What the energy shortage shows about future power supply

[author:emma_ricketts]

New Zealand's recent energy shortage sparked several urgent conversations about increasing supply to shore up security in dry years.

And with EVs and industry electrification expected to push up demand going forward, the country could be looking at a renewable energy boom.

But getting the projects from proposal to operational was key, and sector experts say New Zealand is a long way off an energy system that is comprised entirely of renewable sources.

The government wants to reduce processing times for consents, but according to economist Geoff Bertram, there are bigger issues at play.

"The incumbents, the people who already own the system, have no incentive to expand their capacity beyond the point where there is an ongoing scarcity of supply which keeps the price up."

It goes beyond a simple question of supply and demand, he added, with the market acting to incentivise keeping gas in the mix.

"If we don't have gas or coal in the system, then under the current market arrangements, the price of electricity will come right down."

"This is because the electricity price is set according to the most expensive operating cost in any trading period and the most expensive operating costs are those of coal and gas.

"If you're the owner of a hydro station or a geothermal plant or a wind farm, it costs you nothing to run your farm once you've got your capacity installed. All the money you get for the electricity you sell is just pure profit."

Octopus Energy chief operating officer Margaret Cooney agreed that these market structures have worked to disincentivise investment in recent years.

The crux of the problem is a lack of competition in the sector, she said.

"If you want to build new generation, you need to have a counterparty that will contract with you to take the load.

"That's necessary to get financing for any project. But with so much of the market concentrated in the four main players, if any new generators come in, they really need to be able to get contracts from them, and the gentailers aren't going to do anything that lowers their returns."

Projects sit in the pipelines

If all the renewable energy projects that have resource consent, but not underway were developed, they could produce at least 4000 GWh per year.

That was nearly double the amount of electricity that Wellington homes use in a year.

At least 65 percent of that generation capacity is in consents held by Mercury, Genesis and Contact.

Mercury holds resource consents for three wind farms: one in the Puketoi Range, another near Dargaville, and one for the second stage of an existing farm near Lake Mahinerangi.

Puketoi and Mahinerangi consents have been held for more than 10 years.

Mercury executive in charge of development Phil Gibson attributed this slow progress to stagnant electricity demand and uncertainty from the previous government's Lake Onslow proposal and the Tiwai aluminium smelter.

"Those two things together constitute about 30 percent of New Zealand's energy demand - 15 percent of introduced energy and 15 percent of removed energy," he explained.

"That provides huge uncertainty that provides to the investment ... literally, your investment is not needed if either of those two things happen."

But Cooney said there has been clear signs of growing demand for several years, with retiring infrastructure outstripping the new generation coming to market.

"For six years we have had strong signals to build new generation, but very few projects could get off the ground and the gentailers have been comfortably enjoying escalating prices," she said.

"Any excuses from the gentailers around the gas ban and Onslow are simply red herrings."

Now, Mercury is forecasting increasing demand out to 2050, Gibson said. But he wanted to manage expectations around New Zealand's renewable future.

He said the proposed wind farms at Puketoi and Mahinerangi would not have saved New Zealand from the recent energy shortage.

"They definitely help, but the real question is: where is the investment in the thermal fuel and thermal plants that are needed to support a long-term build out of renewables?

"I think a system that is 100 percent renewable is still a long way off. If we take ourselves beyond 2050, maybe well beyond, it might be viable.

"But we are going to need traditional, dispatchable and reliable thermal generation for at least another 20 years."