Security of supply has high price tag

By BRYAN LEYLAND*

The plan to set up an Electricity Commission with responsibilities for providing reserve generation for dry years represents welcome Government recognition of the problems of the market. Unfortunately, it also has considerable potential to distort the market, which may increase the price of power.

Before examining the proposal, it is necessary to understand why we need reserve generation for use in dry years.

The electricity load varies from minute to minute and from day to day. It is lowest in the early hours of Sunday mornings in summer and highest in winter evenings. The maximum load is more than twice the minimum load.

Generation must match demand exactly - it is not possible to store electricity once it has been generated. To meet this requirement, four types of generating plant are needed: base load, mid-range, hydro-firming, and emergency/peaking.

Base-load generation is provided mostly by geothermal plants that run continuously at full load. Mid-range generation, which is needed most of the time, is provided by hydro and the gas-fired combined cycle stations at Otahuhu and Taranaki. These stations run virtually continuously, with their output varying from about 70 per cent to about 100 per cent depending on the load and the spot price.

Hydro-power generates about 65 per cent of our electricity and this is our most flexible form of generation. Some is base load, most is mid-range and some is for peaking. All the hydro power stations have some storage although some have only enough for a few hours.

Unfortunately, if it does not rain, output reduces significantly. Places with a high proportion of hydro power - like Tasmania and Norway - have sufficient storage for about three years' operation. We can run our lakes dry in two or three months.

To overcome this, we have "hydro firming" stations such as Huntly and New Plymouth. Firming stations often generate in late summer to make sure the storage lakes will be full before winter and run flat-out during dry years.

This combination of low-cost hydro power with "hydro firming" stations has given us the low-cost electricity we have enjoyed for many years.

For emergency generation and peaking, we had the gas turbine peaking stations at Stratford and Whirinaki. They existed basically as insurance and were seldom used. These are the type of stations for which the Electricity Commission will be responsible.

The restructuring and new market regime did not recognise the need for hydro-firming and peaking stations. The reserve stations were either shut down or sold. This was a perfectly logical commercial reaction to "market" forces.

If this "uneconomic" plant had been available and the storage had been managed to minimise the dry-year risk, we would not have had shortages in 2001 and this year.

Happily, the Government has recognised there is a need to eliminate unacceptable price spikes. Its solution is the Electricity Commission, which will be instructed to ensure that dry-year reserve plant is available.

The basic concept is that the commission should contract with generators to ensure that reserve generation is available to cope with a one-in-60-year drought without restrictions.

The commission will keep this generation in reserve and release on to the market only when a trigger point (probably a spot price of about 25c) is met. The Government expects this generation to be used infrequently.

But if market forces (for example, insufficient generating capacity) push the price up beyond the trigger point in what is not an unusually dry year, it will be difficult for the Government to allow the commission to withhold the reserve generation. So there is a risk that the commission's reserve plant will be needed more frequently. As it generates at a high cost, this may push up prices.

But the problem we have is insufficient base load generation. Because of this, the Huntly station has changed from a hydro-firming role to mostly base-load generation. It does not have sufficient spare capacity - or gas or coal - to be able to fulfil the hydro-firming role for which it is ideal.

If we had had more base-load generation, we would have avoided this crisis without having to use the high-cost reserve generation.

This is not to say that we do not need reserve generation. In extreme droughts low capital cost gas turbines running on oil provide the most economic solution. They are also useful in the event of system emergencies, such as the loss of the Maui platform or a transmission line.

But they are not a substitute for what we need most - more low-cost base-load generation so that Huntly and New Plymouth can do the job they were designed to do - hydro firming.

The Government recognises the need to manage hydro storage and coal stockpiles. The commission will be responsible for long-term modelling of supply and demand so the balance, especially in dry years, can be monitored and corrective action taken. This is a welcome step.

The commission will be empowered to direct the hydro generators to limit hydro generation to build up storage and also direct thermal generators to increase generation to make up the shortfall in power.

There is no doubt the Government's plan will improve security of supply.

The generators will be pleased that the proposal relieves them of responsibility for providing reserve plant for dry years. And they will be happy to see the Government carrying the blame for any shortages.

But from a consumer's point of view, it will result in higher prices than would be achieved by taking the bolder step of changing to co-ordinated operation and competitive generation.

* Bryan Leyland is an Auckland energy consultant.