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• 3. Electricity Generation

• Energy Modelling

• Modelling Papers

• Supply Cost & Availability

• Renewable Energy: 2005 Edition
• Fossil Fuel Generating Costs
• Renewable Sources 2002
• Generating: Technical Note

• 3.1 Grid-Connected, Embedded and Islanded Generation
  • Grid-Connected Generation
  • Islanded Generation
  • Embedded Generation
  • General Comment on Embedded Generation within this Report
• 3.2 Renewable Resource Development Costs
• 3.3 Renewable Resource Availability Estimates
• 3.4 National Electricity Supply Curve Data
• 3.5 Comparison of Electricity Supply Curve Data with That of the 1993 Ministry of Commerce Report

3.1 Grid-Connected, Embedded and Islanded Generation

For a detailed discussion on grid-connected and distributed generation options and the paradigm shifts that have seen a recent proliferation of distributed generation, refer to Appendix C.

Broad relationships between the various generation options are shown in Figure 1. Renewable energy options can make a contribution within any of these areas.

Figure 1: Relationship between Generation Options

Grid-Connected Generation

Any generation that is synchronised to the grid can be said to be "grid-connected". Thus a small photovoltaic cell on a home may be grid-connected.

Islanded Generation

Islanded generation refers to generation that feeds a load that is either not connected to, or which has been disconnected from (or is remote from) the local electricity grid or network. These systems can function well, as long as the equipment supplied by the generator has been appropriately designed for the delivered voltage and frequency (even a direct current supply is possible). Examples could include a remote farm, or a company that has made a strategic decision to operate on its own supply and operates disconnected from the grid. In these applications there is no interaction between generation, load and the national grid. A risk is introduced in that generator outage (if not supported with backup generators) will result in failure of electricity supply with resulting effects on factory/business operations.

A grey area exists where the load can be either grid-connected or islanded. Examples of this include use of backup generators in hospitals, prisons, factories, hotels or pumping stations.

In the short to medium term, islanded generation is expected to be only a small contributor to the national electricity supply. Where it can be used to progressively isolate a site from the grid, it can have an impact on peak load management and can affect peak price on the spot market if on a sufficient scale.

Embedded Generation

Generation can be connected to the grid at a range of levels, each with their own costs and benefits.

Traditionally, large power stations have directly fed into the national grid through a dedicated substation (Grid Injection Point) at transmission voltages. Generation is generally too great to be absorbed by the local network company's system. This would not normally be considered embedded generation.

Many of the renewable energy options are in the 5 to 100MW class. Depending on location, there may be opportunity to feed this directly into the network company's system. There is a potential match between many of the renewable generation options and local network demand allowing embedded generation. The lower voltage associated with embedded generation can make better use of existing transformers or lead to a lower cost transformer.

Embedded generation will help to offset losses and capacity constraints associated with transmission and distribution of electricity. There may be opportunity to be rewarded for this system service.

In some cases, generation may be installed in a factory, office or home. In some cases this electricity generation would be simply netted off the load. In other cases it may be sold back to a retailer (usually one that supplies the load) through the network company's system. Benefit would be site-specific and a strong function of the local tariff structure offered by the site electricity retailer (including any pass through or other basis for pricing lines charges).

General Comment on Embedded Generation within this Report

Capital costs used in this report for the various electricity generation options are those associated with the appropriate level of grid-connection. Because of their size, some of the renewable generation options will be embedded. These and other factors have been fed into the cost supply curves.

The uptake of some renewable generation will be a strong function of the network companies' desire to accept (and both the network and retail companies willingness to promote) distributed/embedded generation through appropriate tariffs and/or investment.

3.2 Renewable Resource Development Costs

All projections in this report are based on generic costs, or cost estimates which have been published previously. As projections, they are subject to considerable uncertainty (±30% would be expected for any one project). However, because these estimates are based on past developments, they have been checked with industry trends, and are across many projects, the overall result is considered to be reasonable.

Capital costs are discussed in the resource reports (Appendix A and Appendix B). A wide range of cost sources has been consulted. Values associated with most confidence have been converted into New Zealand dollars of the time of the estimate. These have then been escalated to current dollars.

Operations and maintenance costs have been estimated on a similar basis. As a rule, O&M can be considered to be largely fixed with little variable component for the range of applications considered here.

Exchange rate costs have an impact on the cost of imported components. This affects both capital and maintenance. Assessments have been made of the proportion of the total cost that may be affected by exchange rate changes.

For a detailed description of the derivation of the capital and Operations and Maintenance estimates, refer to Appendix D. Appendix D also outlines the inputs into unit cost modelling. Unit cost modelling was carried out with a weighted average cost of capital (WACC) set at 5% and 10% as requested by the Ministry of Economic Development. A comprehensive set of estimates for each WACC and confidence level has been derived and is given in the resource reports (Appendix A and Appendix B). These have been used to develop the cost supply curves.

Table 3, based on the discussion in the resource reports, shows the assumed relationship between generator size, capital cost and O&M for each technology.

Table 3: Cost Estimates for a Range of Resources

The unit costs used in this study are levelised unit costs for each project life. For a project this unit cost is derived by taking the present value of costs, i.e. capital, O&M, tax, depreciation (including tax benefits of depreciation), fuel (where applicable), and dividing it by the present value of the kWhs generated over the lifetime of the project. No revenue stream is included in this calculation.

3.3 Renewable Resource Availability Estimates

A key output of this report is an assessment of resource availability. The total resource on a primary energy basis was outlined in Table 2 of section 2.3. Detailed discussion is given in Appendices A and B. To obtain estimates of resource availability on a consumer energy basis, the conversion efficiencies associated with each relevant technology have been applied (details are given in Appendix D). Tables 4 and 5 below give the resulting resource availability estimates.

Table 4: Potential Resource Available (Consumer Energy) at less than 15c/kWh⁸ (MW)

Table 5: Potential Resource Available (Consumer Energy) at less than 15c/kWh¹¹ (GWh/y)

3.4 National Electricity Supply Curve Data

The resource availabilities and unit cost projections have been combined to form electricity cost supply curves. These are presented in tabular and graphical form below.

Underlying these curves is the assumption that levelised unit costs will mark entry points into the wholesale market. As electricity demand in concert with the generation available to the grid lead to wholesale electricity prices projected to be similar or higher than the assessed unit costs, then the next least expensive generation option will be taken up to supply the demand.

Table 6: 2012 Cost Supply Curves by Technology 10% WACC Medium Confidence Level (GWh/annum)

Figure 2: 2012 Cost Supply Curves by Technology

Table 7: 2025 Cost Supply Curves by Technology 10% WACC Medium Confidence Level (GWh/annum)

Figure 3: 2025 Cost Supply Curves

A comparison of Figures 2 and 3 shows that:

• Hydro resources are fixed in quantity and in price. The lowest cost hydro block (at 4-6c/kWh) is all associated with Meridian Energy's Project Aqua.
• Geothermal resources are significant in the 6-8c/kWh band. These include a number of high temperature field developments. The quantity available is greater in 2025 because this gives more time for staged development.
• A low cost (2-4c/kWh) geothermal option exists based around increased utilisation of the Poihipi Rd station using steam from the Wairakei field (requires additional resource consents).
• Some wind resource becomes available in the 4-6/kWh cost band in 2012. However, the technology is maturing resulting in progressive lowering of costs, such that more of the resource could be in the 4-6c/kWh cost band by 2025. In practice, much of the prime resource in this cost band may have already been developed before 2025. The total available wind resource by 2025 is slightly greater due to more resource being brought in under the 15c/kWh cut-off point.
• Biomass can make a small contribution in the 4-6c/kWh range (associated with landfill gas projects). In 2012 the woody biomass resource is not available until the 8-10c/kWh cost band. Its uptake could be helped by its ability to embed in the local network, and perhaps to assist network alleviation for the new mills that must be developed to process the large quantities of new timber becoming available in the coming period. The added volume of timber processing increases the quantity of process residue available with time. In addition, the price of woody biomass developments drops with time due to maturing technology.
• Solar hot water heating is seen to make a small, but significant contribution above 12c/kWh. Given that this technology competes at the retail end of the market, and that it is currently competitive, then the opportunity for increased uptake could be significantly greater if electricity market prices increase.
• The above discussion is based on assessed resources at 10% WACC and medium confidence levels. Data in Appendix A should be referenced to see the effect of selecting the high confidence level or alternative WACC values.

3.5 Comparison of Electricity Supply Curve Data with That of the 1993 Ministry of Commerce Report

The analysis above is more than a reindexing of the previous Ministry of Commerce report "Renewable Energy Opportunities for New Zealand". The 1993 report looked forward 20 years to 2013. Some resource has been taken up e.g. the Manapouri second tailrace tunnel. The following table makes a brief comparison between the two assessments at a medium confidence level using the 2012 data.

Table 8: Comparison Between the 1993 Report and the Current Report

⁸Cost is related to a WACC of 10%. Other factors influencing assessment include elimination of remote sites or sites for which consents will not be obtained, practicality of installing options, previous expressions of interest/commitment, current utilisation.

⁹Confidence is treated cumulatively e.g. medium confidence resource includes that available with high confidence also.

¹⁰Landfill gas resource confidence is high but there is later discussion about the price.

¹¹Cost is related to a WACC of 10%. Other factors influencing assessment include elimination of remote sites or sites for which consents will not be obtained, practicality of installing options, previous expressions of interest/commitment, current utilisation.

¹²Confidence is treated cumulatively e.g. medium confidence resource includes that available with high confidence also.

¹³Landfill gas resource confidence is high but there is later discussion about the price.

¹⁴Woody biomass, landfill gas and other biomass options have been aggregated for this table.

¹⁵Woody biomass, landfill gas and other biomass options have been aggregated for this table.

¹⁶Energy quantities are on a consumer energy basis.