A pumped hydro storage scheme at Lake Onslow in Central Otago may well be an idea whose time has come.
It is certainly worth spending the $30 million the Government plans to on investigating the national cost/benefit case for it.
Let's start with the big picture.
If we (mankind)are to stop doing the dumb things which are rendering the planet inhospitable to ourselves as a species, among the things that will need to change is to use electricity for a wider range of things than we already do, including propelling vehicles. At the same time, we will need to decarbonise the way in which electricity is generated. That much is conventional wisdom.
At a national level, we start from a low use of electric vehicles but a relatively high share — over 80 per cent — of electricity from renewable sources, mainly hydro.
The closure of the Tiwai Point aluminium smelter is grim for the people of the far south, but from a national point of view it is the 21st century equivalent of striking oil.
Given the distinct possibility that the oil companies will decide it is cheaper to supply their NZ customers with imported refined product rather than poking crude oil through a relatively small and old refinery at Marsden Point, the best use of the energy freed up by the smelter's closure may well be in vehicles. Import substitution to compensate for the loss of a major exporter.
The automotive industry seems to be going that way. And for at least some city-dwellers, transport is liable to be increasingly seen as a service to be consumed rather than something which requires spending tens of thousands of dollars to buy the mechanical equivalent of a carriage and team of horses, which will spend almost all of its economic life doing nothing but take up space, tie up capital and depreciate.
The earliest adoption of EVs is likely to be for vehicles that spend more of their time on the move, like municipal buses, cabs and courier vans, where higher capital costs are offset more quickly by lower operating costs.
Certainly, it is idle to assume that Tiwai's closure will only result in a glut on the supply side of the electricity market and not elicit a demand side response.
But as for increasing renewables' share of generation, there are a couple of problems relating to security of supply.
One is the intermittency of wind and solar, necessitating some kind of storage. The other is dry year risk, when a lot less rain and snow than normal falls in the catchments of the hydro schemes, especially given their relatively limited storage capacity.
The Lake Onslow project's proponents argue that it would address both those issues. It would be huge, with a storage capacity of around 5000 gigawatt hours and a generating capacity of 1000 megawatts, usefully capable of rapid response if large chunks of generation elsewhere drop out of the system.
To calibrate the scale, 5000 GWh is what the smelter consumes in a year and roughly matches the gap between hydro generation in a normal year and a dry year.
"Some time in the next 10 years the ageing and costly Huntly power station's coal units will close and falling wholesale prices post-Tiwai will cause the closure of other, gas-fired power stations that fill in the gaps when there isn't enough storage in hydro storage lakes," says Keith Turner, a former chief executive of Meridian Energy and member of the interim climate change committee.
The committee recommended the Government investigate the potential for pumped hydro storage to eliminate the use of fossil fuels in the electricity system.
But when Energy Minister Megan Woods announced the study last Sunday, her language was less stringent: "While pumped storage was recommended for further investigation by the interim climate change committee, it is important a range of options to solve the dry hydrological year problem and find ways to decarbonise the energy system is explored."
Dealing with dry year risk and decarbonising generation are not the same thing.
The generators, with vested interests to protect, will no doubt argue that the cost of pumped storage at Lake Onslow — roughly estimated at $4 billion — needs to be compared with the status quo, which relies on having large gas-fired plants operational and plugged into the grid, available to take up the slack in dry years.
Those plants have the twin advantages that their capital costs are sunk and they are in the right island, relative to demand.
The flip side of that is the way in which the electricity market works means that the more often fossil-fuel plants are the marginal generators which set the wholesale price in any given half-hour period, the higher average wholesale power prices will be.
Turner argues that those prices reflect uncertainty about future gas reserves and carbon pricing, which means a substantial and growing risk premium is built into power prices. Great for the generators; for consumers, not so much.
If the cost of Lake Onslow was spread across all electricity consumers like an insurance premium, it would be only 0.5 to 0.75 cents a kilowatt hour or about $50 a year for an average household, he says.
But he reckons that would be offset by wholesale prices dropping twice as much as that when Lake Onslow began operating.
Don't hold your breath though. Even if the business case stacks up and the project is green-lit, it would take four to five years to build and another two or three years to fill the lake, Turner says.
"But once full only the top few metres would be used for regulating intermittent wind and solar and it might only be drawn down fully once every 10 years or so." These are the kind of claims the analysis the Government is embarking on will have to test.
Other issues to be considered are who would fund the scheme and who would operate it.
"This is not a project any one of the existing generator-retailers is likely to undertake," Turner says. "That's partly because of the construction risk and scale, but also because they do not have the commercial incentive if it leads to falling wholesale prices."
The asset should be state-owned, he says, and the rules around its use would have to be absolutely transparent.
