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Bryan Leyland

Escalating Power Prices

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Can we avoid escalating power prices and frequent shortages?

Escalating power prices and frequent shortages seem to be inevitable. If the government takes prompt and effective action, the magnitude can be mitigated. If the government continues its blind pursuit of “carbon zero” increasing economic damage will force it to abandon the policy.

Power prices in the UK and Europe have more than doubled over the last 10 years and are now increasing rapidly. Millions of people in the UK can no longer afford electricity for heating. 

Russian funded environmental groups in Europe and the UK have effectively blocked fracking thus increasing dependence on Russian gas. Then the invasion of the Ukraine suddenly limited the amount of oil and gas available to Europe thus trebling energy prices in the last year and further increasing electricity prices.

Even before this happened the mistaken belief that heavily subsidised wind and solar power was a cheap and effective way of reducing emissions of man-made greenhouse gases pushed electricity prices upwards. The premature closing down of coal-fired power stations and safe and emissions free nuclear power stations that produced low-cost reliable electricity exacerbated the situation

Officials in the UK and Europe are now predicting serious shortages and major price spikes this coming winter. Coal-fired stations are being recommissioned and gas has been declared “green”.

Australia is also experiencing high power prices and shortages resulting from their decision to heavily subsidise wind and solar power. Although coal-fired power stations still supply the bulk of the electricity, the way the electricity market works, a relatively small amount of expensive renewable energy triggers high and fluctuating power prices.

What does this mean for New Zealand? Unless drastic action is taken we too cannot avoid substantial price increases and an increased risk of shortages and blackouts driven by insufficient generating plant with a predictable output, limited gas supplies, the Ukraine driven increase in the price of coal, the flow on effects of the rapidly increasing carbon tax, and a flawed electricity market. The recent grid emergency that drove spot prices as high as $1.50/kWh mainly because 1040 MW of wind generation produced 30 MW, signals the new normal.

What could be done?

Immediate investment in existing gas fields is needed to ensure we have enough stored gas for peak demand generation in the evenings when the wind is not blowing and for base load generation. To minimise the risk of dry year shortages Transpower says we need to build about 1000 MW of gas fired generation in the next few years and also hope that industry and the methanol and urea plants will reduce gas consumption when demand is high. The Ukraine invasion has increased methanol and urea prices and this will flow back into gas prices. The cheapest option is for the consumers to pay the annual costs of keeping gas in storage. To do this, we need to change the electricity market against strong opposition from those who are reaping the benefits of the market.

As a result of the gas shortage, Huntly power station has been running most of the time since 2017 burning more and more coal. The indications are that Huntly will continue doing this for years. The fact that the more gas we have, the less coal Huntly burns, seems to be beyond the comprehension of the government. (For the same amount of generation, Huntly emits twice as much CO2 as a gas fired station.)

The electricity market combined with the carbon tax disproportionately drives up electricity prices. At the moment, the carbon tax is about $75/tonne of CO2 and the Climate Commission predicts that it could go as high as $250/tonne. Every $50 increase in carbon tax increases the cost of generation at Huntly by at least 2.5¢ and 1.5¢ at a gas fired station. “Green” geothermal stations also pay carbon tax on the carbon dioxide they emit. 

The damage to the consumer is compounded by the fact that the market pays every generator the same price that it pays to the most expensive generator selected to run. If the increased carbon tax drives the wholesale price from, for instance, 15¢ to 17.5¢ all the low cost hydro stations get windfall profits. The market turns the carbon tax into a gigantic rort that results in the hapless consumer paying carbon tax on hydropower!

The electricity market promised us cheaper electricity. Between 2004 and 2018 wholesale electricity market prices increased at a rate above inflation – from about 7¢ to about 10¢. In 2018 prices jumped to about 15¢ and have been relatively steady at more than 20¢ for the last two years. This doubling of the wholesale price is already showing up in commercial and industrial tariffs and retail tariffs must soon increase. The economic damage will be huge and the underprivileged will be even worse off.

Before the electricity market was invented the primary consideration of the power planners was to make sure that we had enough reasonably priced electricity during a dry year when, during the critical 4 month period, hydropower generation drops to about 50% of normal. Now, there is no one responsible for ensuring that we have sufficient generation to meet dry year demand at a reasonable price or ensure that the lights stay on during peak demand periods. No one.

So what can be done? The incredibly foolish decision to shut down gas exploration has, perhaps permanently, scared off overseas explorers. All the government can now do its promote increased production at existing fields and maximise the amount of gas stored for dry years at Ahuroa and Tariki in the hope of reducing coal burning at Huntly and help to minimise the risk of shortages. 

If the electricity market was reformed so that someone is responsible for ensuring that the power price reflects the real cost of generation at individual power stations we would be a lot better off and power prices might even drop. If wind and solar farms, not the consumers, were obliged to pay for the backup they need when the sun is not shining and the wind is not blowing generators would be incentivised to build power stations that could be relied upon. This would make it much easier to ensure that the lights stayed on during dry years.

In summary, electricity price rises in the region of 30% and a high risk of shortages are virtually inevitable. Further substantial increases can be avoided only if the government increases the gas supply, reforms the electricity market and promotes reliable and predictable generation such as geothermal, hydro and, maybe, nuclear power.

The government has two options: take effective action to mitigate the otherwise inevitable price rises or sit on its hands and watch disaster unfold.