Thursday, March 09, 2006

Brian Fallow: Be prepared for cold showers

There are a couple of things I must remember to do next week: Have the chimney swept and a load of firewood delivered.

We have just had the strongest signal yet that we could be facing electricity shortages again this winter, for the third time in six years.

While the Electricity Commission and generators Genesis and Meridian trade contradictory words about the level of risk, Comalco, the largest consumer of all, has acted.

It has already stopped buying electricity on the spot market, necessitating a cut of about 5 per cent in output from the Tiwai Point aluminium smelter.

And it has just announced it will be cutting its power demand by another 6 per cent because of what its managing director, Tom Campbell, calls the "scary" levels of the hydro lakes.

Actions speak louder than words and this action is louder than most because Comalco does this at a time when the world price of aluminium is the highest it has been for many years and the exchange rate is at last moving in exporters' favour. An 11 per cent cut in production will cost it $2 million a week in revenues, Campbell says, and it will not be compensated by supplier Meridian.

"If we don't start conserving water now there is a risk of much more serious things happening in the winter. The time has come to have the same sort of energy-saving strategy as there was in 2001 and 2003."

Like Genesis chief executive Murray Jackson and Meridian chief executive Keith Turner, Campbell wants to see the 150MW reserve generator at Whirinaki cranked up and offering electricity to the market.

"The risk of having a serious crisis in the winter depends on whether it rains heavily between now and then, but the chances are already high enough," Campbell says.

"We ought to be trying to conserve water in the hydro lakes. The only way to do that is to start up Whirinaki because, unlike previous years, there is no spare thermal capacity. They are running full tack."

Storage in Lakes Tekapo and Pukaki, the main hydro lakes in the vital Waitaki catchment, was only 55 per cent of average for this time of year, Turner told MPs on the commerce select committee last week.

Water levels in those lakes are slightly below where they were at the same stage in 1992, when there was a power crisis, and they have been below 1991/92 levels for most of the past five months.

And levels of those lakes are significantly lower than in the more recent crisis years of 2001 and 2003.

Nationally, the picture is a bit better with storage sitting at about 70 per cent of normal for this time of year.

But the trend over the past couple of months has been downward when it should be upward.

"The trend line is worrying," says commission chairman Roy Hemmingway. "We have had only three or four weeks of good rain, around Christmas time, and we need another period like that to put things in good shape. But I think there is a ways to go before we could say we have got a real problem on our hands."

While lake levels are below average, they are still in the commission's comfort zone, based on its modelling of demand and its analysis of inflows during the past 72 years.

"In simple terms if from here we had an inflow identical to the worst on record, the worst drought on record, we would still get through the winter, according to our analysis," Hemmingway says.

Turner said historically the inflows to the Waitaki catchment came from the spring to the end of March. "We are not at the end of March yet. The forecasts are not particularly encouraging that we will get a lot of rain. But I don't believe we should put the country through a major savings programme just yet," he told the MPs.

"It's not something I would want to plan on but, over the past five years, there has been a significant winter inflow into the Waitaki catchment, contrary to the normal experience, contrary to 70 years of data. Is this a climate change phenomenon? I don't know. Is it permanent or temporary? I don't know. But if we got it again this winter there would be no problem."

The commission was set up after the industry was unable to agree on a self-governing regulatory model.

It is only 2 years old and was not around at the time of the last electricity crisis.

After that crisis, the Government decided to commission reserve generation capacity, for emergency use only, and ring-fenced from the normal operations of the wholesale electricity market.

The Whirinaki plant is designed to run on distillate, essentially diesel, a fuel so expensive it might be cheaper to shovel bank notes into its boiler.

The cost of building it is borne by electricity consumers through a levy and is spread over 10 years. It costs us $22 million a year to have it sitting there not generating.

The commission puts the short-run marginal cost of running Whirinaki, essentially the cost of fuel, at between $170 and $180 a MWh.

It went through a formal process to determine a security of supply policy and then to decide at what price and how electricity from Whirinaki should be offered to the market.

Either the spot price has to hit $200 a MWh - roughly three times its normal level - or hydro storage has to drop to the commission's "minzone".

The minzone is derived by asking a model based on hydrological records of the past 72 years this question: If all the gas and coal-fired generation is running, what is the minimum level of hydro storage we need to ensure we don't run out of water if the inflows are no better than the lowest on record?

But how sure can we be that the future will be like the past?

And can we be sure none of the big thermal generators will fall over?

Waiting until we hit the minzone, Jackson told the MPs, was akin to waiting until you hit an iceberg before taking action.

Hemmingway said, with some asperity, that when the rules were being drawn up none of the industry submissions argued that the minzone was being set too low or that Whirinaki should be run at its short-run marginal cost or that there should be a conservation campaign as soon as we hit the minzone.

Certainly, when the policy of levy-funded reserve generation was set, the industry was adamant that the trigger for its being used be set way above the market's normal price range.

That is because no future investor in generation would want to have to compete with a plant whose capital cost is automatically recouped from all consumers and which only has to cover its operating costs.

So there is a risk of chilling further investment if rules are changed now.

But that will not cut much ice with consumers and voters if they end up taking cold showers this winter.

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