Alasdair Thompson: Expanding power needs present urgent challenge

COMMENT

New Zealand has suffered two electricity supply shortages in three years. In any developed country, that is unacceptable.

In New Zealand, a small country dependent on exports and aspiring to maintain growth of 3 to 4 per cent of GDP or more annually, it is dangerous.

To business and consumers alike, the lack of investment in new generation capacity is a major concern, especially when companies such as Genesis estimate New Zealand's demand for electricity is increasing at 120MW or 1.4 per cent a year. Our present generating capacity exceeds 8400MW.

Accordingly, John Blakeley's recent solution in the Herald, that we should build a series of power-generating wind farms, is interesting though neither strategically sustainable nor a sufficient response to the challenge of increasing our investment in power supply.

We need to provide generation capacity for our expanding energy needs as well as to guarantee the reliable distribution of the power at present available. Two power shortages in three years indicates a need for faster action than can be provided by a programme of building wind farms over eight or more years.

Besides, the Nimby green opposition to the Project Aqua hydro scheme in the South Island's Waitaki Valley will extend to wind farms around the country.

For that matter, it is affecting any project characterised as using scarce resources to achieve economic growth, though the Employers and Manufacturers Association knows of no poor society with good environment outcomes. Consequently we welcome moves by Genesis Power to commission new, efficient and reliable gas turbine power plants.

To encourage ongoing investment in new power supply capacity, it is clear the electricity market requires more reform to provide a climate in which investors can be confident.

The Prime Minister, in her statement to Parliament last week on the state of the nation, said our recent power shortages proved beyond doubt that there were fundamental flaws in the 1990s electricity market model.

Helen Clark referred to the Electricity Commission now being established to help to build security of supply and to ensure there is enough standby generation to get us through dry years.

The Employers and Manufacturers Association welcomes these measures and others announced by the Government in May last year, including the proper modelling and forecasting of power supply and demand, and decisions to price electricity transmission in a way that will guarantee new investment in it occurs.

The Prime Minister also noted the legislation before Parliament to amend the Resource Management Act with the aim of giving regulatory priority to renewable energy projects - which we oppose on the basis that it is selective and, though likely to favour wind plants and small hydro, does not address the core deficiencies of the act's procedures.

Still more needs to be done to ensure power shortages and other dramatic anomalies in the market won't occur again.

One immediate and practical step should be an inquiry into the bizarre spike in prices that followed a power outage in the main North-South transmission line. Several transmission towers in Marlborough were blown over in a storm early in January which sent spot prices in the North Island skyrocketing to extreme levels for several days.

Some argued this showed the spot market worked well by reflecting the higher cost of generating replacement power in the North Island, and by ensuring that total power consumption was reduced to match the available supply.

However, the North Island at the time of the outage was in fact self-sufficient in power. There was no shortage of hydro storage or other generation capacity despite the Otahuhu power station being down for maintenance.

Market observers might have expected a 20c a kilowatt hour spike, not the extreme 80c-100c spikes that ensued.

The inquiry the Electricity Commission says it will hold into these events and their downstream effect should focus on whether the power generation companies are following some orchestrated spike pricing strategy, or simply if their market knowledge and responses are immature.

The inquiry alone will clearly not be enough, especially since during the past four or five years the Government has shown it neither understood the deficiencies of electricity generation and supply, nor made the necessary incremental changes to ensure power shortages do not occur in future.

Several things need to be done to secure our power supply and the investment in jobs and growth that will encourage.

They are: the establishment of a market for the advance buying and selling of electricity hedges; effective consumer response mechanisms when power prices are likely to spike; urgent investment in the transmission grid to overcome supply constraints; real commercial disciplines on Government-owned power companies; and changing their belief that the Government won't intervene for political ends.

* Alasdair Thompson is chief executive of the Employers and Manufacturers Association (Northern).