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• Appendix F

• Water

• Waitaki Catchment

• Final Report
• Terms of Reference
• Model Scoping Report
• Project Aqua
• Media Statements

• F.1 Description of Existing Conditions
• F.2 Transition Outcomes, Irrigation Sector Expansion
• F.3 Transition Outcomes, Hydroelectric Generation Expansion
  • F.3.1 Summary of Approach
  • F.3.2 Additional Generation Capacity Sequence
  • F.3.3 Capital Investment for Generation Scenarios
  • F.3.4 Operations and Maintenance Expenditure Associated with Generation Scenarios
  • F.3.5 Other Cash Flows Attributed to Project Aquaf
  • F.3.6 Differences between Concept Consulting (2004) and SKM Analysis

F.1 Description of Existing Conditions

In an average year, the existing Waitaki Hydroelectric system currently generates in the order of 7,600GWh of electricity for New Zealand, approximately the 20% of the current energy demand (MED, 2003).

Table 47 provides an indication of the installed power ratings for each of the power stations, the average annual flow (in cumecs) that passes through the power station.

Note:
1) Based on mean flows from 1927 to 2000

It is recognised that small efficiency improvements have been undertaken at Aviemore Dam (75GWh), and similar improvements are planned for Benmore Dam. This improvement would represent an increase in generation capacity of 3%

If it were to proceed, Project Aqua would represent an increase in power installed of 528MW, with average annual electricity production of approximately 3,000GWh. While it appears that hydrology information over a longer time period suggests an average annual production capacity slightly less than this figure, this could be mitigated though integration of existing irrigation schemes on the south bank of the Waitaki River. This has not been considered in the cost-benefit analysis.

In the scenarios that Project Aqua does not proceed, then alternative energy generation alternatives are available however the order in which they are developed will depend on the energy demand, the long run marginal cost of supply, and the likely location of the generation capacity in relation to the network. The analysis provided below draws upon results of Concept Consulting (2004) and information supplied from Meridian Energy.

As part of the consultancy, the project team was also asked to calculate the likely implications for the upper catchment if additional irrigation demands were permitted.

F.2 Transition Outcomes, Irrigation Sector Expansion

The expansion of irrigation in the Waitaki Catchment could potentially decrease electricity potential of both the existing and proposed electricity generation capacity. The most likely locations for irrigation expansion this are;

• anywhere upstream of the Waitaki Dam will affect the generation potential of the existing asset portfolio.
• with the inclusion of Project Aqua, anywhere upstream of an Aqua power station will reduce the potential for electricity generation, and this includes additional demands in the reaches of the Waitaki River between Waitaki Dam and Stewards road.

It is noted that the Project Aqua AEE (Meridian Energy, 2003) indicated that they had allowed for an additional 25 cumecs for irrigation demand downstream of the Waitaki Dam in part to supply a Downlands type scheme, and also irrigation areas on the North Bank.

From the national perspective, any decrease in the generation potential will require the inclusion of costs associated with alternative generation capacity to make up for shortfalls attributed to additional irrigation demands upon the Waitaki River. The magnitude of these shortfalls can be minimised through integration of existing and proposed demands on the Project Aqua canal. Where a shortfall still occurs, the value of the loss has been based on the price path applicable (with or without Project Aqua) as this represents the cost of next source of additional electricity.

The modelling ignores who is responsible for compensating Meridian Energy for lost revenue with their existing plant, but assumes some mechanism exists to allow this to happen. An indication of the lost revenue to Meridian Energy under scenarios with and without Project Aqua is presented in Figure 9. The method employed assumes that the opportunity cost of the water is the long-run marginal cost of the water (from Concept Consulting, 2004), reduced for transmission losses that are assumed representing the location of the existing Waitaki System.

The results indicate that value per cumec of water increase considerably under a scenario with Project Aqua. This is an important point as it is likely to provide an indication of the likely negotiations that would be required to transfer water from hydro-electric generation to irrigation, once the initial allocation is made.

An observation has been made that even with additional compensation costs that might be applicable to removing capacity from the existing Waitaki infrastructure, it may still be worthwhile for grazing properties to enter negotiations with Meridian Energy that allows irrigation expansion, although the financial returns would be considerably less.

If a water allocation was made to Project Aqua the compensation requirement is likely to increase, and consequently make transfers for irrigation less likely for enterprises based on irrigated grazing.

While broad economic evaluation may demonstrate a particular scheme is viable, larger schemes that depend on economies of scale will be affected if a significant proportion of customers cannot afford the contribution required. If this occurs, it is possible that the scheme will become unviable for the remaining customers and the scheme loses economies of scale.

Figure 9: Comparison of Lost Revenue to Meridian Energy

The salient point to note is that future water allocations must be flexible to ensure maximum productive output from the resource. After allocations are made to private enterprises, the decisions for water transfer will largely reduce to the financial impacts for relevant parties and not necessarily capture externalities that could apply to the nation as a whole.

F.3 Transition Outcomes, Hydroelectric Generation Expansion

F.3.1 Summary of Approach

Concept Consulting (2004) investigated the likely development of generation capacity with and without Project Aqua for the period 2003 to 2050, with residual values calculated at 2020. Given that the economic model that was developed for this process had to extend 30 years from 2003, some interpretation of the Concept Consulting (2004) results has been included. Due to minor adjustments it is expected that some of the results will not agree entirely with Concept Consulting (2004) cash flow projections.

The following provides a summary of the approach taken by Concept Consulting (2004):

• The supply development options…have all been referenced to Haywards to allow ranking and comparison; (see below for explanation)
• For each scenario, supply development options have been scheduled to meet rising demand in "merit" order according to cost, taking into account committed (or highly likely) options and possible project lead times;
• To develop each scenario we have used a quarterly supply and demand "energy balance" model to establish likely system operation across 20 different inflow years from the period 1980 to 1999;
• A "security of supply" criterion has been adopted to establish the timing of new plant options. This is achieved by simulating dry years and timing the development schedule to allow for similar levels of thermal utilisation and "moderate" but not "excessive" running of New Plymouth and Whirinaki on oil;
• The likely pattern of running and calculation of fuel consumption is established across the 20 inflow sequences

The modelling incorporated "location factors" which adjusts the merit of power generation options by adjusting the wholesale spot price with factors representing transmission costs and losses to make power available at a reference point in the system. For the Concept Consulting (2004) modelling the reference point used was Haywards transmission station.

F.3.2 Additional Generation Capacity Sequence

The sequence for capital investment was determined on the basis of assuming a hydro-inflow year in the bottom 5th percentile for both scenarios. The results show that over the analysis period, the Project Aqua's 524MW was replaced by 375MW of alternative capacity while maintaining a similar level of security of supply (Concept Consulting, 2004).

The results are presented in Table 48 and Table 49. As the Concept Consulting (2004) forecasts were restricted to 2020, it was assumed that the electricity demand growth beyond this time was achieved through small increases in co-generation, geothermal, other hydro and wind at the rate of 73MW per year. As will be discussed later, this differs slightly from the methods of estimation for savings achieved in perpetuity calculated by Concept Consulting.

Based upon the generation sequence, the calculations for capital investment, operations and maintenance costs, fuel costs, and emissions charges were as follows:

F.3.3 Capital Investment for Generation Scenarios

Based on the generation profiles calculated by Concept Consulting (2004), the capital investment was calculated. In the non-Aqua generation capacity, standard rates were used for the capital cost, and economic life of the investment (Table 50). It was assumed that capital investment was required in the year before generation capacity was required. The economic life of the investment was used to calculate the residual value of new assets at the end of the analysis period.

For Project Aqua, the cash flow sequence adopted was identical to that assumed by Concept Consulting (2004) with removal of land acquisition and compensation costs.

The national cost benefit analysis incorporates the replacement of assets until such time that Project Aqua would also require significant refurbishment in the residual value calculations.

F.3.4 Operations and Maintenance Expenditure Associated with Generation Scenarios

Based on the generation profiles calculated by Concept Consulting (2004), the annual operations and maintenance costs were calculated for each of the generation profiles. It was assumed that operations and maintenance costs were incurred from the first year of operation. The unit rates provided in Table 51 below were applied to the total installed generation capacity on an annual basis.

The operations and maintenance cost are assumed to be indicative of the average across the 20-year hydro inflow sequence used by Concept Consulting (2004).

While Concept Consulting (2004) adopted a figure of $20/kW/annum detailed information provided by Meridian Energy to Sinclair Knight Merz suggested an annual operations and maintenance equivalent of $14/kW/annum. Due to this variation the Concept Consulting (2004) estimate was adopted with the Meridian Energy data tested as part of a sensitivity test. The Meridian Energy estimate has removed the annual compensation payments to other parties which is not included in the national cost benefit analysis.

Concept Consulting (2004) stated that savings in annual operations and maintenance costs beyond 2020 were realised in perpetuity.

F.3.5 Other Cash Flows Attributed to Project Aquaf

Several other cash flows have been developed with reference to Project Aqua, a description of each is considered in brief below. These emissions costs were calculated on the basis of incremental benefits if the "With Aqua" scenario was to proceed.

• Fuel Costs: If Project Aqua was not to proceed, Concept Consulting (2004) demonstrated that existing and proposed thermal power stations would, on average, need to operate more often assuming a 20-year hydro inflow sequence. This increase in operation would result in greater amounts fuel being used (coal and gas).
• Transmission Costs: Concept Consulting (2004) has suggested that the presence of Project Aqua on the system might require the upgrade on the HVDC link to be brought forward 5 years from 2015. This judgement is considered highly sensitive to the requirements of Transpower, and it is arguable that Project Aqua would not induce any change in the Transpower's planned investment. The inclusion of this benefit is to be subjected to a sensitivity test.
• Reserve Plant: Concept Consulting (2004) recommended, as a matter of a sensitivity test, the inclusion of additional reserve plant to provide supply security. This is to meet the possible requirements of increased variability of electricity supply as a result of augmentation of existing hydro system. This is considered a separate issue to the "without Project Aqua" generation sequence which caters for a specified baseline of hydroelectricity production. Concept Consulting proposed an upper-bound estimate of an additional 32MW if reserve generation installed before 2010, adding a present cost (10%) to the With Project Aqua scenario of $15m. Using similar assumptions, Covec (2004) suggested a mid-range estimate of $9m (31MW over period to 2020), with an upper bound estimate of $85m (250MW over period to 2020).
• Emissions Charges: The Ministry of Economic Development website states that "although an emissions charge is currently part of the preferred policy package under the Kyoto Protocol, the Government has retained the option of introducing emissions trading as an alternative to an emissions charge if the international carbon market is functional."⁶⁴ For this assessment, it has been assumed that benefits attributed to international emissions trading⁶⁵ would be available.

There is still uncertainty about the reserve energy issue and related costs, and it is likely that resolution will require further study and analysis. However, it can be concluded that should reserve requirements increase, then it is likely that the net benefits of Project Aqua will be reduced from the analysis presented above. While additional reserve requirements are not included in the primary analysis, they are included as a sensitivity test.

The cash flows described above have been included in the modelling without modification from the Concept Consulting report (2003). For the period beyond 2020 (to 2050) the annual fuel saving for the scenario with Project Aqua was based on the average between 2018 and 2020.

A residual value of the reserve plant has been calculated as at 2033 if this sensitivity test is performed.

F.3.6 Differences between Concept Consulting (2004) and SKM Analysis

From the discussion above it is clear that several differences exist between the Concept Consulting (2004) analysis and the SKM modelling. Preliminary analysis of the Project Aqua scenario was undertaken to understand the quantum of the major variances. It should be noted that the reconciliation is affected by:

1. the base date for the analysis. Concept Consulting (2004) uses July 2004 as the base date, whereas Sinclair Knight Merz applies July 2003. This has been adjusted in the third column of Table 52.
2. the period of the analysis. Concept Consulting (2004) applied the period 2004 - 2020 for discounting purposes, where as Sinclair Knight Merz applied the period 2003 - 2033.

The other major difference presented in Table 52 is the exclusion of transfer payments. The overall results indicate that Sinclair Knight Merz revises the net present value to the economy to $149m, a increase of $49m from Concept Consulting (2004).

Clearly, the largest difference is attributed to the capital investment in generation. This is due to two main factors. The first is associated with the period of analysis as Concept Consulting (2004) calculations assumed a period 2004 to 2020, whereas this investigation has constructed the analysis to 2033 using information contained in the Concept Consulting (2004) report. The second variation is the removal of compensation amounts that Meridian is negotiating with affected parties. From the perspective of a national cost-benefit analysis this represents a wealth transfer between two parties, rather than any change in the output of the economy. It is important that these amounts are removed from the analysis. Given the sensitivity of this information, further disclosure is not appropriate at this time.

It is also thought that the operations and maintenance values incorporate some amount of compensation that may be payable on an annual basis. Accordingly, this amount should to be removed from the analysis. Concept Consulting (2004) developed independent estimates of operations and maintenance costs from Meridian Energy, and the project team were unsure as to the level of compensation that formed part of this estimate. A sensitivity test has been performed representing the potential variation of the operations and maintenance costs attributed to Project Aqua.

The major difference in the operations and maintenance benefits between SKM and Concept Consulting (2004) is that the latter applied the average benefits between 2018-2020 to represent ongoing benefits beyond 2020. The current investigations profile assumed a stable power investment schedule beyond 2020, such that where the operations and maintenance benefits are averaged over the period 2030-2033, these benefits are slightly higher, and consequently the residual included in the analysis is greater also. Both of these impacts increase the value of operations and maintenance benefits included in the analysis.

The emissions benefits are included in the base set of assumptions for the national cost benefit analysis. The difference in the SKM and Concept Consulting estimates result from differences in methodology applicable to the operations and maintenance estimates described above.

⁶⁴see Emissions Trading.

⁶⁵Analysis completed by ABARE (2003) assesses the economic impact of various scenarios relating to international emissions Economic Implications of the Kyoto Protocol for New Zealand [New Zealand Government link] [150 KB PDF].