Brian Fallow: Power supply continuity all-important

As an electricity consumer all I want is maximum security of supply at minimum cost. Is that so hard?

Evidently it is.

The sector's regulators have to walk an exquisitely fine line. Err in one direction and the consumer's hard-earned money is wasted. Go too far the other way and investment in vital infrastructure is too little or too late and economic growth is stunted.

Have they got the balance right?

The Government apparently thinks not.

I am assuming here that this week's amendment to the Government policy statement that the Electricity Commission is required to give effect to, and the section 26 notice to the Commerce Commission which it is required to have regard to, were not just empty political theatre. They were intended to change things.

Read our lips, the Government was saying, security of supply is paramount.

Electricity Commission chairman Roy Hemmingway's response is that the commission couldn't take security any more seriously than it already does, and that had the new policy statement been in place it would not have changed the decision to knock back Transpower's original plan for a 400kv line into Auckland.

Energy Minister David Parker denied that the changes to its riding instructions amounted to a criticism of the way the commission has been approaching its task.

It was as much about the failure of the Otahuhu substation that plunged Auckland into darkness as about the Waikato snafu, he said.

Finance Minister Michael Cullen, speaking to Auckland business leaders on Tuesday, was more direct.

There had been a tendency to focus on cost and not enough on security of supply.

"There's little point in saving perhaps $200 million if the cost is to so chill investment in Auckland that you lose more than that a year. The commission was perhaps taking too narrow a view."

The Government also considered the Commerce Commission, in regulating electricity lines companies, was setting levels of return that would chill investment.

The changes to the Government policy statement broadly de-emphasise cost and emphasise renewables and the importance of a grid free of bottlenecks if there is to be effective competition among generators.

Where previously it talked of ensuring transmission made a "cost-effective contribution to security", now it talks of "ensuring efficient and reliable transmission services".

Where previously it talked of producing the services "grid users and consumers want at least cost" the reference to cost has been dropped and there is a lot of language about being "adequately resilient against the effects of low probability but high impact events" and "adequate alternative supply routes to large load centres".

That is code for saying: we really don't like it when the lights go out in Auckland.

And the grid is to be planned and operated in a way that helps achieve the Government's climate change and renewable energy objectives.

The long period when no major investment in the grid occurred was not just one of radical structural change in the electricity sector.

It was also marked by a belief in "distributed generation", the idea that new generating capacity should be and would be built close to where the demand was, reducing the need for transmission investment.

And indeed, gas-fired power stations have been built in south Auckland at Otahuhu and Southdown.

But there seems to have been a sea change, at least at Government level, about the desirability of that approach.

At her post-Cabinet press conference on Monday, Prime Minister Helen Clark said that "distributed generation would almost certainly be thermal and could commit the country to very expensive electricity. Hence the emphasis on renewables."

Maybe she had in mind the risks attending a commitment to imported liquefied natural gas or the carbon price risk around coal.

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Mighty River Power chief executive Doug Heffernan said last week that "the idea that we can rely on distributed generation and we won't need a grid is just nonsense".

The whole industry believed significant reinforcement of transmission into Auckland was imperative.

"Otahuhu was a disaster waiting to happen and it's waiting to happen again."

The extra cost to have a 400kV line into Auckland by 2010, rather than 2020, would lift Aucklanders' power bills by between 1 and 2 per cent.

"For that the lights stay on. What the hell are we waiting for?" he said.

The national grid and the lines companies should be seen as enablers of competition and better outcomes for consumers. Instead, they were looked upon as a source of cost, he said, and we had spent a decade trying to get the cost down.

All the risk to security of supply at this point lay with transmission and distribution, not a lack of investment in generation, Heffernan said.

After a hiatus in generation investment, there was now a lot of new generation capacity in the pipeline from next year on.

Some 7000 gigawatt hours worth of annual output, in fact, which is about as much as demand has increased over the past 10 years.

A big chunk of that is Genesis' gas-fired e3p plant at Huntly but the rest, the majority, is renewable energy, from wind farms or geothermal fields.

The real crunch for fuel supplies would come in the middle of the next decade, Heffernan warned. "Which is why it is eminently sensible to be thinking about LNG."

He painted a picture of a country in a process of transition from a century when fuel for power generation was abundant, to the more internationally normal position of not having the luxury of fuel abundance.

The latest Government policy statement instructs the commission, when considering non-transmission alternatives to grid upgrades, only to consider those which have a high probability of proceeding and where security of supply can be maintained if they are delayed or do not proceed.

And it says the current pressing need for transmission upgrades reflects, in part, insufficient planning and securing of consents and land access rights.

The Government expects Transpower to identify and secure the necessary land corridors and, as far as it can, the necessary resource consents well before they are urgently needed.

What is essential is maintaining confidence in ongoing security of supply, even at the expense of reducing flexibility in investment choices and extra cost for consumers.