Electricity market lacks dry-year options

OPINION

The electricity market and the associated reforms are riddled with problems that have cost consumers billions of dollars.

The first problem is the belief that the electricity market is efficient. Efficient markets deal in commodities where the demand drops significantly if the price increases and there is an alternative; for example, if baked beans are too expensive, buy spaghetti.

With electricity there is no alternative: The value is hugely greater than the price and the consumer is locked in.

When we are close to a shortage, the generators set the price. When we have a surplus of generation, they shut down power stations to regain control of the price.

The electricity market has brought windfall profits to hydropower generators. Before the electricity reforms most of our power came from old hydropower stations and cost about 3c/kWh. When the market suddenly paid them the cost of generation from thermal stations – about 6c – they Inevitably made windfall profits. This has cost the consumer in excess of $4 billion.

The electricity reforms have resulted in the running down of the hot water control system, which has probably cost the consumer more than a billion dollars. Before the electricity reforms, all storage water heaters were controlled by a ripple relay that the lines companies used to reduce system peak demand charges.

As a result we did not need to build so many new power stations and transmission lines or build our distribution systems to supply the unrestricted peak demand. Everybody benefited.

The reforms did not allow the lines companies to recover the cost of managing peak demand and so deprived them of the income they needed to cover the cost of managing, maintaining and upgrading their ripple control systems. So they let their systems run down and now New Zealand’s peak demand is at least 300MW higher than it should be.

As a result the consumer has paid $900 million for the 400 kV line from the central North Island to Auckland, millions have been spent on reinforcing distribution systems to meet unrestricted peak demand and new power stations have been needed to meet the higher demand.

Report reveals dry year shortage
Transpower recently released a report on the security of supply in dry years. It revealed there will be a problem in meeting peak demands in the North Island from 2019 onward. Yet, for some strange reason, it did not mention reviving the ripple control system that could easily knock 300MW off the peak demand.

A proposal has been made for a new smart water heater controller that could bring even more benefits to the consumer than ripple control because it could be controlled by the consumer, the retailer, the lines company and Transpower to reduce electricity costs.

It would also reduce the cost of stabilising system frequency and the chance of blackouts due to a major failure. It would bring huge benefits but the electricity market has ensured there is no way that the hundreds of millions of dollars a year of the multiple benefits can be collected together and delivered to the consumers. Market theory wins: the consumers lose.

New Zealand gets most of its electricity from hydropower stations that suffer in a dry year. Before the reforms, planning to meet the one-in-20 dry year was a key factor in electricity supply.

When Genesis Energy shuts down the Huntly coal-fired station in 2018, this will lose the benefits of the dry year reserves in its coal stockpile that amount to about 30% of hydro storage.

Wind power exacerbates the problem because its output drops in the autumn and early winter.

From 2019 onward, the risk of shortages in a dry year will be the greatest since the Meremere station was built in the 1950s.

This has been confirmed by the Transpower report, which says up to 600MW of new generation is needed by 2019 to avert the risk of a dry year shortage. An industry insider told me there is little chance this amount of generation can be found in the time available.

During a dry year, spot prices will skyrocket to politically unacceptable levels and one or two "gentailers" might go broke because they will run out of money to purchase extra power on the spot market.

Others will make windfall profits. During the last shortage in 2003 – that did not result in blackouts – the damage to the economy was estimated at $200 million.

Some claim the dry year shortfall can be picked up by geothermal and gas-fired stations but this ignores the fact that geothermal stations always operate at maximum output so they can’t help and gas-fired stations are limited by their contracts because the suppliers want a guaranteed steady off take and cannot afford to hold large quantities of gas as a dry year reserve.

If Methanex had large volume long-term contracts for gas, the methanol plant could shut down and sell its gas for power generation. Unfortunately, it seems the company is running on short-term contracts.

One option is to pay lots of money to shut down the Tiwai Point aluminium smelter. But if the restart costs are too high, it might stay shut. The result will be economic damage to Southland and lots of water spilled at South Island hydro stations.

No alternative to coal stockpile
As there is no real alternative to a coal stockpile for holding dry year reserve energy, the most practical option is to pay Genesis an annual sum to keep Huntly available.

As this would amount to an admission the market has failed, I suspect the Electricity Authority will hold to its belief that “the market will provide” until the day when it is too late to provide the generation that is needed for dry year reserve.

If shortages occur, it is not at all clear how the electricity market will cope. There do not appear to be any contingency plans for coordinating the system, stabilising power prices and efficiently rationing the limited electricity supply.

There is a big risk is the government will panic and bring in regulations with unforeseen consequences. There is also a big risk of political upheaval.

So what can be done? What we need is a truly independent and wide ranging look at the whole electricity market and associated reforms from the point of view of consumer benefit.

But, to do this, politicians will have to accept the existing market is less than perfect and has served consumers badly. There is little chance of this happening.

If it did happen, there is reasonable chance that an independent review would recommend the single buyer market originally recommended to the Wholesale Market Development Group that would solve most of these problems.

Unfortunately, a single buyer market has a bad name as a result of the Labour/Green parody of a single buyer market whose main objective was to return electricity to government control and subsidise expensive wind and solar power.

What is needed is management by a body responsible for providing the consumers with an economic and reliable supply and independent of the government.

Bryan Leyland is a commentator on the electricity industry and owns a power generation station

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