Engineers are warning that the need to provide back up for intermittent wind-generated electricity is emerging as a significant concern for maintaining supply when hydro lakes are low in dry years.
A new report on this country's electricity generation also said that the Institution of Professional Engineers of New Zealand (Ipenz) considered that the target of producing 90 percent of New Zealand's electricity from renewables by 2025 was never practical, and it recommended the government remove the target.
Ipenz is also pushing for more demand side management, such as time-of-use tariffs, smart meters, smart appliances and wider use of load control and interruptible supplies.
Successive governments had taken a lukewarm approach to energy efficiency, conservation and demand management, Ipenz said. Interruptible supplies, such as ripple control of hot water, had been rundown.
The introduction of mandatory efficiency standards based on allowing only equipment designed to achieve minimum life cycle costs would have a growing impact, and by 2025 would be showing significant benefit.
"A rigorous and interventionist approach on electricity using devices is justified by the higher returns on capital for demand initiatives than by expanding generation capacity."
The report said it was a concern that there did not appear to be any overarching energy efficiency target.
It pointed out that improving the efficiency of energy use was not the same as reducing consumption, which could increase if greater efficiency prompted more use or new uses of electricity.
"As an isolated island nation, with a strong reliance on climate-related generation sources with limited storage, New Zealand operates possible one of the more vulnerable systems in the developed world," the report said.
"As a result of this, New Zealand may need more sophisticated solutions than other countries to ensure security of supply."
About two-thirds of electricity generation came from renewables now, although it had been as high as 90 percent around 30 years ago. Under a likely scenario, 68 percent would come from renewables in 2015, rising to 71 percent in 2025.
The number of renewable projects had risen in recent years, but the percentage of electricity from renewables had declined.
The rise in renewable energy projects had not been due to government interventions, and it was not clear whether the trend would continue, particularly if more gas was found.
With hydro storage capacity limited to about 10 percent of annual demand, generation-related security of supply concerns had arisen as a result of hydro shortages in 1992, 2001, 2003, 2006 and 2008.
"The most significant remaining issue to be resolved is how and who is best to provide for future dry year shortages and to back up wind generation."
It was generally agreed that mechanisms must be provided to ensure plant built to cover peaking and backup requirements was adequately compensated. Either way, consumers must face the costs.
The report said that, on balance, Ipenz believed the existing market structure should be retained and it did not support the direct provision of reserve energy, as it removed the revenue needed to justify peaking plant.
But long term consistency of market arrangements was vital. Signals must be set and kept the same for many years so companies that invested would get a return.
Ipenz considered New Zealand compared well with other countries when it came to emissions from electricity generation, but it expected carbon-based emissions from electricity generation would rise, due to the need for backup and peaking plant influenced by increasing wind penetration.
"In terms of future generation types, New Zealand faces considerable difficulties," the report said.
"There are increasing concerns on the environmental impact of wind and hydro projects. Furthermore, there is a difficult investment climate for thermal generation, and the economic viability of new technologies is marginal."
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