Power firms’ building plans need a jolt
Capacity lag is propping up prices and hindering Govt’s green priorities
The last big power station to be added to the electricity system was five years ago: the 26 turbine, 60 Megawatt windfarm owned by Meridian Energy at Mill Creek, west of Wellington.
Commissioned in 2014, the path to the Meridian board’s investment decision dated back more than a decade. A resource consent application to build the project was first filed in 2008. It was another six years before its turbines were spinning.
Good things take time, especially where major infrastructure and the Resource Management Act are involved. Environment Minister David Parker cited the need to consent windfarms more quickly as one of the many objectives of the sweeping RMA review he announced yesterday.
No significant new renewable electricity capacity has been added since Mill Creek because, coinciding with the 2008 global financial crisis, New Zealand broke a decades-long link between economic and electricity demand growth. The economy grew but electricity demand didn’t — until recently.
The power stations completed between 2008 and
Mill Creek in 2014 added a cushion of excess supply that produced a prolonged period of low, stable wholesale electricity prices.
That allowed new entrant retailers like Flick Electric and ElectricKiwi to enter the market without the risk of volatile wholesale prices sinking them in a flash and leaving the field clear again for the traditional big-five generator-retailers: Contact, Genesis, Meridian, Mercury and TrustPower.
As all this was happening, gas and coal use in the electricity system also fell, because so much of the new electricity was produced from geothermal steam — a source of the stable 24-7 baseload generation that secure power systems usually get from fossil fuels.
According to last week’s Interim Climate Change Committee’s report, that trend to more renewable electricity will keep rising from around 87 per cent now to 97 per cent, just by letting the electricity market work as it is now.
However, that market has been getting tighter. Instead of writing long-term supply contracts at $60 or less per Megawatt hour, as they could earlier this decade, big industrial electricity users are looking at $90-plus under current market conditions.
Where $50 to $60 per MWh had often been the norm in recent years, wholesale spot prices have risen to sit above $100 per MWh in most parts of the country.
These signals are not lost on the generators. Mercury will break ground on the first stage of a 300MW Turitea windfarm near Palmerston North later this year while 20 per cent Mercury-owned Tilt Renewables has announced a new 130 MW, $300 million windfarm near Waverley, with an offtake agreement to Genesis Energy.
Contact Energy, whose Te Mihi geothermal power station brought 166MW of new production to the grid just before Mill Creek, has been drilling the undeveloped Tauhara geothermal steamfield since earlier this year with a view to a new build.
Across the sector, generation development teams that had been slimmed down or ejected are being reassembled and plans being dusted off as the electricity sector prepares for the next generation of new power stations.
But is it happening fast enough? That question is something major electricity users focus on. While the country’s single biggest consumer of electricity, the Rio Tinto-controlled aluminium smelter at Tiwai Point, has a fixed price contract for most of its demand, its recently reopened fourth potline pays for electricity on a formula linked to spot price trends.
And at heavy electricityusing sites such as New Zealand Steel’s Glenbrook mill and Ravensdown’s plants, the Methanex facility in New Plymouth or the oil refinery at Whanga¯ rei, recent price increases equate to tens of millions of dollars in higher electricity costs.
They will be keen, if not anxious, to see wholesale power prices falling from current levels — all the more so as the Government’s commitment to a low-carbon economy implies exponential demand for renewable electricity is going to grow far faster from now than it did in the last decade.
That is the assumption behind the ICCC’s recommendation that the Government back “accelerated electrification” of the parts of the economy driven by fossil fuels. In transport, that means either electric vehicles, bio-fuels or the emergence of a hydrogen economy. For industrial users, that means converting from oil and gas to electricity or biofuels for processing heat.
Now, there is embryonic talk among major users about the potential to change the game on the incumbent power generators by jointly tendering a sizeable new chunk of demand to be met by new renewable generation.
It’s an idea that’s been tried before and foundered. Big users can talk a big game about future demand but putting that in a binding contract with other parties is a big extra step.
Then again, a government wanting accelerated electrification to occur might well consider how it could encourage such an outcome.
With the final result of the Electricity Pricing Review just a few weeks away, Energy Minister Megan Woods must find it tempting to give this price-cutting dynamic any shove she can.