The electricity sector and the government will have to find ways to keep power costs lower if renewable energy is to displace fossil fuels in industrial processes, the Major Electricity Users’ Group says.
Electrification of process heat offers “significant potential” as a means of reducing the country’s carbon emissions, MEUG chair John Harbord says. But pricing will ultimately drive electrification and current wholesale power prices are so high that they dis-incentivise industrial electrification.
“If government wants to drive electrification, it needs market settings and behaviours that deliver a lower spot price than the market is currently delivering,” Harbord says in the group’s latest monthly newsletter.
“An alternative approach to incentivising electrification is pricing carbon to move industry away from more affordable forms of energy. However, relative to the current wholesale electricity price, the price of carbon would have to be so high that carbon flight results.
“Industrial businesses would become unviable, with those that can, relocating to other countries that don’t face high carbon prices and where they can get lower electricity prices.”
New Zealand homes and businesses exposed to spot prices have faced sustained high bills since late September due to a combination of reduced gas supplies, occasional generator outages, declining hydro storage and weak wind generation. Average daily prices this week have been two- to three-times those a year earlier, according to Electricity Authority data.
The gas industry regulator is considering new disclosure rules after major users complained of the lack of notice they had of outages at the Pohokura gas field last year. Firms are also sceptical that the current arrangements for the electricity futures market can cater for periods of disruption like those late last year.
Electrification of transport and industry are considered key climate strategies, given half New Zealand’s emissions come from agriculture and will take time to address through things like land use change and the development of methane inhibitors. Afforestation is another core element of the strategy, but is recognised as buying time, rather than being a long-term option in itself.
The Interim Climate Change Committee will next month report on how agriculture should be brought into the emissions trading scheme. In recent workshops it has warned that pursuing the government’s 2035 100 percent renewable generation target will be very costly and deliver relatively little emissions benefit.
The New Zealand Initiative, citing estimates by Contact Energy, this week said that – even after leaving some thermal plant to run in dry years – the 100 percent renewable target could increase power costs by $500 million a year.
Harbord said it is a difficult challenge for policy-makers. Achieving lower prices, and sustaining them, will not be easy and a “simplistic approach is unlikely to work.”
Shorter term there may be some help in sight for the group’s members, which include Fonterra, OceanaGold and Cold Storage Nelson.
Heavy rain on the West Coast earlier this week boosted storage in the major South Island hydro catchments and brought national storage close to average levels.
While gas supplies will again be interrupted next month as work at Pohokura wraps up, more rain is forecast over both islands early next week.
June quarter Otahuhu electricity futures fell to $145 a megawatt-hour yesterday, from $245/MWh 10 days earlier. The contract had sold for $90/MWh at the start of December.