Thursday, March 09, 2006

Bryan Leyland: Co-ordination key to avoid power shortage

At a power conference last week, two chiefs of state-owned enterprises made it clear that the risk of an electricity shortage is quite high. But the Electricity Commission believes that the risk is not high - so far.

This assessment seems to be based on a computer program used to analyse the risk. There are a number of reasons for believing that this is not an accurate model of the real world.

With the Centre For Advanced Engineering, I worked on regular forecasts of electricity supply and demand from 1992 onwards. This background leads me to believe that there is about a 10 per cent chance that the situation will not get much worse than it is now - but only if we get heavy rain in the South Island very soon.

I suspect there is a 20 per cent chance that we will have a shortage similar to 2001 or 2003, and something like a 5 per cent chance that it will be similar to 1992.

The hydro storage is now the same as it was at this time in 1992, the year of the big shortage. The main difference between now and 1992 is that we no longer have large reserves of Maui gas to burn - and even if we did, we do not have much spare capacity in the power stations that could burn it.

As industries are already backing off production, some would say that we are experiencing a shortage right now, thus damaging our economy and business confidence.

As a delegate at the conference pointed out, the cost of having additional capacity is small compared with the cost of a shortage. But the cost to the economy is not factored into the calculations of how much reserve energy we need. It should be.

It was surprising that, despite looking down the barrel of the third shortage in six years, many of the speakers and delegates still believe that "the market is working". If it is, it is certainly not working for NZ Inc.

In the past two years power prices have increased rapidly and there is no reason to expect that they will return to a reasonable level in the near future.

As former Contact Energy chief executive Steve Barrett wrote: "Generation companies have to strike a balance between not bringing a plant on too early and pushing electricity prices down, and not having a shortage that will trigger government intervention."

In the longer term, the conference highlighted the fact that we have no idea where the power we need is coming from. Although we were shown a list of proposed stations we had no indication of how big they were and when they might - if ever - be built. It did not give me much confidence.

Onshore gas exploration in Taranaki has failed to find anything of the size we need. Contact chief executive David Hunt pointed out that even if we found a large offshore gas field tomorrow we don't have enough time to get the gas ashore before shortages begin to bite.

Two speakers pointed out that there were large reserves of low-cost energy in the lower South Island. Keith Turner of Meridian talked of hydro power and wind power and Don Elder of Solid Energy talked of huge reserves of lignite.

Another delegate told me that his firm held large lignite reserves in Southland and that several companies were drilling for offshore gas/oil off Canterbury and Otago and to the west of Stewart Island.

The major energy sources we have available to us are geothermal (maybe 1500MW), South Island hydro (1000MW+), wind (about 1000MW, equivalent to 400MW of geothermal), South Island coal (enough for hundreds of years), domestic gas (if we can find it), nuclear power north of Auckland (2000-4000MW), imported compressed natural gas or, worst of all, imported liquified natural gas.

To minimise the high risk of shortages and high, ever increasing electricity prices the Government should immediately instruct the Electricity Commission and Transpower to investigate the South Island resources and a new 2000MW DC link all the way to Auckland.

This needs to be done quickly because a major benefit of the new DC link is that it defers the need for the 400kV system for many years.

If large-scale generation in the South Island and a DC link turn out to be a good long-term option with no significant downside, then the Electricity Commission should announce that a DC link will be built and invite competitive proposals for building and operating South Island power stations.

If they did this, I am sure that they would be deluged with offers.

If no action is taken we may well finish up building the 400kV line into Auckland from the south and then importing LNG into Marsden and building power stations that would make the 400kV line redundant.

The worst aspect of the LNG option is that it locks us into overseas energy prices and escalating power prices.

New Zealand has ample indigenous energy resources and our economy needs the competitive advantage that they will provide.

It is hard to avoid the conclusion that when we reformed the electricity industry we threw out the baby with the bathwater.

While there is no doubt that it was right to end the Electricity Department's and Ministry of Works' monopoly on building and operating power stations and transmission lines, it was not necessary to choose an electricity market structure that does not co-ordinate generation and transmission or provide enough reserve capacity, and induces generators to maximise profits by keeping us on the edge of a shortage.

Better options were available, but the decision-makers seemed to believe that if they called their proposed system a "market" it would behave like a real market. It is like calling a frog a bird and expecting it to fly.

* Bryan Leyland, of Auckland, is an electricity industry consultant.

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