By Brendon Harre
New Zealand’s energy and electricity system is complicated. It is hard to understand because it requires three variable thinking to solve a trilemma problem.
New Zealand is in a difficult place in the global transition to decarbonised electricity usage. The country has the unique problem of having a largely renewable electricity system that in ordinary hydrological years provides the country with all the electricity it needs, but in dry years, which occur once or twice a decade, there is a winter shortfall that requires the extensive use of gas and coal, and industrial curtailment due to high wholesale electricity prices.
It is a fact that New Zealand’s hydropower has a cycle of variability that is years long. New Zealand’s other main types of electricity generation have the following characteristics, geothermal is good baseload - it has virtually no variability in its rate of production, the economics of its generation is it is best run at a steady rate. Coal and gas fuelled electricity production can be turned on whenever needed, it takes some hours to warm up etc but as long as there is a coal and gas stockpile available then there is no issue with this backup supply. Solar has a predictable daily intermittent cycle with a little added cloudiness variability. Wind has a cycle of variability that is weeks long as weather systems pass over the country. On a seasonal and yearly basis both solar and wind have a predictable level of output.
New Zealand’s recent experience with the electricity transition has been that large industrial energy users, especially in the forestry processing industry, are permanently exiting the market. The reason the exiting businesses give for leaving is high and fluctuating short-term electricity prices. Mercury Energy – a gentailer – denies there is a straight line between energy prices and company closures, yet despite Mercury’s denials energy prices do seem to be a factor.
New Zealand is hoping to expand its electricity generation capacity by 80% in the coming decades to take advantage of the global electrification trend, so it is concerning that large scale electricity users at this early stage are being priced out of the market. This indicates the electrification transition is not going smoothly, and the country may lose out to other places that manage the process better.
Providing energy storage or a ‘battery’ for New Zealand’s entire electricity system to counter the dry year risk would be very expensive. Preliminary estimates of the capital costs for a ‘battery’ that would solve the variable hydrological problem was $16 bln for the Lake Onslow project and $13 bln for a portfolio of smaller projects. The most expensive option of building the giant Onslow pumped hydro battery would have the highest upfront capital costs but the lowest ongoing running costs.
This dry year issue demonstrates the tension between security and affordability. For illustrative purposes $16 bln works out at about $8000 per New Zealand household to provide them each with the equivalent of a 1000 kWh gravitational battery. Also, because households only make about a third of electricity demand in New Zealand this upfront capital cost could be spread across even more electricity users and therefore lower the per household cost. Unfortunately the full report from the NZ Battery Project investigation was never completed because the current government cancelled the investigation six months before its final business case report was due.
Continuing with the status quo means using fossil fuel powered peaker units to cover dry years (and at other times when maximum electricity production is required). In the future this will require importing LNG, as it is unlikely that a new domestic gas field will be found and even if found, like Maui and New Zealand’s other gas fields, over time it will be depleted.
LNG thermal peaker plants will be expensive, the resulting electricity will cost at least three times the ordinary megawatt hour prices, and it also adds the third factor of the energy trilemma problem of not being environmentally sustainable.
LNG imports may have the potential to put a cap on wholesale electricity prices in the absence of major structural reforms…
Meridian Energy chief executive Neal Barclay said on Wednesday that, at current prices, imported LNG could be used to produce electricity at a price of between $200 and $300 a megawatt hour.
So, relying on fossil fuel thermal generation as New Zealand’s back-up electricity supply will have high ongoing operating costs.
The New Zealand electricity market is dominated by four large generating and retail power companies called gentailers. Historically new entrant retailers in the electricity market have struggled because customers want long-term contracts which requires the retailers to buy electricity from the short-term wholesale market. This exposes them to the risk of peak spot and dry year electricity prices.
The gentailers who own New Zealand’s large hydroelectric and geothermal generation and who have the largest customer base are not incentivised by the market structure to solve the dry year problem because the increase in wholesale electricity prices when there is the fear or the actuality of a dry year more than compensates them for any loss in generation they experience during the dry year.
The wholesale market is structured so that if there is an oversupply in wholesale electricity generation then short-term spot electricity prices fall well below the cost to build new generation. This occurs for long periods – months and years – when New Zealand experiences ordinary hydrological conditions. This limits the investment in new generation, even though the lowest cost generation, which is wind and solar has had falling costs for many years.
The electricity market as it is currently configured is always on the precipice of under supply and whenever a dry year occurs (which is highly unpredictable) and supply falls off the cliff then prices spike many times over.
The only way for solar and wind generators to consistently profit from selling on the short-term wholesale spot price market is to store some of their production for times when the market is under supplied, and prices are high. Another possible solution for new wind and solar generators is they could get into the retail business by offering long-term 24/7 contracts to a steady customer base. Both options would require the new intermittent generation businesses to invest in energy storage options. Genesis has experimented with a new electricity contractual product which shows there is market demand for the second option of providing long-term 24/7 guaranteed supply.
Genesis who is the gentailer with the most fossil fuel thermal units has started to provide to the market a guaranteed generation product called the Huntly Firming Option (HFO). Each HFO secures 1 MW of generation, available 24/7, for a fixed price for the next two calendar years. Genesis Energy says demand for its new derivative product has exceeded supply. The power generator and retailer said 85 megawatts (MW) of HFOs have been secured by a number of participants after bids for 270MW were lodged.
In theory, if New Zealand households were to go fully electric, by installing rooftop solar, and switching to all electric appliances including for transport (so electric vehicles) then each household would save $thousands a year and the country would save $billions a year.
There is a campaign for New Zealand to replicate Australia’s rooftop solar success with the claimed prize being the country would save $95 billion by 2040. This was most clearly articulated on a Q+A interview called - The case for electrification – which discussed some of the economics of electrification. Unfortunately, what this campaign does not explain is how these households would get through winter cold snaps when electricity demand is up, and solar production is down. The campaign doesn’t explain the mechanism that would provide a guarantee to purchase electricity when solar households produce excess and would have the capacity to supply electricity when solar households require it, at a tariff price that means for New Zealand’s household sector switching to being solar powered is a good economic investment.
New Zealand is different from Australia. Household peak demand in New Zealand is a extended winter cold snap. In Australia it is a summer heatwave. Australia’s heatwave problem is better aligned with peak solar generation. Even worse, New Zealand’s winter cold snap problem intersects with the country’s dry hydrological year problem. As explained earlier, the current market structure does not encourage the major suppliers of electricity – the gentailers – to solve this problem. Basically, this means that if rooftop solar households want to stay connected to the grid to ensure they have electricity supply during a winter cold snap, then the gentailers are not incentivised by the market structure to provide these households with the tariffs that will allow them to unlock the $thousands in savings that are theoretically available. No entity, including the government can promise the entire household sector that they will supply them with low priced electricity at any time they need it because in a dry hydrological year New Zealand is under supplied with electricity.
The roof top solar campaigners need to stop fudging. They either need to openly say what they are advocating for is households going off-grid which is a viable solution for only a small percentage of people. Alternatively, if they are advocating for a general solution for all households then they need to explain how they will address the security of supply factor of the energy trilemma.
Former Green Party leader James Shaw who since leaving parliament has gone back to being a corporate investment advisor has stated that importing LNG is not the solution for New Zealand’s dry year problem. He does though think that the Queensland Sunshine Hydro company could be helpful if it came to New Zealand. It is worthwhile looking further into the model behind his suggestion, because it has several interesting features that could in a localised manner address New Zealand’s energy trilemma problem.
Sunshine Hydro’s business model like the Genesis Huntly Firming Option offers a 24/7 long-term electricity supply solution to its contracted customers. Unlike Genesis its business model achieves this by using carbon free energy sources – large scale wind and solar. It firms its renewable energy generation in several different ways. Firstly, with much smaller scale pumped hydro projects than the giant Onslow proposal (because the intermittent cycle is only days long), secondly it proposes it will invest in intermittent hydrogen production for ammonia or methanol purposes, and thirdly with clever software that balances demand and supply operations. The third option of using distributed energy sources, including EV batteries, and ripple control of air conditioning and water heating could be a quite effective virtual battery that many places are innovating with.
Source: The Power is in your hands!
I am not convinced about the economics of producing hydrogen from intermittent renewables at this stage, but there is huge global pressure to find a use for excess solar and wind production which frequently drops to basically nothing in price. So maybe there will be progress in this area.
Separate to the hydrogen industrial production issue, it would make sense for the Sunshine Hydro business model to have a diversity of customer types because industrial and commercial electricity users have different demand profiles to households, so there are offsetting opportunities. It might be advantageous, for instance, for an industrial company to agree in advance to a planned winter shutdown in exchange for guaranteed lower priced electricity during the remainder of the year. This opportunity arises because on a seasonal basis solar production is predictable, there will be more generation in summer relative to winter, and on the demand side, households predictably use more electricity in the winter than in the summer. Also note there are already some large-scale offsetting users who naturally only consume electricity during the summer, such as Canterbury’s irrigators.
Building a localised energy store to convert solar’s daily intermittent cycle to a 24/7 baseload supply could be an affordable option for a localised customer group. This group could build storage systems relatively cheaply compared to the costs of a seasonal or yearly storage battery for the whole of the electricity system – such as Onslow. It could also be built at a lower cost compared to thousands of households having to buy and install their own energy storage systems.
How could this work?
The nature of New Zealand’s geography is the sort of elevation difference needed for pumped hydro is quite common. Recently I took a multi-day train journey from Stockholm to Copenhagen, to Berlin, and then to Warsaw. I saw plenty of wind turbines, rooftop solar, and large fields of solar panels, but I rarely saw steep hills (with a gradient of at least 1 in 10) that had a height drop of greater than100m which affordable pumped hydro requires.
This indicates to me that low-cost pumped hydro gravitational storage batteries could be a competitive advantage for New Zealand.
The basic formula for gravitational potential energy is mass times gravity times the height difference in metres. The website Omni has a potential energy calculator. On this website you can select the energy store units that the calculation produces – joules, watt hours, calories etc - kWh is a good option because it allows comparison with batteries used in home solar systems.
I spent a few hours on topomap.co.nz looking around my local area near Christchurch for potential small-scale pumped hydro sites. I relatively quickly found one that I liked. It may not be the best location, a more thorough search could find many alternatives which might have better characteristics, but it seems quite good.
I quite liked the hilltop by Bossu Road 400m above Lake Forsyth. Although, I think there could be dozens, if not hundreds of equally good sites for small scale pumped hydro in the Canterbury area where I live. Most regions in New Zealand would have a similar set of opportunities.
My thinking was a reservoir could be built similar to those in Waipara wine valley that are approximately 200m by 200m in surface area and about 4 metre deep. This would store 160 million litres of water.
Which given the necessary civil works, such as a penstock pipe and a bidirectional generator pump could store 174,000 kWh of energy. This is over 10,000 times more storage capacity than a home solar battery would achieve. Ten thousand lithium batteries for home solar systems would cost over $100m (note buying and installing solar panels would double or more this cost). The capital costs of the pumping and generating station, the penstock, and the reservoir should be significantly cheaper than that. So this one pumped hydro project if it was paired with something like the $104m Canterbury Lauriston Solar Farm could provide an affordable 24/7 electricity supply solution for over 10,000 household customers. This is about 5% of the homes in Canterbury.
It may make commercial sense to build a larger reservoir on the site that uses the full dimensions of the hilltop and is much deeper – increasing the water and therefore energy storage capacity many times over. This would cost more but these costs would be spread across more customers. A full commercial business case would determine the sweet spot for how much to invest in civil works. Queensland has fully committed to a number of pumped hydro projects so there are civil works contractors in Australasia with the expertise to do this work.
Luddington Pumped Hydro Scheme
For instance, the Luddington pumped hydro scheme above Lake Michigan has a reservoir that is 30m deep. It was built in the 1970s because local nuclear power plants were steady state power generators. The local electricity company needed to store excess energy overnight, so they built the pumped hydro scheme. More recently they have invested in upgrading Luddington because they want to store excess solar and wind energy. There is a good video which describes this history.
If the Sunshine Solar business model did come to New Zealand it has the potential to be a significant market disrupter.
It is possible the dry-year and energy security risk more generally could shift from being a New Zealand wide consumer problem to being a specific gentailer producer problem. Each time wholesale electricity prices spiked because of fears of under supply then consumers would leave the gentailers who have the highest energy security risk and shift to more reliable and more affordable Sunshine Hydro type suppliers.
On a personal basis as an electricity consumer, I would be interested in the competitive effect of this potential market disruption. I would certainly consider buying my electricity from a Sunshine Hydro type supplier. I would also consider investing in such a company rather than paying to install and maintain my own household solar and battery system. Additionally, I think my KiwiSaver provider should be investigating this sort of reliable return long-term investment.
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