Guest post: High electricity prices

A guest post by Bryan Leland:

The primary reason for high electricity prices at the moment is that nobody is responsible for ensuring that we have a reliable and economic supply. Not the Electricity Authority, not the generators, not Transpower. Not anyone.

According to the academic economists who run the market, market forces should ensure that we have a low cost, adequate and reliable supply even in a dry year. If they understood power systems they would realise that the market lacks the inducements needed to ensure that this happens.

The reality is that we have an electricity market that is not fit for purpose.  An efficient market would provide a reliable supply with every new increment of generation chosen because it provides a reliable supply and minimises the long term cost of electricity to everyone.

Right now spot prices are between three and 10 times normal because the lake levels are low and we don’t have enough gas or coal-fired generating capacity. If it doesn’t rain heavily, the situation will get worse.

The existing market makes new generation investment very risky. It discourages investment in power stations that are a good long-term investment and rewards generators with prices well above the cost of generation when they have failed to provide sufficient generating capacity.

To illustrate this, in their retirement speeches, two CEOs of generating companies said that the way to make a profit in this market is to keep the system on the edge of a shortage. It follows that when a dry year comes along there is a risk of high prices and, possibly, blackouts. 

During shortages the generators jack up the prices because this is the only way they can hope to affect demand. It doesn’t work for the simple reason that most consumers are on contract prices so they don’t see the price rise. The high prices severely damages many industries who buy on the spot market and cannot afford to cut back production, or like dairy companies, have no alternative but to keep on processing. Others, like the paper mill at Whakatane, simply shut up shop and put people out of work. According to the Major Electricity Users group “If the prices continue on the pathway they are on… there will be a number of major industrial operations in the country that simply won’t be in business anymore.” “We’re looking at the loss of thousands of jobs…”

In the “bad old days” the electricity industry gave early warnings to consumers about the risk of shortages so that everyone could do their bit towards reducing demand. As most people are public spirited, this worked well without any need to increase prices.

In our brave new world the government has decreed that it will respond to shortages and high prices by shutting down industries and sacrificing jobs before asking consumers to reduce consumption. So your lights stay on, but you lose your job and struggle to pay the electricity bill.

At the moment the storage lakes that should be close to full are at their lowest level in 20 years, we have a serious shortage of gas and, thanks to the ban on exploration, this will get worse. The coal-fired station at Huntly is now running flat out and it seems that the “last ditch” oil fired gas turbines at Whirinaki are being called on.

If we had a properly coordinated system steps would have been taken to ensure that sufficient energy was held in reserve in the lakes, in gas storage and in the coal stockpile to get us through. Right now the country desperately needs unusually heavy rain quite soon. NIWA is predicting average or low rainfall. If it doesn’t rain the high prices will continue. These will hurt poor people most and more industries will shut down putting more people out of work.

Assuming that nothing is done – as seems to be likely – the future outlook is that the drive to shut down fossil fuel generation and build more windfarms will exacerbate the problem of extreme price fluctuations. When the wind is blowing, prices will crash and when it stops blowing, prices will skyrocket and rotating blackouts may be needed. Prices will continue to increase. 

A recent government policy is to encourage industry to shut down coal-fired boilers and turn to electric heat. Given the shortage situation, the electricity can only come from burning more coal at Huntly and for every tonne of coal industry saves Huntly will need to burn 2 1/2 tons of coal to provide the necessary electricity. And the latest is to subsidise electric cars that will also increase coal consumption at Huntly. Madness.

If this is allowed to happen, industry and commerce will have no alternative but to buy diesel generators and New Zealand will be in a third world the same situation. In Nigeria 30% of the electricity is generated by emergency diesels even though, like us, they have ample gas resources.

To get out of this mess in the short term we need to:

  • warn the public that lake storage is critically low and conservation is needed;
  • put a cap on the spot price of, say, 30 cents/kWh;
  • set up a committee comprised of experienced power system engineers to monitor the situation and make recommendations as needed;
  • delay promoting electric cars and electric boilers until the power system is more than 95% emissions free.

In the longer term, we need to:

  • reform the electricity market;
  • explore for more gas and, in particular, shale gas in the South Island, to minimise coal consumption;
  • consider adopting nuclear power. 

Bryan Leyland MSc, DistFEngNZ, FIMechE, FIEE(rtd) is a Power Systems engineer with 60 years of experience in the industry in New Zealand and overseas.

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