Security of Electricity Supply
This section of the New Zealand Energy strategy contains actions to help meet one of the key objectives of the NZES – to maintain high levels of security and reliability of electricity supply at reasonable cost.
Submitters unequivocally recognised the importance to New Zealand economic and social well being of maintaining secure electricity at competitive prices. For the major energy users, in particular, security and quality of supply is critical to maintaining business confidence and economic growth. Together with affordability it is one of the two key factors underpinning business confidence in the New Zealand energy system and should be a primary objective of the NZES.
This summary of submissions focuses on some key areas submitters commented on and key actions proposed by government to maintain security of supply. Most of the substantive comment was received from major electricity generators, lines companies, those with interests in fossil fuels or renewable generation. Submitters often noted, particularly on regulatory actions currently in progress (e.g. investment of lines companies in generation) that detailed submissions had been made to the appropriate Government organisations on their views and that engagement would be ongoing.
Security of supply in a market context
This section of the NZES set out the key characteristic of the NZ electricity market – the competitive market structure. It notes that no central planning for investment in generation exists. This combined with investment decisions being made by firms in response to commercial drivers can create a perception that the system is insecure.
The NZES notes that the Government has considered a return to centralised decision making arrangements to improve security of supply. Its preferred approach is to improve current market arrangements.
Submitters responded to these comments in a number of ways.
Some suggested that national planning for future developments should be reintroduced with Government calling for the construction of hydro or geothermal resources when additional capacity is perceived to be necessary.
Some Environmental NGO's and individuals suggested:
- a re-evaluation of the use of markets should be undertaken including their role in servicing New Zealand's energy requirements and producing desired outcomes
- steps must be taken to restore community ownership of and responsibility for energy and electricity in particular;
- a cooperative approach and values that will facilitate and encourage more reliable energy production and better energy savings than the current commercially focused system was needed
- measures should be introduced to prevent large generators and electricity supply companies from exerting market power individually or working as a cartel to the detriment of electricity consumers.
The push for greater central planning contrasts with the views of others, both individual, interest groups and the electricity sector who agree with the Governments conclusions that improvements in the current arrangements are more desirable then a shift to centralised decision making.
It was noted that the electricity market is designed to deliver pricing signals that encourage timely investment in generation and to date this has been successful as the lowest cost generators have generally been brought on line at an appropriate time.
Several major electricity generators confirm that the competitive market is delivering the required growth in generation to meet market demand, and that security of supply issues are less of an issue than they have been in recent years.
Some electricity companies, both generators and lines companies, note that the current market arrangements, particularly price volatility in dry years, can affect the public perceptions, both consumer and investor, of security of supply. They recommend ongoing education so there is a better general understanding of the market, its mode of operation and the role of the Electricity Commission in security of supply under the direction of the Government Policy Statement. The Electricity Commission, as market regulator, should have an educative role as one of its core functions.
Interestingly, individuals answering the question on whether more needs to be done on public confidence, were divided equally in their views. It was noted that the Electricity Commission was a step in the right direction and suggested data on reserve capacity and the costs of providing electricity during periods of peak demand be published.
Role of the Electricity Commission
Generally there seems to be a high degree of comfort with the role of the Electricity Commission (EC) as a market regulator. There was no questioning of the need for the EC, though there was some discussion around the division of responsibilities between the EC and EECA. One electricity company considered that the EC role should be more targeted to markets and security of supply with EECA dealing with efficiency issues.
Several companies underscored the need for an independent Electricity Commission given that the Government was potentially compromised through both owning assets (electricity State Owned Enterprises, Transpower and Solid Energy) that are affected by EC regulation, and possibly directly affecting EC policy decisions.
Electricity Market Arrangements
There was limited comment from submitters, though some endorsement, on the regulatory reviews currently underway.
Lines companies supported the review of the Commerce Act regulatory provisions. They note a clarified or modified Act could provide greater incentive and confidence for lines companies to invest where it is efficient to do so.
It was suggested a new initiative for promoting lines company investment in energy efficiency and conservation. They suggest s57E of the Commerce Act be amended to allow pass through of a portion of costs associated with lines company investment in energy efficiency and conservation. Currently line companies are discouraged from investing in energy efficiency because this can reduce demand and therefore income.
Several submitters stressed that the EC market design review to be conducted in close contact with consumers and address a wide range of options for price responsive demand. Major energy users thought the scope of the review should be broader. Another submitter considered protracted market reviews by the Commerce commission and EC was a potential cause of regulatory instability.
Lines company investment in generation
Lines businesses continued to oppose regulation in their area and support the direction of the Government's proposed changes to the Electricity Industry Reform Act 1998 (EIRA) to make it easier for lines companies to invest in generation in network areas outside their own. It was noted, by lines companies, that the proposals to date fall short of what is fully required to encourage generation investment. They note that the proposals for board directors to sit on both lines company boards and arms length boards of a generation company and the removal of constraints on hedging and spot trading are positive. However, restrictions or barriers such as accounting separation and restrictions on local area retailing still exist, that are likely to continue to hinder investment in distributed generation.
It was suggested that ongoing concerns about anti-competitive behaviour associated with own network wholesaling and retailing could be addressed through specific regulatory measures.
Another suggestion was that a distinction be made between community/consumer owned businesses and private companies as the community/consumer businesses will naturally act in the interests of their owners when compared with a profit-driven monopoly. In those cases it was suggested that lesser regulatory compliance requirements could be applied.
Major electricity generators had mixed views on liberalisation. Some gave qualified support for the proposals but reiterated their view that lines companies should not be able to own generation facilities or provide retailing within their own networks. Those opposed cited:
- Ongoing risks of monopoly lines businesses using their position to reduce competition in the contestable segments of the electricity market by favouring their own generation or retailing activities over competitors.
- The underlying rationale – to facilitate greater investment in the electricity industry leading to greater supply – is flawed. There is no evidence to indicate a shortage of parties willing and able to make timely investments in new generation.
- Section 81 of the EIRA, which enables lines businesses to seek an exemption for the provisions of the Act, is sufficient to enable variations from the EIRA requirements.
Generation Sources
There was much discussion regarding the appropriate energy mix to meet the two pronged objectives of the NZES – security of supply and reductions in greenhouse gas emissions.
A recurring theme was that the NZES should focus on and recognise the range of and diversity of all New Zealand's indigenous energy sources – renewable and fossil fuel alike – and their ongoing importance in meeting the strategy's objectives. Indigenous supplies of gas and coal are essential to the security of supply of electricity which in turn is critical to the New Zealand economy. The NZES, some thought, downplays their role.
Of note were concerns about:
- the need to recognise the ongoing and critical role of thermal generation in providing security of supply
- under recognition of the role of gas in the strategy which has the potential to disincentivise fossil fuel generation, exploration for both oil and gas (gas often being a by product of oil exploration) and investment in infrastructure.
The discussion in this section focuses on these concerns, plus responses to the Government's proposed actions in relation to wind generation development. More detailed discussion of the feasibility of a 100% renewables future is covered in the section on low emissions power and heat.
Ongoing Critical Role of Thermal Generation in Security of Supply
Many submitters across the sectors recognised and acknowledged the need for thermal generation in the electricity system. The degree to which thermal played a role varied.
Electricity and lines companies and the fossil fuel sector considered that gas and coal will continue to play a critical role in future generation and future energy use. They gave a number of reasons for this view including
- provides flexible, reliable weather-independent generation
- is characterised by high efficiency, especially in terms of co-generation or tri-generation
- it can be located close to the market it supplies reducing the need for transmission upgrades and reducing transmission losses
- provides a low cost option that can benefit the economy in terms of future generation.
They also suggested that a balanced mix of thermal and renewable electricity for security of supply and affordability was needed, wind being a key part of the mix. This was supported by submitters from consultant and interest group sectors.
A submitter from the major user sector said hydro with thermal back up (mainly gas) will form the backbone of our generation system in the medium term. Grey Power submitted that thermal generation should be used to conserve hydro so that winter peaks could be met.
Within the renewables and interest group sectors there was general agreement that there was a need to have a high level of renewable generation with a number of submitters saying that all new generation requirements should be renewable and a significant increase in renewable generation should not compromise security of supply. Thermal generation plant should not be allowed except to provide security of supply to the national grid. One renewable submitter considered that it is not only technically possible but also economically desirable that at least 95% of New Zealand's electricity generation be derived from renewable energy resources.
Role of Huntly Power Station
Electricity sector submitters considered that Huntly had a number of advantages because of the nature of the plant and its location. It can provide a frequency keeping function, peaking and emergency generation, is located close to the Auckland load centre and avoids further reinforcement of the transmission line into Auckland.
It was pointed out that the market is unlikely to force the cessation of Huntly generation. It will eventually compete on a purely short-run basis in contrast to the renewables which require recovery of the long run costs.
A submission from an academic group noted that a rising price of carbon should eventually squeeze coal fired Huntly out of the market but the resulting higher power prices may hurt the economy. A more proactive approach is to have Huntly move to a dry year support role with appropriate commercial arrangements with Genesis and the market. (This would incur extra cost to the sector, recovered, perhaps by a levy.) Under this scenario it would afford certainty for additional renewable energy to replace Huntly coal.
If Huntly is displaced then there could be major investment in peaking plant (probably diesel-fired because of the lack of a suitable supply of gas) and this could be counter to the emissions goals of the strategy.
Other points made were:
- co-firing Huntly coal with biomass is a possibility
- as the percentage of wind generation increases it is expected that increased reserves will be required to manage stability and frequency. Huntly coal could assist (on agreed terms) as experience is gained.
The Role of Gas
There was a widely held view amongst electricity companies, gas companies and the fossil fuel sector that the NZES does not recognise the fundamental importance of natural gas in NZ energy system. It was noted that:
- there is a conflict between efforts to encourage gas exploration and signals that gas is an emitting fuel to be displaced. The signals contradict other Government initiatives aimed at encouraging exploration
- while parts of the NZES focus on gas for electricity generation the efficiency benefits of direct use are insufficiently recognised
- the importance of gas to NZ security of supply, particularly with the variability of most of our renewable power sources, is under recognised
- gas is a cleaner energy source then coal and can have a significant role in reducing greenhouse gas emissions for the electricity sector. These sources of generation should be dealt with separately in the NZES.
The consequences of the mixed signals in the NZES could be:
- a perception that the demand for gas will reduce in the future which will discourage investment in exploration for both oil and gas (with the risk of greater reliance being placed on coal or imported LNG as the alternative energy option)
- a risk that long life investments in the gas sector could be stranded
- a reduction in the viability of infrastructure investments, the gas market and erosion of the skill base. In the future the gas market could benefit from new carbon capture technologies putting it on an equal footing with renewables. This situation should not be foreclosed.
Powerco and Vector had jointly funded a substantial study by NZIER on "The Gas Sector and the Energy Strategy". This recognised market failures in the form of both non-reflection of emissions cost and of the value of security of supply, which justified a measure of market intervention. However the report saw a risk that efforts to restrict new non-renewable capacity risked scoring an ‘own goal'.
Specifically the NZES proposal "is likely to:
- increase the probability that gas will be imported into New Zealand for use in electricity generation
- encourage the replacement of gas-fired reserve capacity by diesel-fired standby generators, with adverse economic and environmental consequences
- increase the price volatility of electricity in New Zealand and raise the average cost, with adverse economic consequences and
- Encourage calls for further intervention by the government to cap electricity prices and to build reserve generation capacity."
It was suggested that the strategy should:
- reconsider the critical role for gas, including direct supply
- recognise the role gas can play in reducing greenhouse gas emissions by replacing coal-fired generation
- Create and maintain an economic environment that encourages investment in domestic uses of natural gas reserves as this is critical to encouraging exploration and development of gas in NZ. To develop these discoveries a significant domestic market for natural gas, such as for electricity generation, is necessary in order to permit co-extraction of the high value liquids and further increase energy self sufficiency.
- Ensure NZ remains attractive for new exploration and production investment
- endorse direct use of gas. Lack of endorsement acts as a disincentive for investment and consumer choice
- recognise the benefits of different uses of gas – residential, commercial, industrial and electricity generation.
Geothermal Energy
Several submitters stressed the importance of our geothermal resource. There are abundant resources that can be consented and developed. It was considered that geothermal should be acknowledged as a strategic resource.
Geothermal is a renewable energy source that can provide base load generation, adding to security of supply. It does not however have the flexibility to counter the rapid and significant swings in wind generation. While there are some CO2 emissions, they are low in comparison with thermal generation.
Many future developments will have some benefit for local Maori interests by virtue of their land ownership (and kaitiakitanga role) within the geothermal fields.
It was suggested the exploration for geothermal resources would be encouraged by developing a regime that protects the investment of prospecting parties. The minerals discovery and development regime was cited as model.
Wind generation and security of supply
The NZES notes that at current levels, wind generation is not yet a source of supply risk though a significantly larger share of wind generation could make supply less secure. Further work is to be undertaken by the Electricity Commission to assess the impact of wind generation development and wider power system implications.
This work was endorsed by submitters. The work will help understanding the impacts of significant renewables and the necessary infrastructure requirements that will be required to support greater reliance on wind generation. It was suggested the NZES should address the reliability of wind in much greater detail as a component of the overall power system, not in isolation.
Submitters with strong interests in wind generation noted that a geographically dispersed generation portfolio greatly increases reliability and can provide a reliable base load (this however was estimated at around 10% of total installed capacity). It was noted that over longer timeframes, wind can be less volatile than hydro schemes. They advocated for greater industry participation in the Electricity Commission project and proposed that government fund development of a wind forecasting system.
Other submitters were more cautious and considered that winds' variability has implications for security of supply, will put pressure on other generation types to make up the shortfall, and can not be relied on to meet peak electricity demand.
The Transmissions Grid and Distribution Networks
There was general recognition amongst submitters from various sectors that a strong and robust transmission grid was fundamental to implementation of the strategy. A robust transmission grid is essential to:
- maintain security and reliability of supply
- enable effective competition in a national market (and thus encourage least cost energy delivery)
- promote and support a range of generation options which are often geographically distant from the consumers they supply.
Four themes recurred across submissions commenting on this issue;
- major investment in the transmission grid is required to enable the NZES vision, with its emphasis on an 100% renewables future, to eventuate
- investment in the transmission grid should precede development of renewable generation as the lead in times for transmission development are likely to exceed those for generation
- a high renewables mix requires a particular transmission grid formation given intermittency – planning needs to commence at an early stage
- investment in transmission infrastructure remains urgent and must be progressed.
Transpower provided a detailed submission on transmissions issues. They considered the NZES should acknowledge the pivotal role that transmission will play in meeting it objectives and recommend a technical work stream be established to resolve complex and critical transmission issues. Other recommendations were:
- "Acknowledge that, in order to maintain security as and when investment in intermittent generation exceeds the limits of the current system, timely decisions need to be made in terms of generation mix, dispatch systems and transmission capacity"
- "Facilitate, clarify or, if necessary, legislate to establish unambiguous property rights for Transpower to maintain, replace, refurbish and augment its grid assets"
- "Provide clear national direction to local and regional authorities on how to achieve sustainable management of transmission assets to allow Transpower to invest in existing assets more efficiently and to acquire designations for likely future transmission investments"
- "Facilitate market investment in generation by ensuring adequate transmission capacity exists ahead of time. This will enable the development of prime areas of renewable resource for generation"
- "Support Transpower and the Electricity Commission to develop an integrated approval framework"
- "Use Transpower's expertise as transmission asset owner, grid planner and system operator, to develop the policy and regulatory framework required to realise the Government's vision for a renewables future."
Major electricity companies noted major investment is required in transmission to enable the vision, one suggested investment in to order of $350M, over and above currently planned investment in the core grid to maintain security of supply.
Several submitters noted that some areas are already supply-constrained. For example, there are capacity constraints with the Taranaki transmission and distribution network which imposes limits on generation from more efficient plants e.g. Stratford cogeneration plant.
There was support for a robust transmission system from within the renewable sector. Wind farms cannot occur at significant levels nationally without a robust and interlocking transmission network, and will often require upgrades to the grid. Government commitment is required to provide a better transmission infrastructure and well defined grid connection rules.
For geothermal energy, reliable infrastructure links are also critical for development, especially into Auckland from the immediately developable high temperature geothermal resources at Ngawha and Taupo/Rotorua areas.
Interest group submitters recognised the importance of the transmission system with comments such as:
- More detailed analysis of energy supply and demand and transmission capacity is required to provide investors and users of the plan that the projections are robust and will assure security of supply, by region, in both the short and medium term. Energy demand growth and peak loadings in the top half of the North Island are considerably higher than the national average. Despite this, geographic distribution of energy demand has not been addressed in the strategy. This is a significant security of supply risk.
- Simplify the regulatory structures and approval processes for transmission.
- The national grid will have an increasingly pivotal role in transporting renewable energy, often from remote locations, to customers. It will also need to balance demand and supply between regions during generation outages as well as balancing supply from wind and other forms of intermittent generation.
Major electricity users also recognised the importance of the transmission system. They supported the role of EC particularly in ensuring investment in the transmission grid. They recognise that much of our generation is far from the loads it serves so a strong transmission system is needed. Adequate transmission infrastructure is critical to providing the flexibility needed to maintain security of supply with a high level of renewables.
Councils of the Auckland region considered that supply is not secure in their region though vital for economic development. Security could be improved by diversifying the location (both within and to the North) and scale of electricity generation (preferably from renewable sources). Resilience of supply could be improved by taking a new approach to grid reliability, one that is customer focused and related to duration and frequency of outages. This could result in further design work to transmission networks to create dispersed multiple pathways to reduce reliance on a few.
Gas Market Arrangements
Little comment was received on this particular topic. It was noted:
- the gas industry needs to develop and maintain a national natural gas contingency plan covering the Maui gas platform failure
- development of a robust wholesale gas market should be a Government and NZES priority and be accelerated. Gas consumers would be able to improve the efficiency of their energy consumption if a gas spot market operated. One submitter noted they operate a spot market with customers benefiting from lower gas prices. A wider and deeper market could develop with appropriate signalling.
- More competitiveness in the sector was sought as gas supply contracts can be inflexible resulting in non-optimal gas utilisation and wastage.
Demand Side Response
Demand side management was supported by submitters from a wide range of sectors including local government, academia, environmental NGOs, interest groups, electricity and lines companies.
Demand management was seen as a key to reducing both emissions and reducing pressure on supply networks and has been underestimated in the NZES.
Energy efficiency and demand management could be more cost effective than new energy supply according to submitters from the renewable and interest group sectors.
The Electricity Networks Association (ENA) pointed out that line companies were incentivised to seek demand response to minimise investment in system reinforcement and transmission charge costs, and help manage load in real time while generator-retailers may actually be incentivised to maximise generation at times of peak price if they are long on generation.
It was noted that the Electricity Commission had work underway in the area of demand side management, how to facilitate demand side bidding and forecasting and work to determine the optimal load management infrastructure in New Zealand.
Demand Side Tools
Several sectors and individuals supported the introduction of smart meter technology along with pricing plans that enable customers to have control over the cost of their electricity.
Electricity and lines companies viewed time of use pricing as a very effective demand response tool. One submitted that prices should signal the marginal cost of supply and had removed all fixed charges except for their largest customers. Winter/summer pricing could be the minimum cost reflective tool that could be introduced. Day/night pricing was suggested by several individuals.
Ripple control was another useful demand side tool.
A range of mechanisms to promote demand-side energy efficiency/response were suggested by the academic sector, including smart metering and household electricity storage technologies. In particular they supported wider use of incentives and/or regulation to facilitate increased energy efficiency throughout the economy, with a particular focus on the residential sector where it is felt there is scope for cost-effective savings to be made.
Lines Companies Role
Line companies submitted their roles could be strengthened by:
- market arrangements giving line company's primacy in load management
- strengthened commercial signals to control line losses, with strong incentives to develop and protect load control investments.
Lines companies also commented that retailers often mute signals sent by lines companies. Making lines charges fully variable does send a signal that retailers can readily pass on.
It was noted that current regulatory controls on transmission pricing mean that locational signals are not accurately passed on.
Other issues
Some other issues and policy suggestions were:
- Concern about line companies not being obliged to supply electricity beyond 2013. NZES should recognise the environmental, social and economic importance of ensuring continuance of supply beyond 2013.
- NZES does not acknowledge the importance of water in meeting future growth in renewable energy. There are issues around maintenance of existing water rights and increasing competition for scarce water resources. Policy regarding allocation of water have implications for climate change and energy policy and should be recognised in the NZES.
- Large scale production of biogas as an alternative to natural gas was not considered in NZES. A working group was proposed to develop a biogas strategy, prepare feasibility study to assess the market and economics and construct a demonstration plant.
- It was suggested the chapter be renamed "Security of Energy Supply" recognising that other fuel sources, particularly gas and its direct use, have a role to play in security of supply.
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