New Zealand’s electricity market is structured in such a way that generator retailers are incentivised to keep supply scarce rather than plentiful, two energy analysts say.
But this is an avoidable problem according to energy analyst Geoff Bertram and consulting engineer Bryan Leyland.
Listen to the full interview
The problem could be avoided by setting up a separate market for dry year energy reserves, Leyland says.
“We always need to have a national insurance policy of a whole lot of reserves sitting there in case it's a dry year.
“At the moment, nobody gets paid for holding a coal stockpile doing nothing and only get paid when it's needed. But what we need is to pay them every year as an insurance policy.”
New Zealand pays too much for its power, Leyland says.
“The particular market model that was chosen is largely to blame. It just isn't suited for the New Zealand electricity situation.”
It's in the generator’s interest to keep the system on the edge of a shortage, Leyland told Nine to Noon.
“We should have a sufficient supply and not a marginally enough supply. If it rains, we should have better reserves.”
He believes a more fundamental restructure of the market is needed.
“If you set up a separate market, running alongside this one, for dry year reserves, it would help a lot. There is an alternative, which is abandoning this market and adopting the market that was originally recommended to the Wholesale Electricity Market Development Group - which is called a single buyer market.
“Nobody likes it because they say it's a return to government monopoly. That is actually not correct, they don't understand how it works.”
The single buyer would coordinate the market and ensure that all generating plants that are built contribute to providing a reliable and economic supply, Leyland says.
“That doesn't happen now.”
Energy analyst Geoff Bertram agrees that the electricity market has a structural problem.
“We've set up a market in which the incentive for the owners of generating plant is to coordinate in such a way that the market is always in scarcity, rather than to coordinate in a way that gives us ample supply and resilience against dry years,” Bertram says.
Individual generators are not incentivised to build extra capacity, Bertram says. The single buyer is one solution, another is a return to government ownership, he believes.
“If you cast your mind back 35 years to the way we used to run the system, it was designed and run by engineers as a social service.
“And it was it was reliable and very high quality and low priced.”
The weakness in that model was barrier to entry, he says.
“Achieving entry for newcomers has always been a really important issue. And to get dry year resilience one of the really important things that we're going to have to do in the future is to bring in as much small scale distributed generation opportunities that are out there as possible.
“That does mean things like people putting solar on the roof and being able to get enough of a return on that, to make it worth their while. It does mean independent small wind farms being able to be set up. And the way the market is currently structured, is actually obstructing the development of that resilience.”
The market has failed to signal the need for extra capacity in dry years, he says.
“Another signal which would have been taken on by our by our planning system, but it's not taken on by corporates with a profit motive, is that for the last 10 years we've known that a dry year was coming eventually. But we haven't put in place the capacity to deal with it.”
New supply has failed to materialise, he says.
“Those companies who talk a big game about all the wind they're going to build. They're sitting on over 2000 megawatts of consented wind farm opportunities that they haven't built.
“Many of those consents have been in place for a decade or more. And the simple fact of the matter is that by sitting on those wind farm sites, they've closed out the opportunity for newcomers to build wind farms. And at the same time, they've held back the expansion of our renewable energy base.”
New entrants to the electricity market could include the old electricity supply authorities, which became network companies.
“That's one bunch of corporate entities at local level who could be coming in if the legislature framework was a bit more relaxed for them to build community generation schemes.”
Micro generation is another opportunity, he says, as is new entrepreneurs coming to the market.
“There are companies I'm sure who would be prepared to stake-up the cost of a medium-sized or even a small-size wind farm if the sites were available.”