Water way to go

Keith Turner

The only known cure for rising power bills, it has been said, is to send teenage offspring off to live in a flat.

That might work for some households, but for the economy as a whole the threat of higher electricity prices and a more hand-to-mouth power supply is harder to deal with.

Significantly higher costs and reduced security of supply are predicted if a proposed regime to manage the Waitaki River is adopted.

The warning comes from Meridian Energy, which runs the hydro-electric scheme on the South Island river that generates about a quarter of the country's power.

But it is endorsed by other power companies and by an independent study by the Institute of Economic Research commissioned by the Major Electricity Users Group, Business New Zealand and the Business Roundtable.

The Government, which last year set up the body that has come up with the plan, is also voicing alarm about it loud and clear.

The draft plan produced by the Waitaki Catchment Water Allocation Board would roughly double the minimum flow of water required at all times downstream of Meridian's dams.

It would also raise by 2 metres the minimum level below which the water in Lake Tekapo may not be allowed to fall.

These requirements would dramatically change the way Meridian manages the hydro scheme, slashing its effective storage capacity, especially going into the winter when demand is greatest.

This is a problem because New Zealand gets most of its electricity from hydro-electric sources, but the hydro system has little storage capacity as it is, leaving it vulnerable to variable rain and snowfalls.

Two of the upper Waitaki hydro lakes, Tekapo and Pukaki, provide about 62 per cent of the national hydro storage capacity of 4000GWh which, in turn, equates to only about 10 per cent of the electricity consumed last year. One gigawatt hour is enough power for 100 households.

Meridian chief executive Keith Turner said: "The minimum flows proposed by the Waitaki allocation board would require us to keep in the lakes storage of somewhere between 600 and 1500GWh to enable us to meet the minimum flows under dry sequences. We have no rights to breach the minimum flows. I go to jail."

He said it meant keeping up to 40 per cent of the country's hydro storage locked up just in case of another dry year like 2001, 1992 or 1976.

On average, less electricity would be produced from the Waitaki, Meridian said in its submission on the board's draft plan.

Generation would shift from winter, when demand is greatest, to summer, when demand is relatively low.

There would tend to be more generation at night and weekends, when demand is lower than during the working day.

Instead of being able to conserve water in the summer, it would have to send it through its turbines and down the river, regardless of what spot market prices were signalling about demand. In the winter, it would have to hold water back so that the minimum flow constraints could be met under extreme conditions, losing the ability to meet peak winter demand.

In effect, the system would be managed not to reduce the risk of power shortages in winter, but to ensure that the flow of water in the lower Waitaki never fell below the minimum level the board has specified.

The institute says that more water will be spilled, that is, sent down the river without passing through a turbine. Estimates are about 200GWh to 300GWh in an average year, and up to 1000GWh in a wet year.

Wholesale electricity prices are likely to be significantly higher, Meridian says, at least in the short to medium term before new thermal generation is built to replace the lost production and peak capacity.

"Over this period, the average winter price ... is expected to increase more than summer prices fall. This would result in higher overall energy prices for consumers."

The institute says that, in the short term, there is likely to be a price spike as the market adjusts and new thermal generating plant is built.

"In the longer term, the level of prices may well settle. It is certain, though, that there will be a real permanent cost as a result of the loss of relatively cheap hydro flexibility."

More water in the dams does not necessarily mean more security of supply. "Meridian is not able to use that storage at its discretion to gener ate electricity. The water must be used for river purposes," the institute says.

As a result, the Electricity Commission, which is the body responsible, insofar as anyone is, for keeping the lights on, will have to reassess how much reserve generation capacity is needed.

"We have traditionally been a power system that is energy constrained, that is we depend on how much water we get," Turner said. "But what this minimum flow will do is make us capacity-constrained in winter, particularly in years that are drier than average. We will have to put in more thermal power stations to meet winter peaks. That will increase prices."

Turner estimates that 300MW of new peak capacity would be required to substitute for the capacity lost in the Waitaki system.

That is the equivalent of two Whirinakis, the $150 million diesel-powered reserve plant commissioned last year.

Such plants are comparatively cheap to build but expensive to run. Alternatively, new capacity in the form of a "mid-merit or hydro-firming" thermal plant could be built, with higher capital costs and lower operating costs.

Either way, it is capacity needed not to meet growth in demand for electricity but to replace flexibility which is already there.

A common concern in the submissions from the power companies, business groups and the Government, is that they cannot discern in the allocation board's draft plan the scientific or environmental basis for raising the minimum flow requirement from 120cu m a second (which is what Meridian's existing consents require) to 200cusecs in winter and 230cusecs in summer.

The whole-of-Government submission says a flow of 200 to 230cusecs would not maintain the integrity of the river system. It was likely to result in fewer, more incised channels rather than maintaining a wide, braided riverbed.

 

The Government recommends a minimum flow rate of 120cusecs, in line with Meridian's existing consents, be set for the lower Waitaki. It said that would be more consistent with the natural flow of the river than 200 to 230cusecs, which is based on the average flow in the modified river system.

The Government submission also says the planned minimum flows will impact on the security of supply for existing irrigators and could jeopardise foreshadowed irrigation schemes.

Turner said at present water might not be available for irrigators less than 1 per cent of the time. "Under the board's regime, it would be 30 per cent of the time. You can't run a farm on that sort of reliability. And, of course, dry conditions are just when they want the water most."

Another concern about the board's plan, expressed by the business groups as well as Meridian and its fellow-generator, Contact Energy, is the impact on existing water use rights. No compensation is proposed for this loss of value.

"It would send a signal of regulatory uncertainty to prospective investors in the electricity sector as well as other sectors that depend on access to resources," Contact said.