy that is fully protected from its most significant risk factors.
Yet even the modest debt cost for building pumped hydro could be offset by significant savings in wholesale electricity prices. It is possible that pumped hydro’s arbitrage operations will lower prices to such a degree, that in effect, there is no cost for this climate change initiative.
Dr Keith Turner, the former chief executive of Meridian Energy from 1999 to 2008, has given his professional opinion that if the cost of the Onslow pumped hydro scheme was spread across all electricity consumption, like an insurance premium, it would be only 0.5 to 0.75 cents per kilowatt hour. That is about $50 a year for an average household. Whereas wholesale electricity prices would likely drop by twice this much once the scheme begins operating. Note Turner’s opinion piece is a great read and fully demonstrates how large a nation-building opportunity the Onslow pumped hydro scheme is.
Constructing the Green Grid will likely require the use of tax-funded debt. The initial benefit is the boost to employment and incomes to construction workers and firms which is helpful for recovering from the Covid Recession. Yet importantly the assets once completed will benefit future generations that we are borrowing from. The borrowing will provide them with a low-cost domestic energy supply that is secure against major risk factors whilst also taking a significant step towards addressing climate change.
There are different funding options for the Green Grid. The government could pay the capital and interest costs from the consolidated fund and ‘gift’ the Green Grid, including a completed and filled Onslow to a crown entity to manage. The most obvious entity being Transpower who would manage the operating costs and revenues resulting from the buying and selling arbitrage operations on a financially neutral basis (non-profit/non-subsidy over the long term).
In this case, Transpower’s legislated public purpose should be security of supply, lowest possible transmission costs and facilitating competition of supply for new entrant renewable generation. Over time renewable electricity generation is tracking down in price (unlike coal and gas which is tracking up). Facilitating the competitive entry of new renewable generation into the electricity market should result in wholesale electricity prices falling. Which should mean consumers gaining an even greater advantage, as electricity prices will over time be lower than they would otherwise have been.
More competition is certainly needed in New Zealand’s electricity market. The Electricity Authority recently found Meridian Energy guilty of manipulating the electricity market at a cost of $80m to consumers.
Other funding models could include Transpower gaining the right to borrow like Kainga Ora. That it repays the debt for building the Green Grid by either a higher line charge levy or through its buying and selling arbitrage operations. The second option meaning the effect on electricity per unit charges would be higher than the other counter-factuals.
The business case will fully analyse the overall market effect of replacing high cost peaking coal and gas with lower cost renewables that is fully buffered by pumped hydro.
Megan Woods the Energy Minister has discussed the business case process, she highlights how pumped hydro will allow New Zealand to take full advantage of its abundant renewable natural resources to produce some of the lowest cost and cleanest electricity in the world.
Whatever funding model the business case lands on I am satisfied the correct process is in place to determine the right option.