Pumped hydro is being acclaimed as a possible climate saviour, but are we asking the right questions? David Williams reports

Capacity was huge.

Second-year geography students spread themselves across a cavernous University of Canterbury lecture theatre, booked before the Covid-19 alert levels were clear.

Environment Minister David Parker addressed about 120 people, speaking passionately about climate change, the portfolio of his Green Party coalition partner James Shaw, and connecting his theme with energy, overseen by his Labour Party colleague Megan Woods.

Parker focused on one particular project – a proposed pumped hydro scheme at Otago’s Lake Onslow.

Last month, Labour announced it was setting aside an extra $70 million to the project, already subject to a $30 million business case, so a potential second stage could progress more quickly, if needs be. Lake Onslow’s central to the party’s pledge to make the country’s electricity generation 100 percent renewable by 2030, five years earlier than planned.

“I think we’ll achieve that in no small part because of that project that we’re proposing for pumped storage,” Parkers told the university students last week.

The rough idea is water would be pumped from the Clutha River, near Roxburgh, to a high spot, about 600 vertical metres above, via a 24km-long pipe. There, behind a 60m-high dam, a 74 square kilometre lake would be created.

That’s under half the size of Lake Pukaki, but its capacity would be about 1000 megawatts – bigger than the country’s biggest power station, coal-and-gas-fired Huntly, at 953MW. The lake would hold an incredible 5500 gigawatt-hours of storage. That’s bigger than the nominal full storage of the country’s entire hydro-electric lakes, which is 4409GWh.

(A watt is a power unit. A megawatt is a million watts, while a billion watts is a gigawatt. A power source’s capacity, measured in watts, is combined with time to get energy output. So when a heater with a capacity of 1000 watts, or one kilowatt, runs for two hours, it generates two kilowatt hours (kWh) of energy.)

Last year, hydro generated 25,321GWh of electricity, 58 percent of total net generation. Non-renewables counted for 17.6 percent.

The Lake Onslow scheme is predicted to cost $4 billion, and will create more than 3000 direct jobs for four-to-five years, it’s estimated.

The pumped hydro project would become the country’s dry-year hedge, Parker says, enabling the country to retire Huntly, which he describes as “New Zealand’s biggest source of greenhouse gas emissions”.

The minister then indulges in some pumped hydro hyperbole.

“In my opinion, that’s actually the single-most practical climate change-related policy that’s on offer this election.” That’s because, he explains, it gets the country to 100 percent renewable electricity generation, and “effectively guarantees” a low future price path for electricity, because low-cost intermittent renewables, like wind and solar, don’t have to rely on expensive Huntly power for reliable baseload electricity.

You can almost hear Green Party co-leader Shaw choking. While his party is supportive of investigations into Lake Onslow, it’ll take time, he tells Newsroom via email – “and our planet is running out of time”.

“We need to be using all the tools in the toolbox that we can use immediately, including putting solar panels and batteries in every suitable state home, working with businesses to stop burning coal, increasing energy efficiency to reduce demand, making electric cars more accessible and affordable … and reducing synthetic agricultural fertiliser use.”

Putting aside its merits as a climate change tool, Lake Onslow raises several swirling, inter-related issues that pose big questions for an electricity industry which seems mired in uncertainty.

Former energy minister David Parker addresses University of Canterbury students last week. Photo: David Williams

In a leaders’ debate last month, the National Party’s Judith Collins, a former energy minister, claimed building Lake Onslow would push up electricity prices. “According to the experts, 14 per cent up for residential, big numbers for industrial and commercial.”

Parker, also a former energy minister, disagrees. He tells Newsroom: “Onslow’s not cheap, but in the scheme of things, to get to 100 percent electricity, it’s an extremely cost-effective investment. In my opinion, it effectively guarantees a lower future price path of electricity, by enabling those intermittent low-cost renewables to have a reliable low-cost hedge. The economics of it are essentially that simple.”

As pointed out by Australian media company AAP, Collins was referring to a report published by the independent Interim Climate Change Committee. But the potential power price hikes weren’t attributable to pumped hydro, rather the report ran the numbers on a scenario in which renewable electricity generation was “overbuilt”.

Collins’ claim, AAP said, was “mostly false”, while acknowledging high uncertainty, because the Lake Onslow scheme is in its infancy, and the difficulty of saying, for sure, how it would affect prices.

Ex-Meridian Energy boss Keith Turner is another who says Onslow will lower prices. In a piece for BusinessDesk, he says it will eliminate the “risk premium” in electricity that drive up “spot” prices for wholesale electricity in dry years.

Following similar logic to Parker (or maybe Parker was riffing off Turner), he says more wind and solar would flow into the system to meet growing demand, electricity would become the energy of choice for transport and industrial heat, and lower prices would speed up the transition to electric cars. (Although not fast enough for some.)

Turner says the cost of Onslow, presumably operated by Transpower, would be borne by electricity users, through a levy of as little as half a cent per kilowatt hour on everyone’s electricity bill – about $50 a year for an average household.

Hang on, isn’t that a price increase? Yes, but Turner says wholesale electricity prices, faced with low-cost hydro flowing into the market from pumped hydro, “would likely drop by twice this much”.

The University of Auckland has done some modelling for Onslow.

Dr Stephen Poletti, a senior lecturer whose main research area is energy economics, says if the pumped hydro dam runs like a commercial operation, it’ll release energy onto the spot market when a shortage of water sparks higher prices.

“The way we model it, it doesn’t really change the price – in fact the prices would probably go down.”

An important factor in the model is long-run marginal costs, or “levelised cost of energy” (a power plant’s lifetime cost, divided by energy production). Poletti’s thinking specifically of wind farms. A recently released report commissioned by the business ministry puts the levelised cost of energy for wind at about $60 per megawatt hour, which is lower than the current price of about $80MWh.

Another variable is a wind farm’s output, depending on the configuration of turbines. Poletti says the so-called “capacity factors” of future wind farms might be a little lower.

He reinforces, with Onslow available: “If anything, the prices will go down, but maybe not much.”

The Tiwai teaser

These hydro hypotheticals need to be grounded in the uncertainties facing the electricity sector today.

The biggest of those is Southland’s Tiwai aluminium smelter which, unless things change, is meant to close in August next year. (A longer exit is possible, the smelter’s owner, global resources giant Rio Tinto, admits.)

Tiwai takes its power from the Lake Manapouri hydro station, and is the country’s biggest electricity user, at about 13 percent of New Zealand’s supply.

But when the smelter shuts, as it’s expected to one day, it’s not like the power can just be diverted elsewhere. Ex-Meridian boss Turner expects the closure to be good for consumers, but reckons it’ll take about $650 million and seven years of transmission upgrades to get it to market.

Other major electricity users are reviewing their New Zealand operations. There’s the Glenbrook steel mill (also the country’s biggest coal user) owned by Aussie firm Bluescope, the Norwegian-owned Tasman newsprint mill in Kawerau, and Refining New Zealand’s oil plant at Marsden Point. Canada-based Methanex Corporation, the world’s biggest methanol maker, cut production at its Taranaki plant earlier this year because of weaker prices and a tightening natural gas supply.

Hovering above all of this is the Covid-19 pandemic.

“We’ve actually got a fairly significant risk of demand destruction over the next couple of years,” John Kidd, director of energy research firm Enerlytica, says. “This is at the same time we’re seeing, already, a new wave of generation coming into the market with new windfarms. There’s probably a good five or six projects which are well advanced towards completion.”

Big electricity companies (the generator-retailers known as “gentailers”) have been united in their criticism of Lake Onslow.

Mercury director Dr Patrick Strange called the Government’s $100 million advance to the project “mind-boggling”, and labelled claims it’ll lower power prices as “dreamland”. Meridian chair Mark Verbiest said public investment in pumped hydro “could lead to uneconomic generation overbuild, crowd out public investment and push up electricity prices – slowing down the electrification of the economy”. Meanwhile, Genesis chief executive Marc England also pondered publicly if spending $4 billion on a new dam would scare off renewable investment by the private sector.  

Enerlytica director Kidd describes Onslow as gargantuan, and a very large overhang on the electricity sector.

“This is the wrong time to consider these types of options,” Kidd says. “I just suggest it’s the wrong option anyway. The ICCC (Interim Climate Change Committee) had a good look at Onslow and concluded that the equivalent carbon abatement costs about $250 a tonne. That’s a very, very large number.”

(The abatement cost, dividing the overall spend on a scheme by the carbon emissions savings, is a useful comparison to ensure projects, especially those paid for by taxpayers, are value for money.)

Lake Onslow has been a champion project that “the Government is picking as a winner”, Kidd says – highlighting, perhaps, a fear of Government intervention. “Just the mere presence of it has a very chilling effect on investment decisions that the sector is contemplating anyway. Irrespective of Onslow, the future is very uncertain.”

Climate change comes knocking

Poletti, the University of Auckland lecturer, concurs.

He says no one knows how Onslow would operate. (Environment Minister Parker says it’s important the Government retains control of the project. “The feasibility study will look at financing issues.”)

Although, if Tiwai closes, Poletti’s picking power prices could be pushed down in the short-to-medium term. “In the long run, you’re expecting more demand, and a lot more wind and solar to accommodate that.” Transpower is expecting electricity demand to increase from about 40 terawatt hours today, to about 70TWh by 2050. (A terawatt is a trillion watts.)

If a Government-controlled Onslow scheme flooded the electricity market with cheap power, that’s not really sustainable, Poletti worries. “If prices are that low, then how do you get new wind and solar being built?”

These uncertainties also pose risks to businesses like Meridian, which supplies Tiwai’s smelter, Genesis, and Mercury. “I think with Tiwai, and depending on how Lake Onslow’s operated, there’s a real risk for them, that their wholesale prices will come down a lot.”

Are these companies trying to protect their profits, some of which (about $500 million a year, according to one report) flow as a dividend to the Government, as a 51 percent shareholder?

“Exactly,” Poletti says of the profit motive. “Why was Meridian spilling water instead of generating it in December last year?”

He’s referring to a preliminary Electricity Authority ruling in June, known as an “undesirable trading situation”, which said Meridian unnecessarily spilled water from its hydro lakes, increasing power prices and indirectly causing thousands of tonnes of greenhouse gas emissions.

Poletti suggests electricity supply contracts with Tiwai ensure hydro generation from Lake Manapouri is off the general market. (Less cynically, it also props up thousands of jobs. Should the smelter close, however, alternatives are already being suggested.)

While many electricity industry professionals and academics are wrestling with the conundrum of electricity generation, dangerous temperature rises from climate change loom.

The strength of climate pledges during the election campaign is being questioned. Will they take the country near enough to its Paris Agreement targets?

Labour, in particular, is accused of a steady incrementalism, which is more about wooing voters than a transformative approach to climate change policy. (One academic points out that is what voters seem to want.)

Back at Canterbury University, we ask Environment Minister Parker why Labour doesn’t create incentives for people to buy electric vehicles.

“This transition’s happening anyway,” he says. “What you want to do is make it happen faster.”

There are three ways Governments can intervene – education, regulation or price. “We’re not proposing at this election to use regulation or price outside of public transport, where we think that’s where we should start.”

Is that good enough? “It’s better than where we sit today,” Parker says.

The minister is confident the country can be net zero (carbon emissions minus carbon sinks, like trees) by 2050. “I think the energy part of that journey is just about under control,” he tells the second-year geography students.

More difficult, Parker says, is reducing methane and nitrous oxide emissions, although there’s hope.

Unfortunately, in a climate emergency hope won’t get you very far.

DISCLOSURE: The writer owns a very small number of shares in Meridian Energy via Sharesies

David Williams is Newsroom's environment editor, South Island correspondent and investigative writer.

Leave a comment