The electricity market must bring ‘certainty’, and that means a change

OPINION: If one message has come out loud from the country’s major utilities over the past year, it’s that the market needs “certainty.”

I can only nod furiously in agreement.

But what exactly must the market be certain of?

Well, the country will need to invest heavily in renewable electricity over the next decade to replace fossil fuel production, reduce gas use, and electrify heavy industry and transportation.

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Meridian estimates that more than $ 7 billion will need to be invested in green energy.

And the investment will be less than what is required unless producers can be reasonably certain that they will be able to obtain a fair and predictable return on the total amount of these expenses.

The Ministry of Enterprise, Innovation and Employment estimates that new wind and solar power plants can produce energy throughout their lifespan at a cost of around 6 or 7 cents per kilowatt hour. .

On that basis, it would be helpful if producers were absolutely certain that they could earn a little more than that, maybe 7 or 8 cents per kilowatt hour on these investments.

At the same time, customers – especially heavy industrial users – need the certainty that they will be able to purchase electricity at a reasonable price before converting devices, vehicles and factories to electricity.

Fortunately, given that about half of the country’s electricity is produced from existing hydropower generation, that doesn’t mean they’ll necessarily have to pay the price of the new plant for all of their electricity.

Meridian was content for years to sell electricity to the Tiwai Point aluminum smelter at around 5c / KWh after all, before it was reduced to around 3.5c / KWh.

It would be optimal if electricity buyers could be confident that they would be able to purchase electricity at a wholesale price that reflects the combined production costs plus a fair profit for the generators – perhaps around 6c / KWh once the industry completely wipes itself out from expensive gas and coal.

Of course, there is some debate over the exact numbers.

We could also do with much more certainty that the country will actually be able to meet the government’s target of 100% renewable energy production by 2030.

Right now, Energy Minister Megan Woods describes it as an ‘ambitious’ target, which makes it sound a bit like a target the government wants, but doesn’t expect. really, to achieve.

Finally, we saw on August 9 that consumers also need to be sure that their electricity will not suddenly be cut without warning.

And as the operator of the Transpower system made clear in his review of the August blackouts, this is not something he can currently guarantee – for although he can encourage producers to increase the capacity in times of scarcity, it can not actually force them to turn on generation.

In fact, the snag with the current electricity market is that it has not been good at providing one of the certainties that are important – fair and stable prices for producers and users of electricity, the the certainty that we won’t continue to rely on coal and gas for years to come, or even the certainty of keeping the lights on.

There is, however, a sort of certainty that the market delivers in spades.

And it is the certainty that the big power companies will be able to take advantage of huge production surpluses, realize surplus profits and pay the vast majority of these to shareholders in dividends every year.

But it’s a certainty we don’t really need – at least not quite as far as we have it now.

To be fair to the power companies, they have every right to fear that their returns will become very unpredictable if the government builds a hydroelectric pumping system at Lake Onslow that could store a month or two of New Zealand’s electricity needs. .

Having an electricity reservoir of this size could make supply and demand much more stable, hourly and year-to-year, while eliminating the need for costly coal and gas production. and allowing a greater contribution from cheaper but less reliable renewable sources – all that would be great.

But under competitive market conditions and an oversupply situation, Onslow Lake or something similar could cause generators to wholesale electricity up to the cost of greasing their turbines and turbines. wind turbines and their solar panels free from tall weeds; next to zero.

This in turn creates the risk that producers will stop building new factories if they assess that the project will go ahead, as it currently seems likely, thus creating a bit of a Catch 22.

It is for all these reasons that I believe the government needs to create certainty as soon as possible about the market structure that will prevail in the 100% renewable world.

To its credit, the Electricity Authority touched on many of the current market issues in its wholesale review released on Wednesday, before focusing oddly enough only on the tangential issue of the Tiwai Point aluminum smelter during the review. solutions.

Problems identified included an incentive for producers to under-build new production and an ability for them to charge excess prices for hydropower.

Calls to renationalize generators are understandable, but I don’t think it’s necessary – nor does the government need to own the super-high-speed network.

At this time, I continue to see no better alternative to the “one-buyer market” offered by Labor in 2013 to solve the problems.

A single buyer would see a new state-owned entity – possibly one that also operated Lake Onslow – purchase electricity on behalf of electricity users from generators, including new power plants, at cost. plus a fair profit margin.

This would lead to cheaper and more predictable electricity prices while providing more incentives to invest in renewables and increasing the reliability of power supplies.

But if there is a better way to provide the certainty that producers, consumers and the environment really need, then so much the better, because it’s the end result that matters.

New Zealand has incredible hydroelectric, wind and geothermal resources and – even with a multibillion dollar price tag – over its lifetime Lake Onslow could provide the capacity to store a large amount of electricity to a small fraction of the cost of pumped hydro systems built elsewhere around the world.

We should definitely stand out by competing with cheap green energy, and not just do better than most countries.

A single buyer’s market would mean big changes for gentailers, that’s right.

But change and uncertainty – well, it’s not really the same, is it?