This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
Four centuries ago, theologians wondered how public virtue could be generated from private vice – they meant selfishness or, more euphemistically, self-interest. In his Wealth of Nations, Adam Smith gave an answer which posited a mechanism which reconciles the vice and virtue.
The mechanism was competition. As Smith famously observed, ‘it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’ Because the suppliers are each privately competing against others, the public benefits. Economics has gone on to identify when the competition mechanism works beneficially. Its answer is ‘sometimes’ – even often – but not always.
One issue is how many competitors are required in a market? If there is one – a monopoly – the answer is that it is unlikely that private vice seeking profits will result in the public benefit. At the other end of the spectrum, under pure competition, where there is a myriad of small suppliers, the answer is more favourable to the public interest. However if there are economies of scale in production or distribution or there is a high rate of innovation, the pure market may be a low productivity one, so that there are gains from having fewer players.
How few? A common view was that there had to be at least five significant players. Fewer, and the players would ‘game’ one another with an overall monopoly-like outcome in which consumers suffered. That suggests public regulation to ensure private vice delivers sufficient public virtue. Even when there were five or more suppliers, there might a need for public interventions in order to ensure ‘workable competition’.
Workable competition is a term which hardly appears in New Zealand’s public discussions, the notion having been trampled on by the neoliberal framework which abhors public intervention. It is easier to take this hands-off stance in the US, whose economy is fifty and more times larger than New Zealand’s. Even so the US seems to be going through major changes in its competitions policy thinking.
The reality is that for many New Zealand markets there are not enough players to let competition rip; looking to the US is hardly a good place to start thinking about the problem.
As it happens, New Zealand has five significant electricity gentailers (generator-retailers). Does that mean the electricity market can be left alone? But the rule of five is only a rough indicator and there is a particularity in our electricity which means it does not easily apply here. Implicit in the standard model is the assumption that all the players have access to the same production technologies.
That is not true for the gentailers. In particular, the supply of one – Genesis – is centred on a coal-fired station at Huntly. All the others are more dependent upon hydro-power. Huntly has a special role in our system. Because its thermal units have to be run much of the time – even when there is not a drought – it broadly sets the price of electricity. The economics is complicated but that the gentailers admit they game one another tells us that it is not the competitive market that Adam Smith had in mind.
What should we do? Could we increase the number of gentailers? But that would not reduce the special role of the Huntly station – the rule of five suggests we need five independent thermals. More promising is that we need to restructure the industry to, in effect, be a monopoly regulated in the public interest. This not to rule out private suppliers, but competing generators would sell to a monopoly public agency who would then onsell to competing independent retailers.
This proposal is not very different from the old system of a state-owned Electricorp (except that generators were largely state-owned). The restructuring in the 1990s was heavily influenced by market theories based on financial markets (and certainly financiers are having a great time in the current electricity system). Producing electricity is very different from producing financial paper.
The case for restructuring the industry is strengthened by major future changes. Here are some.
The Huntly coal-fired stations will have to close in order to meet our emission commitments.
Replacement supply will mainly come from solar and wind farms. Currently market arrangements favour corporate farms but I shall not be surprised if, despite industry protests, we make it easier for others – farmers, houses and commercial buildings – to contribute to the grid.
A general problem with the dependence on hydro, solar and wind power is that their generation does not always match demand. To some extent, we can ‘store’ electricity in the hydro-lakes but that is increasingly insufficient to deal with the mismatch, an effect which will be compounded when Huntly closes. Fortunately the cost of battery storage is coming down. The state of Victoria is already installing ‘Big Battery’, a 300 MW grid-scale battery storage project in Geelong. (Each Huntly turbine is 250 MW.) As costs come down, small solar and wind suppliers will have their own on-site batteries.
There is the Lake Onslow proposal which would increase hydro-storage capacity. Its economics is likely to be undercut by the batteries. When the government asked for comments, each of the big gentailers argued against the proposal on the basis – to put it crudely – that it would upset their profitability; as you would expect from private-vice considerations.
The closure of the Tiwai aluminium smelter will release Manapouri’s electricity capacity equivalent to about a sixth of total generation. What to do with this surplus? One proposal is to use the energy to produce hydrogen for export, a logic which would be favoured by the private vice of the gentailers because it would not threaten their current pricing (and profitability) arrangements. Another option would be to send the electricity north. (I am told the capital cost would be only $600m; the Lake Onslow proposal is about $4b plus reticulation.) That would mean that we could close Huntly faster and cheaper but it would hurt the other gentailers’ profits.
There is a danger that the current review of the electricity industry arising from the recent blackout will (once more) fumble the issue by looking at how to patch the current system rather than considering the major restructure the future requires. It takes a lot of courage and competence to face such a future rather than hide from it. The Clark-Cullen Government showed it when it restructured Telecom, splitting it into competing Spark and regulated-monopoly Chorus. That facilitated the broadband rollout which, among other things, contributed to the success of the covid lockdown. Can the Ardern-Robertson Government step as confidently up to the plate?
Footnote. The story of private vice and public virtue is brilliantly told in Benjamin Friedman’s Religion and the Rise of Capitalism. Later chapters discuss the rise of the gospel of wealth versus the social gospel, which is the economic theology underpinning America’s current political divide.
Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
54 Comments
All they need to do to regulate the market is require 15-20% production capacity over the peak power use. Plenty of capacity for the bad times and compensates for the cook straight cable being down or generators offline. If nimbys want to get in the way then sweep them aside for national interests as is allowed in many laws including the RMA.
As I pay market rate I can end up paying double. The market is rigged unfortunately. I also have a low power use household so I already have that penalty rate added.
I'd rather not have rolling blackouts and a manipulated energy market. With the drop in the wholesale generation cost everyone would end up paying less. So the result is counterintuitive to what you are thinking.
NZdrs have already paid for it. The first thing the generation companies did after Bradford's privatisation was reconfigure their Depreciation charges away from historical costs to cover future replacement costs, thereby reducing their tax charges & increasing their profits.
A combination of the above government needs to provide competition by building infrastructure required to send electricity north and build oslow to provide battery backup in general compete with existing retailers I don't give a damn about their profits that are provided at the expense of other businesses and the public and nz economy as a whole .
"It takes a lot of courage and competence to face such a future rather than hide from it."
"Can the Ardern-Robertson Government step as confidently up to the plate?"
Don't make me laugh. This government isn't transformational despite it's rhetoric. They won't be doing anything but can kicking and pretending to do something, like sending angry letters to gentailers as a solution. They talk a big game, but I can see them going down in history as the ones that did pretty well with COVID but didn't do much else.
If the gas wells continue their steep decline they may need to build an LNG import terminal or face blackouts. Perhaps Marsden point or Taranaki could be repurposed for this. It would reduce coal burning so is a medium term emissions reduction until more renewables are sourced in the north island.
There is no guarantee that Tiwai (or Huntly) is going to close anytime soon either- price of Aluminium is looking pretty good recently!
For my children, their options include living overseas and merely coming home to visit me in my old age (Covid19 will pass). This is just like pacific islanders coming here for a better life compared with Fiji/Tonga/Samoa. Seen their infrastructure lately?
The demand for well educated people is going to go nuts as the world reopens.
Regarding infrastructure, things started turning south once you replace engineers with accountants.
Agree in the main but engineers are there own worst enemy. Engineers do need to justify most of their decisions financially.
Its Councillors and politicians who poo poo infrastructure needs.
NP sewerage pipe and pumping system from Oakura to NP is a case in point. Estimated at ~$7m and ended up ~$24m. I haven't read any report on it but can likely point a finger at council officials, outside consultants and construction contractors as in the mix for this financial stuff up.
We're still quoting Smith, and referencing competition; we're still talking of 'cost of battery storage is coming down'.
FFS - Brian, if Pundit had allowed the debate, you might be a little further along the cogitation-path by now.
All purchasing-tokens eventually look to be exchanged for the results of energy-expenditure. Is that so hard to understand? If you keep on keystroking ever-more tokens into the system, yet there is ever-less, ever-worsening energy available; you end up with ever-more irreconcilable debt, and/or rampant inflation/deflation/collapse. We need to be measuring in something which is related to the real - and that ISN'T money.
Thus Easton opts 'likely' for chemical/material batteries, over Onslow, because of 'cost'. The problem is not of coast, the problem is of maintainability in the near and long terms. Water-at-height is not reliant on foreign miners, global transport, or a functioning global 'economy'. Water-at-height can be 100% recycled, and is not a contaminant. Onslow is therefore head-and-shoulders better as an option, but because we see everything though economic lenses, we miss this point entirely.
I doubt the Minister has her intellect around this; I'm sure there are hydrogen aficionados in MBIE, and we can probably link that to the FF industry trying for another angle. We also seem to have folk in the Infrastructure Commission - one in bed with a Green, I'm told - who fail this (economics vs physics/depletion/sustainability) test too. Time we raised our cognitive game. Time we looked at it from a Systems perspective,
Figure2 in the first post here: https://surplusenergyeconomics.wordpress.com/
tells us why Easton's 'cost' is the wrong way to look at things. In fact Brian should read the whole thing.
pdk,
I have always enjoyed your posts. I have just finished writing a short paper/essay on The Path to a Green Economy. However, I must now concentrate on other matters. I learned by phone this morning that I have cancer of the kidney and it would be too risky to attempt its removal. It has also spread to my lung.
I may yet return.
First lets just get one thing straight. Closing the Aluminum Smelter will not eliminate our reliance on non renewable energy. Currently 19% of our total power consumption is generated by fossil fuels and this increasing and predominantly coming from highly polluting Huntly coal power. The aluminum smelter consumes 13% of our power production. The shortfall is therefore 6%. At best, we could generate this from Natural gas fueled combined cycle plants at a conversion efficiency of 56%. Without massive investment in Hydro, geothermal and solar power, the increasing demand from electrical transport and population increase will balloon this.
In a perfect world (one run by engineers and not market theory driven economists, populist driven politicians and profit driven investors) There should be practically no wastage of hydro generated power because it is possible to dictate what asset is generating and when. Across the country with strong power distribution network, it should be possible use most if not all energy that is available from hydro generation sources. (If there is no wastage, where is the surplus energy to store in lake Onslow?) This could be augmented as warranted, by installing extra generation capacity at select dams so that higher peak capacity is available to utilize the energy available from heavy rainfall events. The competitive system that we operate under, completely destroys this facility and will naturally lead to wastage through spilled water. The first priority in sorting this problem out is to wade into the whole NZ electrical with size 12 boots on and a sledge hammer and beat it into something more sensible, preferably the government retaking full control. Get this right and the need to spend $4 billion on Onslow may not be quite so urgent.
Onslow is still a good idea as an asset to smooth energy flows as we move to more volatile renewable energy sources and increasingly volatile weather patterns. If we remain stuck with the present stupid market driven ownership and management model then Onslow should never be allowed to fall into the hands of profit driven private companies. It should instead be owned by Transpower who can offer storage to generators or retailers for a fee. Transpower should also be given the ability to buy, store and sell power on it's own account so that it can act a bit like the Reserve Bank and manage the financial and energy stability of the power system. Having said all that, this is a round about way of achieving full control of the system and it would be far more straight forward for the government to just take back full control of the whole system.
We also need to seriously consider how we are going to increase generation to power electric cars and if we go back to open slather immigration, the demand increase will be proportionate to our population increase. (those of you who think that you are saving the planet by buying an electric car at the moment are sorely mistaken. Your increase in the marginal power demand on the country is being supplied by highly polluting coal being burnt at Huntly at a conversion efficiency of 30% less the transmission and losses within the electric car. A good hybrid is far better for the environment because it burns less emitting petrol and the conversion efficiency according to Toyota is 36%
Upvoted just for this: "In a perfect world (one run by engineers and not market theory driven economists, populist driven politicians and profit driven investors)", because its so funny, imagine a world run by engineers, it would be so utilitarian and brutalist :-D
Chris-M is onto it, please can we start listening to him! Regarding electric cars however, since they will 90% be charged overnight, I suspect that would still be hydro, just changing the daily usage curve and hopefully less spilling as a result. With smart management (like they do for hot water systems), surely it's a no brainer. Electric cars are ~90% efficient for energy in to energy out, ICE engines are up to 30% for an efficient diesel, around 20% for a petrol car, so in pure energy terms significantly more efficient. YES there will be line efficiency losses, but probably similar or smaller losses than those from the oil-petrol refining and transport lines extending all the way from the middle east... not to mention the planet warming effects.
Sorry Bobbles but that energy that you think is free over night will not be wasted otherwise. It will just sit as water in the hydro storage dams. Looking at it another way. If that overnight energy is some how free and not going to affect the total energy that we can generate from renewable sources then it must be being wasted now. Is it? If our system is wasting this energy now, then we are not managing the resources properly now and that is a very important problem that we need to address now.
Or another way. when I worked for The NZED, If any dam had to open the spillway gates to spill water, it was consider almost as a crime. It was only ever done when we were forced to by the threat of flooding caused by abnormal weather. So in a properly operating system there should be no consistently available free over night power for electric cars.
Thanks for the nice comments. Indecently I partially agree with you re full control by engineers and technologists. One only has to look at China to see that. However at the moment we live in a world largely run by Economists, Politicians and investors. How is that working out on the kindness front? Having said that, there are a lot of very human and extremely well rounded engineers. I have worked for companies fully managed by them. They leave a lot of other employers for dead. They are not just narrowly driven by money and greed. In this case however it is a totally mechanistic system and could quite happily be managed by just a computer program; written by an engineer of course.
Didn't say it was free, your comment above did mention spilling water (and some of the big power companies have been caught doing it quite often). Yeah, we would have to probably build more dams, but we aren't short of rivers to dam:
Otaki
Waiohine
Clarence
Dam these with decent sized dams and you will probably have enough electricity to power an electric fleet.
Incidentally, ever looked into pumped hydro by building a larger top dam at Mangahao near Shannon and repurposing the existing station? That seems like a better place for it, close to the wind resource which would be pushing the water back up. You could even put a dam across the bottom to store the water, ready for pumping.
Yes we are sure going to need more dams and a pumped storage in the NI would be good at some stage. But they have enormous lead times even when we had the gumption to get things done. Pre-planning, feasibility studies, permits,consultations, legal appeals, detail designs, tendering, construction and finally commissioning. 15-20 years? at best. Given our completely hopeless ability to achieve anything in this country we could just about double this time?? The electric cars that we are buying now will be on the scrap heap by then. We could achieve a lot of solar power pretty quickly, but to do that sensibly so that people will buy into it and fork out to install them will require a complete rethink of the existing electricity market.
Have we got much more geothermal capacity? The service factor on Geothermal energy is high. Ie the number of mWhrs you get per installed MW of capacity is almost twice as high as Hydro and significantly higher than wind. I.E. Geothermal just keeps going and going constantly.
It seems that we are only using 30 % of our potential capacity and it is the cheapest source of energy that we have.
https://nzgeothermal.org.nz/geothermal-energy/geo_potential/
Solar totally has it's place. The thing that fascinates me is if you go to Nelson/Richmond in the summer. The town centres have HUGE parking lots (like the one outside Pak n Save Richmond), that get stinking hot in the summer and have ridiculous solar potential. A win-win would be putting large solar installations across these carparks, doesn't even have to be a physical building, 3 high tension wires between large poles appropriately spaced and solar panels between them. Shoppers are happier because it's cooler, generating tonnes of free energy right in the centre of towns who are using it. Amazes me that we haven't done that to pretty much every large carpark in Nelson/Richmond/Blenheim/Hawkes Bay.
https://www.stuff.co.nz/business/125013458/power-woes-we-need-a-solutio…
"and the topography of the North Island just doesn’t give you the areas of high elevation."
Mind you, "wreck our economy" is a misguided oxymoron..... it's wrecking itself all on it's unsustainable own.
Moving EV charging overnight will happen because it must (and it is a convenient time window were car use is minimal) to avoid a complete distribution network overbuild.
This only really deals with absorbing the new energy required by electric transport and not with the needs created by the removal of alternative CO2 heavy generation and with the conversion of process heat to electricity.
Solar is largely the answer, we will need to move our peaks as we are able to the middle of the day.
Not mentioned in any comments so far is the Government is a 51% owner of most of the gentailers so has significant dividends at risk with electricity reform. It could even work out that taxes rise to cover the lost dividends, which just shifts the cost of your power to your tax bill.
"There should be practically no wastage of hydro generated power because it is possible to dictate what asset is generating and when...."
I'd suggest the market rules could be tweaked to avoid this.
" preferably the government retaking full control." Definitely no. They aren't very good at running companies The govt under labour and national when owning Genesis Meridian etc did very little to improve the market competitive situation. They do love the dividends though.
The most I can think of on the generation side is making Meridian get rid of Tekapo A I think.
Stopping the generators from being retailers would be a start
You are letting ideology get the better of you.
Yes nationalise, no markets are not a reliable and effective way to run crucial infrastructure like our electricity supply, yes governments do lots of things better than markets when not forced to use SOE structures.
The state run power system was certainly far more efficient and effective than the circus that we have now. In 1987 the system was changed to a market model and the year before that, the price was less than 6 cents per unit. now our average price is about 30 cents per unit. There has been very little significant capital expenditure compared to the previous period, so this does not look to me like a change where the customer experienced any benefits from any increase in management efficiency. Just excessive price gouging and short term profit driven management and under investment, to the point that we now have a system that is manifestly not up to the job.
I remember in the mid 80's that the wage bill for Manapouri was about $2-4 million a year. About then it was restructured and the labor force slashed but the savings were absolutely peanuts compared to the value of what it generated. But in the overall picture that was practically irrelevant. It seems to me that the only things that are relevant to efficient generation are capital investment and fuel source. Get that right and any moron with a modicum of common sense could run it efficiently. Seems that the current operators don't even have that.
The system was not more efficient then. I worked for both There was massive overpadding forced by powerful union.
On hydros, wages cost is minor - lost in the noise. For Manapouri, remember they dug the second tailrace tunnel while the station stayed running. They have also totally refurbished and uprated all the generators, some several times in last 30 years. That is a very expensive exercise. All the hydros have had massive overhauls. They are like grandfather's axe.
The price paid to the generators average only about 10c a unit - and that is only the spot market which is about 10% of electricity demand. Rest on long term contracts which is cheaper. . Transmission and distribution costs make up rest of bill, plus writing off the bad debts.. At 10c a unit, still too cheap to build reliable new generation.
The problem with Onslow is that no private company would touch that with a barge pole because (ignoring the consenting issues). It will not be economical to do so. Therefore if built, the govt will fund it because it will not be economical. If operated commercially once built, its operation will not solely be for dry year backups because that would not provide sufficient income. Greed will take over and it would almost certainly be used daily (evenings to cover electric car/bus charging) just like other (lower) cost new hydros would. Therefore, expect it to be fairly empty when called upon in anger. (Its too late by then because to fill it up would require surplus long term hydro GWhrs).
Yes it can.
Singapore is buying solar based electricity from Australia.
https://www.youtube.com/watch?v=KZBaDle5NbU&ab_channel=Asianometry
The Victoria Big Battery had one of its modules go up in smoke during testing. https://www.whichcar.com.au/car-news/tesla-battery-fire-moorabool-austr…
And Easton has an amateur error in his article, conflating a continuous power output with battery capacity. For the record, the Big Battery can supply output for 1 million households for 30 minutes. When not on fire, of course. It will on practice be used to prop up frequency or voltage droops, which given SA's history of thermal base load generation destruction and the September 2016 blackout, is also sorely needed in its neighbour. Some context here: https://www.energycouncil.com.au/analysis/south-australia-s-blackouts-n…
And let's not forget the 12 big dual fuel diesels recently commissioned to be switched in for SA peaks, and to supply black start capability. Dual fuel = gas, diesel. Totally green...... Context from the makers - Wartsila:. https://www.ecogeneration.com.au/storage-is-key-and-so-is-thermal-gener…
Just a belated note in support of waymad here. The original article's comment about Onslow economics "likely to be undercut by the batteries" is totally wrong. It may happen that Onslow economics are indeed undercut by some measure still to be determined, but batteries don't even come close. Scaling up the Victoria battery to the 5 TWh of storage that Onslow would provide, will lead to a purchase cost well in excess of a trillion dollars. And, at some time in the future, another trillion dollars will need to be found when all those batteries need replacing. Not good economics for sure.
Would love to know what happened to cause the black outs the other week.
If you look on Transpowers website it usually shows about a GW of spare hydro capacity in the south island. If this capacity is real, at the price of electricity at the time of the blackout, if they could have they would have generated. If the DC link was maxed out, what is the point of lake Onslow?
Storage. You're mistaking short-term peak-flattening with long-term. They are different animals.
Ultimately, though, we need to divest the 'market-value' thinking of the last 30 years; it was just plain wrong and has painted us - it was inevitable - into a corner. Chris Morris nearly gets it upthread - we had the capacity to subsidise much upgrading. The reason was we we in an era of greater EROEI across the board: https://surplusenergyeconomics.wordpress.com/ (figure 2 - as mentioned - says it all).
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