Dialogue: Wires crossed on power

Boosting thermal power output by 50 per cent would cut across climate change policy, says PETER READ*.

Plans are afoot to build three large new thermal power stations, each of about 400 MW capacity.

These investments will be located at Otahuhu (Contact Energy), Huntly (Genesis Power), and Stratford (Natural Gas Corporation), and will add 50 per cent to our existing thermal generating capacity, "crowding out" promising sustainable energy power projects like wind farms and hydro-electric projects.

The thermal projects are highly risky investments in the absence of a comprehensive plan to change energy and land use to meet climate treaty commitments at least cost.

The National Energy Efficiency and Conservation Strategy (NEECS), due for release on October 1, is being promoted as a key element in the Government's climate change strategy.

As John Blakeley, convenor of the Sustainable Energy Forum, said recently, "This leaves the distinct impression that the left hand of the Government doesn't know what the right hand is doing."

But just a moment: does the Government not only have a left hand and a right hand but also a foot for kicking with?

Genesis has the Government as its shareholder, so either the Government is wasting taxpayers' money on the energy efficiency and conservation strategy, or it is neglecting its duty to manage its assets prudently.

It is for the Government to weigh the investment risks against its climate change priorities and SOE policies.

I would argue that the SOE policies are based on economic principles that ignore the nature of competition between technologies, specifically that between incumbent fossil fuel technology and the policy-desirable technologies surveyed in the NEECS.

It would be appropriate for the Government to call in the Genesis planning application to give itself time to consider the issues.

They should also ensure a much more explicit statutory duty is inserted into the governance structure being developed for the power industry, requiring it to be responsive to environmental policies.

Mr Blakeley also said: "The Government seems to believe that now that the electricity industry has been deregulated, the market will provide new generating capacity at the time it is needed, and that demand increases will control this."

If this is so, the Government is getting the wrong advice.

Traditional economics says that the single best possible outcome, including the best pattern of electricity investment, will be delivered by perfectly competitive markets, so long as the costs of greenhouse gas pollution are reflected in a carbon tax.

But how can the market determine the right price to pay for finding out about the best innovations when it can't know what their payoff will be?

Risk-averse managers will under-invest in new technology because the other markets that might help them don't exist, for example, a market for insurance against the risk of droughts induced by climate change reducing future hydro dam output.

The economic theory of learning says there are many possible equilibriums, because learning results in reducing costs.

With competing technologies, say thermal power plant versus wind power, the outcome depends on small initial events, like the fabled butterfly in Peru that flaps its wings and causes a typhoon in Japan six weeks later.

Once one technology takes hold, its costs fall and other technologies are locked out.

In typing this I am cursed with the inefficient qwerty keyboard as the legacy of the Remington typewriter company gaining dominance in Wall St in the 1890s.

Such technological lock-in means that escaping from greenhouse gas-emitting fossil fuel technology to low-emissions renewable energy, and efficiency technology, requires a determined effort against the market forces that have been established by the incumbent technology.

One of the barriers is the herd instinct of managers. The penalty for being wrong (the sack) is much greater than the reward for being right (a pat on the back).

So if one generator installs new thermal plant they all do, regardless of there being no need for new plant for at least half a decade.

Never mind if more thermal plants lead to the risk of conflict with climate change policy: the customer, or the shareholders, will pay and managers will collect their bonuses.

Within the lifetime of the proposed new thermal plants, it may be necessary to retrofit them with costly carbon scrubbers, wrecking profitability projections. This might be necessary to meet carbon reduction commitments without cutting profitable but highly emissive dairy industry output.

Without better analysis, we do not know the best payoff between cutting energy sector emissions, cutting land-based emissions, and increasing forest absorption.

The analytic modelling capability to do this is a few years off, but until we know what it will show, the Genesis proposal is risky.

Would making Genesis privy to the Government's climate change policy see it withdraw its planning application?

Ought not such inside information be given to other generators?

Might that lead the Natural Gas Corporation to have second thoughts regarding Stratford?

Might prospective lack of demand lead to postponed development of the Pohukura gas field?

Might that lead Contact to postpone Otahuhu?

Is that not just what the Government wants, assuming it is not pussy-footing over climate change?

New Zealand can take a lead on the international scene, by delaying the exploitation of oil or gas resources for environmental reasons.

Such an event is needed to change the direction of New Zealand's energy plans as the electricity generators have set off in a high-risk direction, directly challenging the Government's climate change strategy.

* Peter Read has been involved in energy issues for most of his working life. He recently reduced his teaching commitments at Massey University to carry out public good research under FRST contract.