Comment

A rock and a hard place for our energy sector

Electrical engineer Bryan Leyland lays out the two serious risks facing New Zealand's energy industry and our climate change catch-22

Our electricity supply appears to be on a knife edge. For the last month wholesale electricity prices have averaged about 40 cents/kWh and on November 1, peaked at about $1. The average spot price over a normal year is about seven cents/kWh but the price is often much lower in the springtime and 3 to 5 cents would be fairly normal.

Prices are higher than they should be because the system is short of generating plant, water (the hydro lakes are low), gas and coal. The generators now control the prices and they seem to be making hay while the sun shines. If this is so, they are playing games with the economy and making a nonsense of the electricity market.

We face two serious risks. One possibility is that we run out of fuel and water or a power station breaks down in the next few weeks and rotating blackouts are needed. But if it rains heavily, the situation will ease. The other risk is that it won’t rain enough in the next few months to refill the lakes and/or we won’t have enough gas and coal to back off the hydro stations to build up hydro storage. The lakes need to be full by mid-April to ensure we have sufficient reserve energy for the winter. If we fail to refill the lakes there is a risk of an electricity shortage, high prices and the possibility of blackouts around June. A major problem is that under electricity market rules the thermal generators cannot be forced to generate extra electricity even though it would be in the national interest to do so.

In the short term, all we can do is to continue importing coal from Indonesia and hope the Pohokura offshore gas supply is restored quickly. If it was incentivised to act in the national interest, Genesis would be aiming to have a stockpile of about 1 million tons by autumn. At 30,000 tons per shipload, this is a lot of ships. This stockpile would insure us against the risk of massive economic damage from major power cuts.

The Minister of Climate Change can be caned for going along with importing lots of coal and forgetting about CO2 emissions, or he can strongly object to the shipments and risk looking seriously silly if there is a shortage.

The Minister of Energy should be seriously worried. Unfortunately she is advised by the Electricity Authority, which has its head firmly in the sand and believes the market will magically solve everything. Although she is getting better advice from other sources, she seems to be ignoring it.

As a result of the high prices over the last month or so, electricity prices for everyone may well increase by about 2c/kWh (7.5 percent) next year. (In the long-term, average electricity prices on a fixed contract must always be higher than the average of spot prices because a contract is an insurance policy for which you pay a premium.) It is worth noting that the high prices do not seem to have produced any reduction in demand even though the assumption that high prices will reduce demand is a central plank of market theory. One can only conclude that, contrary to all the assurances from the Electricity Authority, we don’t have an efficient market.

Looking further ahead, the consequences of the ban on gas exploration and continuing the war on coal are likely to result in more and more high prices and shortages. The economic damage could be huge.

The electricity market has failed to provide a reliable and economic supply. The current shortages and high prices are entirely due to mismanagement of storage combined with constrained gas supplies. But there is no constraint on coal supplies. If the system had been operated prudently, Huntly would have had a substantial coal stockpile and the Ahuroa gas storage facility would have held a substantial amount of gas.

The shortage that didn’t need to happen is likely to cost consumers more than $1 billion in the long term.

The Minister of Climate Change is between and rock and a hard place: he can be caned for going along with importing lots of coal and forgetting about CO2 emissions, or he can strongly object to the shipments and risk looking seriously silly if there is a shortage. Whatever he does, he is not going to look good.

Bryan Leyland MSc, DistFEngNZ, FIMechE, FIEE(rtd), is an electrical engineer with 60 years experience in the power industry in New Zealand and abroad. He and his wife are majority shareholders in a small hydro scheme that, at the moment, is making windfall profits from the crazy electricity market.

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