Monday, March 06, 2006

Alasdair Thompson: Bottlenecks threat to power supply

According to the data coming from Mco, the monitor of our hydro storage lake levels, New Zealand is at risk again from a dry winter. The threat of brownouts looms as large as it did in 2001.

Since 2002 substantial new electricity generation capacity has been brought on line, notably the Whirinaki gas-fired plant, and from wind power. The water level of Lake Taupo is also under no pressure.

Regardless of what happens this winter, in two to three years' time we are likely again to run the risk of brownouts, not from a lack of generation but as a result of bottlenecks in the electricity transmission network.

Power transmission is as important as new electricity generation capacity for securing reliability of power supply and ensuring that the electricity market functions efficiently.

Without reliable transmission, electricity can't get where it is required, or when, at a price that reflects its realistic cost of production and distribution.

When the transmission network fails to carry all the power demanded of it by users in a region, and despite the availability of adequate generation capacity down country, local scarcity will drive up power prices due to the congestion on our "State Highway" for power transmission.

Users in a region like Auckland or Wellington, who are remote from most generation capacity, are likely to find themselves paying much more for their power than if the transmission network was not congested.

At present the price of electricity does not reflect the costs of its generation or transmission or market forces, but the demand factors operating on the transmission network system.

At times when congestion occurs on the transmission network the owners of new generation capacity are well placed to game the system in local regions by charging for their power based on the constraints of the transmission system, which is a monopoly, not on what the market would otherwise determine.

In addition to easing electricity congestion constraints, a high-quality transmission network allows power consumers a choice of who they buy their power from.

As the network is subject at present to constraints and bottlenecks, and approaching a condition where it is unable to carry the capacity demanded of it, business and residential consumers don't have the choice of who they buy electricity from, whether from renewable resources such as wind or solar, or from efficient gas-fired co-generation.

Reliable transmission with the scale to carry power without constraint is required to guarantee reliable power supply at competitive prices.

Until the transmission worry is resolved, new investment in job-creating industry is being deferred.

The Electricity Commission is charged with recommending the best solutions to these issues though it is by no means clear the Commission understands this well enough.

For example a particular measure supported by the Electricity Commission is the Time of Use (TOU) metering of power for smaller businesses and residences. Business fully supports widespread TOU metering but it is impacted negatively by the transmission network's constraints.

At present transmission costs are priced at nodes on the network; this is outmoded. For TOU metering to be effective, transmission pricing needs to reflect demand, but when demand is rising and falling, price signals do not come down the lines past the network's nodes.

So transmission systems need to be designed with the flexibility to eliminate power supply constraints occurring at the present system's nodal bottlenecks.

The proposals being considered by the commission include Transpower's upgrade of the high-voltage line into Auckland and alternatives to it, such as new local generation.

While new generation is welcome, it would represent only a temporary reprieve on the need for upgraded transmission lines, equivalent at the most perhaps to three years' regional load growth. Without significant transmission capacity, investment in new generation, renewable or otherwise, is stifled.

The Electricity Commission is not politically independent, unlike the Commerce Commission. It reports to the Minister of Energy (not even to Parliament) and with the potential for politically motivated decisions.

Business is concerned the commission is not in touch with what security of supply means from the consumer's perspective, and that it doesn't fully appreciate the need for supplier choice to restrain prices through market competition.

* Alasdair Thompson is chief executive of the Employers & Manufacturers Association (Northern)

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