Abstract
The article discusses the challenges facing New Zealand’s electricity supply, attributing recent issues to three main factors: adverse weather conditions, a flawed electricity market, and the push for net-zero emissions. Currently, hydropower accounts for 65% of electricity generation, with the remainder sourced from geothermal, gas, coal, wind, and solar. The reliance on hydropower poses risks during dry years, leading to significant drops in electricity generation. Historically, strategies were in place to maintain adequate water reservoirs and coal stockpiles, but the shift to a market-based system has undermined these safeguards.
The current situation has been exacerbated by a shortage of gas due to declining local supplies and previous government bans on exploration, alongside insufficient coal reserves at a key power station. As a result, electricity prices have soared, impacting industrial operations and raising concerns about future supply reliability.
The article critiques the existing electricity market model, arguing that it fails to adequately balance supply and demand. It emphasizes that electricity should not be treated merely as a commodity and warns that the current system encourages profit maximization at the expense of reliability. The transition to renewable sources, particularly wind and solar, is seen as problematic without reliable storage solutions, which are currently lacking.
Long-term strategies suggested include expanding geothermal and hydroelectric power, reconsidering gas and coal usage, and even exploring nuclear energy as a viable alternative to reduce carbon emissions. The government’s recent policies are critiqued for relying on the existing market structure while expecting significant increases in renewable generation without acknowledging the need for backup power.
Ultimately, the author concludes that without fundamental changes to the electricity market and a realistic approach to energy supply, New Zealand faces an uncertain future characterized by potential shortages and rising electricity costs. The need for informed political and industry leadership to navigate these complex challenges effectively is emphasized.
The Electricity Saga
There are three underlying reasons for our recent problems with power supply: the weather, a flawed electricity market and the drive for ‘net zero’.
Sixty-five percent of our electricity is provided by hydropower, and the remainder by geothermal, gas, coal, wind and some solar. In a dry year, hydro’s ability to deliver falls away, and we lose about 10% of our generation. In the past, we always tried to have the reservoirs and the Huntly coal stockpile full by the end of summer to guard against this possibility. When we switched to an electricity market, this objective fell by the wayside.
This year, we failed to refill the reservoirs and, until a few weeks ago, they had been declining fast to a record low level. Recent rain, lots of wind plus some expensive gas from Methanex has eliminated the risk of blackouts this year.
We used to get 20% of our electricity from gas-fired power stations, but because of declining gas supplies from existing wells, and the previous government banning further exploration, we are now desperately short of gas. The Coalition is going to remove the ban but we won’t see the results for several years.
In late summer Huntly did not have enough coal in its stockpile because not enough retailers were prepared to pay in advance for a larger stockpile. So coal fired generation was constrained by the market failing to provide an adequate supply of fuel.
The situation has been made worse by poor market design. New Zealand chose a risky model which, as the current situation shows, has proved to be seriously flawed. As a result, we have seen wholesale market prices rising to ridiculous levels of as much as $1/kWh. This has already caused some factories to shut down; others are under threat.
The options for next few years are public conservation campaigns (which may not be as unpopular with the electorate as everyone seems to believe), storing the gas to give the gas fields a steady offtake and releasing it when needed, and importing liquefied natural gas – which the government is now contemplating. But will take time and be hugely expensive.
How did we get to this situation?
Firstly, the electricity market is simply not fit for purpose. The underlying propositions are that ‘electricity is “a commodity like any other” and that ‘when the price goes up, the demand goes down’. But electricity is not a commodity like any other, because it does not have an alternative or significant price elasticity. It isn’t a market that Adam Smith would recognise. As two departing CEOs said, the way to make money is to keep the system on the edge of a shortage. Which means that disaster is inevitable if a dry year occurs. And that is exactly what has happened.
An article I wrote that explains why the market is a failure can be found here. It demonstrates the advantages of a single buyer market that has someone directly responsible for providing an economic and reliable supply and also adds genuine competition in building and operating power stations to the largely successful ECNZ model.
Secondly, the pursuit of ‘Net Zero” partly driven by a mistaken belief that if New Zealand reduced its emissions our climate will be better, has driven the ban on gas exploration and the desire to shut down our coal fired station, even though it is doing a vital job in keeping the lights on. It has also given us expensive and unreliable wind and solar power.
The long-term problem
Although we are out of trouble for the time being, the longer-term problem rears its head: storage lakes that need to be refilled, not a lot of snow pack to melt in the springtime, declining supplies of gas, and the need to import shiploads of coal and truck it to the power station to restore the stockpile. This is unlikely to be achieved by the end of summer. The imminent shutdown of Taranaki 380 MW combined cycle station because it cannot find a secure gas supply for the next 20 years or so to justify a much-needed overhaul, adds to the problem.
Like many other countries, the previous government and the National party are relying on more wind and solar power. To be economic, wind and solar must be supported by low-cost long-term storage for days, weeks and months. There is no technology that can deliver this right now. Batteries are too expensive by a factor of 50 or so.
Without storage the price will skyrocket on calm nights and crash when it is abundant. This has happened several times in the last few weeks. This means that the wind and solar farms under construction and planned will not make enough money to pay for their construction and operation. As we do not directly subsidise wind and solar power the generators will stop building them. What will we do then?
Many people assume that gas can fill that the gap when wind and solar are not producing and during dry years. But this requires that we have a large storage facility – for which the market does not provide any reward. Another major problem is that when wind and solar are abundant much of the power they generate will be surplus to our needs and will have to be dumped. This, and the fact that it will cause the prices to crash further damages the economics of wind and solar power.
The expectation is that the demand is going to increase rapidly, driven by the electrification of domestic and industrial heat and road transport. However, we will get certainly get more and more data centres, which need a reliable supply.
So the load will increase but we will be more prone to failures to keep the lights on when wind and solar are not delivering. More and more often we will see power prices crash when wind and solar are abundant and skyrocket when they are not.
We could build more geothermal stations, but that takes time, especially as most of the oil rigs needed to drill production wells have departed overseas. There is probably 1000 MW so of identified geothermal potential, and there is the possibility that more could be found with exploration. But this is not a quick solution.
In the long-term we could consider more hydro generation from the more than 2000MW of potential in the South Island. For those who, like me, do not believe in dangerous man-made climate change, more coal and gas generation are an obvious solution.
Those who believe that man-made global warming is real and dangerous should be advocating nuclear power, which is the only practical and economic way of reducing CO2 emissions from thermal power generation. I suspect that the New Zealand public are more sympathetic to nuclear power than they are believed to be.
New government policy
A few days ago, the Government issued a statement of its policy for the electricity industry to the Electricity Authority.
The document contains a list of ambitions. Most of them are entirely laudable. They want an efficient system delivering reliable electricity at the lowest possible cost.
Then it spoils it all by its expectation that it will be done using the existing electricity market structure. To achieve this the existing structure will have to be festooned with regulations designed to make the market act in the interests of the consumer rather than profit maximizing for the generators. It also requires that all generators that cannot provide a continuous and reliable supply will need to purchase sufficient back up to solve the problem. Determining the amount of backup actually needed is a system wide problem that varies all the time. If every generator provides its own back up, there will always be surplus backup available because it is not conceivable that all generators will need to provide all their back up at the same time. This will be enormously expensive and I don’t know where the backup will come from. The consumer will pay.
It expects renewable generation to double and ignores the fact that it will need a huge amount of backup and, when wind and solar are generating hard, a very large amount of power will have to be dumped and prices will crash making investment in wind and solar very unattractive. (If they have to provide backup along with the new generation, it will be hopelessly unattractive anyway.) The government have also accepted Transpower’s prediction of a huge increase in electricity demand due to vehicle electrification despite the fact that, all over the world, the market for battery electric cars is showing signs of collapse.
In my view, the only way that their dreams can be achieved would be to look at alternative market structures that are designed to produce the outcome that they want.
Summary
Whatever happens, we face a very uncertain situation in the next few years with an increasing risk of major shortages and a major increase in domestic electricity prices.
The chances of coming up with sensible solutions are much reduced by the fact that very few of our politicians and industry leaders seem to understand the complexities of providing a reliable and economic supply of electricity. They all seem to ignore the need for expensive back up and hence they believe that wind and solar power offer a cheap solution. This was highlighted in a recent speech on behalf of the Minister of Energy at the Electricity Engineers Association Conference. We were told that the future lay in low-cost wind and solar power including offshore wind power. It seems that it has not penetrated the government that offshore wind power has proved to be impossibly expensive where ever it has been tried. It only exists because of massive subsidies paid for by consumers.
We should replace the flawed electricity market with a market model that works and concentrate on generating from more hydro and geothermal power with gas and coal as needed. Nuclear power should also be contemplated.
The reality is that, for lots of perfectly good reasons, net zero is doomed in New Zealand and all over the world and the sooner the government realizes this and acts appropriately the better.