The real power crisis may well be looming

It was called a “network emergency”. There were warnings that there might not be enough power to keep New Zealand operational. Stuff’s Charlie Mitchell explains the biggest problems we could one day face.

On Thursday morning, power grid operators shredded some of the load – namely the hot water tanks, which take a few hours to cool down – to get past the morning peak. Supply quickly matched demand.

As Energy Minister Megan Woods was quick to point out, the system has held up well, thanks in part to lessons learned from the latest grid emergency, which caused widespread outages in the dead of winter.

A brief inability to cover contingencies is not a crisis. What is a crisis is when the electricity market stops working, as happened in Australia last week.

Their electricity spot market – which is structurally similar to ours – has been suspended and taken over by the market operator, who since then dictates which generators will supply the electricity and, in doing so, sets the wholesale price (and pays compensation to producers).

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The Australian crisis is due to an unfortunate confluence of factors; coal and gas prices are high, largely due to Russia’s war on Ukraine, and many of Australia’s aging coal-fired power plants are off-grid for maintenance.

Although the symptoms are different, both countries suffer from a similar disease.

Our national grid is not anchored by coal, but by hydroelectricity. Hydroelectricity is not vulnerable to international markets, but it is highly exposed to the weather, an equally immense and uncontrollable force.

If we have a dry year – one usually occurs every seven or eight years – we risk losing access to the main source of our electricity production. Two dry years in a row would be catastrophic. Mounting a response would require a high level of coordination in a profit-driven, market-based system, where actors have little incentive to act selflessly in the public interest. What’s happening in Australia seems mild in comparison.

At the same time, the demand for electricity is exploding. Since most of our electricity is generated from renewable sources, a simple way to decarbonize the wider energy system is to run as many things as possible on electricity – cars, heaters, irrigators, etc Transpower estimates that electricity demand will increase by around 70% by 2050, and most estimates suggest a 25% increase by 2035.

With this confluence of factors, it’s not hard to imagine that a serious electricity crisis could occur within the next decade, if we are unlucky.

This is the biggest problem we have to face. How can we guard against this problem of a dry year?

The government will decide this year if it wants to go ahead with the Onslow Lake Pumped Hydroelectric Project, a mammoth infrastructure project that would turn a small lake in central Otago into one of the largest batteries in the world.

THINGS

How a shallow lake nestled high in the mountainous region of central Otago could electrify the country.

Onslow would likely make the country’s electricity system 100% renewable and shut down the Huntly Power Station. We would have protection against dry years and could easily deploy wind farms, knowing that if the wind stops blowing we will have a powerful safety net. It’s a neat solution.

But it comes with huge risks – a multi-billion dollar price tag, a long construction period and severe impacts on the local environment. It risks becoming a white elephant, something like Christchurch Stadium, if it were 10 times more expensive and required the destruction of a nationally significant wetland. Few people would fault the government for saying no, given the risks.

The potential for offshore wind, particularly off the south coast of Taranaki, is also significant, especially when supplemented with hydrogen. But, like Onslow, it would be breathtakingly expensive and take many years to get started.

From a planning perspective, we are many years behind where we need to be to fully decarbonize the electricity sector. Over the next decade, we will depend on modest expansions in wind and geothermal generation to get us by, until the bigger projects get underway.

Another aspect to consider here is economic (and political). As in Australia, some promises of the electricity sector reforms of the 1980s have not materialized.

Consumer electricity prices have increased by 80% since 1990 (adjusting inflation) and since 2000 prices have increased faster than the OECD average. Productivity in the electricity and gas sector fell sharply, unlike the economy as a whole.

We have two recent examples of major players in the electricity market appearing to deliberately act in a way that has increased costs for all consumers. Many New Zealanders now live in ‘fuel poverty’, while electricity companies make handsome profits.

And while our share of renewable energy generation has steadily increased in this market-driven environment, it hasn’t been as fast as it would have been ideal. There has been little increase in wind generation over the past decade, although some power companies hold resource permits for large wind farms.

On the spot market, there is an economic incentive to keep more expensive (and therefore more profitable) coal and gas production in the mix, which suggests a system that is incompatible with the urgency of fighting the climate crisis.

The final – and potentially most contentious – issue is consumption. Is the expected growth in electricity consumption inevitable or can we change our way of existing in the world to consume less?

The solution to our longer term electricity problems will likely involve a mixture of the above and many other things.

While Thursday’s network emergency wasn’t a crisis, this government — and everything after it — has a lot on its mind to plan for the real thing.

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