Ministers are demanding the reasons for this week’s unprecedented electricity market breakdown – but their next challenge will be solutions.
ANALYSIS: Maybe not downtown Auckland. And maybe not Marsden Point near Whangārei (Refining NZ ruled that out last week). Maybe not anywhere prone to tsunamis, or earthquakes – but could there be a place for 21st Century-technology nuclear power generators in New Zealand’s electricity grid?
Before you shout me down…. actually, you know what, go ahead, shout me down.
But there are those calling for nuclear power as one of the more sustainable solutions to New Zealand’s broken electricity market. More on that later….
Two small electricity retailers, Electric Kiwi and Haast Energy, have now lodged formal complaints to the Electricity Authority following Monday’s rolling blackouts. They accuse the big gentailers Genesis and Contact of abusing their market powers by withholding generation capacity.
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The grimmest impact of this week’s black-outs and brown-outs was on those elderly and vulnerable community members left shivering on their coldest night of the year. The costliest impact was to those spot market consumers paying unprecedented prices for their electricity, and according to Genesis Energy boss Marc England, the million dollars his company lost by being short in a difficult market.
The most positive outcome, though, is the debate that must now ensue about how to fix an electricity market that most now acknowledge is broken. If they didn’t before, they do now.
So here are six of the best – or at least, six of the boldest – proposals for mending the market so there is less danger that in a dry year, the lights will again go out.
1 / Building a capacity market
At present, most companies pay this month’s power prices. Some even pay the minute-by-minute price on the spot market. But what if distributors and industry were required to buy three-year contracts for electricity, the prices agreed in advance?
Some, like Tiwai Point aluminium smelter which uses a massive 600MW of power, already do long-term deals. That doesn’t help with immediate crises like this week, when there was not enough power to meet record demand. Tiwai Point received its customer advisory notice, like everybody else, inviting it to reduce usage – even a 1 percent cut would have made all the difference. And like almost everybody else, it did nothing.
But in a capacity market, where power deals were done in advance, generators would have the certainty and the surety to build new solar farms and wind farms and more, to increase the country’s baseload generating capacity – and provide reserve capacity for dry winters and unexpected crises like the blockage of the Tokaanu hydro plant on the coldest night of the year.
A smaller, more conservative step in that direction would incentivise companies to sign multi-year deals in advance, but wouldn’t make it mandatory. That’s likely to be more palatable to policy-makers like those at the Electricity Authority who are embarking on a review of how the electricity market works.
2 / Paying for a strategic reserve
Marc England did say that if the market settings had been different, Genesis might have had an additional 250MW coal-fired Rankine unit running every day, meeting the baseload requirements of a dry winter and low hydro lakes. Then the 50MW gas peaker could have been kept in reserve to quickly fire up in emergencies like Monday night.
That would require the electricity market to be redesigned so power companies are paid to strategically reserve power for emergencies – for instance, by stockpiling coal, storing gas, or holding water in the lakes.
Transpower network boss Dr Stephen Jay points out to Newsroom that the company already buys 6-second and 60-second reserves from power generators; in addition, says England, there is an internal industry market of “swaptions” in which Meridian hedges by buying reserves from Genesis. But some in the industry, like consultant Bryan Leyland, argue for strategic reserves in which consumers pay generators, through levies or their power bills, to hold back power for crises.
According to a paper by Concept Consulting director David Hunt, such targeted mechanisms are used in Australian, the UK, Germany and Sweden.
Hunt, a former Contact Energy chief executive, says they are intended to directly support last resort capacity. But one key issue is that market participants often alter their private investment plans to take allow for the strategic reserve, meaning there is no aggregate increase to capacity.
New Zealand had such a scheme from 2004 to 2010. It was shut down, Hunt says, in part because it reduced incentives for market participants to manage their own risks, or to invest in peaker plants. Those hurdles are difficult, but not insurmountable.
3 / Restacking the prices
This solution would not just be embraced by the bosses burning coal at Huntly, but also by those who fear that big generators may cynically manipulate the market to bolster their bottom lines.
One is Newsroom reader John Irving, who asks why didn’t Meridian and Contact didn’t have more hydro capacity online, even if it was only for spinning reserve. “I suspect they were again gaming the market by only bidding in enough power so that Genesis would have to eat the peak at a higher price they could all benefit from,” he argues. “They simply miscalculated when the peak jumped by about 300MW.”
What he’s referring to is the market design that sets the price for power at the level of the last, most expensive generation required to meet demand. So if Transpower needs to source the last 1 percent of its power from Huntly, then that high price sets the bar for the other 99 percent. Coal and gas are far more expensive than renewables – so the hydro generators are laughing all the way to the bank as they claim the much higher coal price for their far cheaper energy.
Suffice to say, Meridian and Contact Energy reject any accusation they gamed the market, and there’s no evidence to support that claim. They say they bid in all their available generating capacity, and Meridian even cancelled an outage at West Wind farm in Wellington to help meet Monday night’s demand.
But regardless of whether that market model is played cynically or in good faith, it doesn’t deliver the best prices to consumer.
The alternative, argued by Marc England and others, is to pay generators what they bid in their power at. If Transpower needs Huntly’s coal power to keep the lights on, then the market will pay Huntly’s price for that power. But clearly, the market will prefer to pay the lower prices charged by Meridian and other renewables whenever possible.
4 / Using Onslow to top prices
Back in 1978, the NZ Electricity Department constructed a 220 MW gas turbine power station at Whirinaki, in Hawke’s Bay. Some argue the underlying (and fulfilled) vision for Whirinaki provides a model for today.
Bear with me on this one. I’m not arguing for new gas power plants. Those will never again be cost-effective, even if the Government threw climate caution to the wind and resumed gas exploration.
But the argument is that quick-start generation capacity, like the gas turbines at Whirinaki, could be used to provide emergency supply and to “top” the power price market. Because Whirinaki was publicly-owned, until its remaining parts were sold to Contact Energy in 2011.
With Whirinaki in reserve, and under government control, the Minister was able to fire it up if and when required. That’s an ability Energy Minister Megan Woods doesn’t now have, because the power plants are no longer run by government departments.
No discussion of dry winters would be complete without talking about the proposed $4 billion Onslow pumped hydro scheme.
But the suggestion here goes a step further: rather than just pumping the water uphill and keeping it in reserve for dry winters, the Minister could also use it as a strategic reserve to effectively cap wholesale prices – or, with sufficient warning, to switch on in crises like this week.
5 / Splitting up the gentailers
Small power retailer Flick has launched a petition to break apart the so-called gentailers. Its chief executive Steve O’Connor argues that the dominance of a small number of gentailers is hindering independent investment in new renewable generation capacity, with adverse consequences for achieving a 100 percent renewable electricity target.
And this week, he won the backing of small retailer Electric Kiwi and wholesale energy trading firm Haast Energy, which lodged formal complaints with the Electricity Authority. They accuse Contact and Genesis of abusing their market powers by withholding generation capacity on Monday night, and say it’s time to break up the big gentailers.
“Genesis claim that they covered their own customers’ needs, and evidently, they feel they have no responsibility to other Kiwi families and businesses to keep the lights on,” said Luke Blincoe, the Electric Kiwi chief executive.
As proposed, it would be similar to the way Telecom was split into lines company Chorus and retailer Spark. The big power companies like Genesis and Contact and Meridian would have to split their generation arms and their retail arms into separate companies.
“The blackout is a grim foreshadowing of what could await us when demand increases … The system is failing on reliability, sustainability and affordability.”
– Steve O’Connor, Flick
O’Connor is fed up with the big gentailers supplying power to their customers at sweetheart rates that aren’t available to competitors. Independent retailers already buy all their electricity from the spot and hedge markets, and are price takers and net buyers when growing their customer base. He wants all retailers required to purchase electricity on the same markets as independent retailers, without any internal arrangements.
“We believe the current market is incentivising gentailers to keep the supply-demand balance very tight,” he says. “The blackout is a grim foreshadowing of what could await us when demand increases, and in future not only will our homes be impacted but our electric transport fleet too. The system is failing on reliability, sustainability and affordability.”
6 / Regulatory changes for big batteries
What’s to stop the Government and power companies calling up French renewable energy giant Neoen or Elon Musk at Tesla, and asking them to build one or two big batteries – like the 300MW “big battery” purchased by the state of Victoria, in Australia?
That could quickly inject power back into the Grid when there are shortages like there were this week, or when another power generator trips.
What is stopping it is existing regulation that is understood to treat a battery as load, not generation. Clearly that’s wrong: a battery is a load when it’s drawing power from the grid, but it’s generation when it’s pumping it back in. And to be fair, the Electricity Authority is understood to be looking into this very problem.
As with solar power generated by homes and businesses, it’s important the system is set up to allow big and small players alike to sell back into the network, as well as draw from it.
Bonus ball: Nuclear power …
Then there’s nuclear. We’re not even putting a number on that.
At last week’s Refining NZ special general meeting, shareholder Charlie Hong argued Marsden Point was well-placed for developing nuclear power. “It’s time to change our thinking,” he told Newsroom. “We shouldn’t see it as risky anymore.”
Hong, who also invests in South Korea’s government-owned nuclear power plants, said there were benefits like being near a skilled workforce. (The workforce of Whangārei may disagree).
And Hong is not alone. Former energy minister Max Bradford was the architect of the 1998 retail market reforms, that broke up the power companies so consumers can now choose where they buy their electricity.
Regrets, he has a few. For instance, he wishes he hadn’t handed the gentailers control of metering. If consumers had been allowed to run their own meters from day one, he says they would have had better visibility of their power use to help them shop around. That would have made it harder for the gentailers to maintain such high prices.
But in large part, he is one of the few who doesn’t think this week’s outages were a market failure. Rather, he says, they resulted from bungled communications between Transpower, the generators, the lines companies and the retailers. Not to mention a dearth of information for consumers.
So he doesn’t think it’s the market that needs fixing; rather it’s the ability to quickly compensate for a loss of renewable generation, when the rain fails to top up New Zealand’s shallow lakes, the wind stops blowing and the sun goes behind a cloud.
At such times, we need big new batteries to store and release our renewable energy – or we need modern nuclear power generation. He argues the technology has come on in leaps and bounds since Chernobyl or Fukushima was built. It’s smaller, it’s safer – though he still wouldn’t put one on the earthquake faultline or anywhere exposed to tsunamis. That does rule out most of mainland New Zealand.
But perhaps the people of the Chatham Islands might like a nuclear power plant atop the 241m peak of Rangiauria? We’ll leave that debate to the politicians….