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Dr Muriel Newman

A Strategy for Power Price Increases

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For those New Zealanders concerned about the relentless rise in the price of power, the New Zealand Energy Strategy, released last month by the National-led government, offers little hope of relief.1 The strategy is a complex mix of common sense and green ideology. On the one hand there is a strong emphasis on utilising New Zealand’s natural minerals and fuel resources to drive energy security and economic growth. That can only be good for the country. But on the other hand, much of the report could have been the work of a Labour-Green government with its green mantra of sustainability and its overarching focus on extreme environmentalism.

The reason it looks so much like the work of Labour and the Greens is that it is. Instead of reducing Labour’s totally unrealistic goal of having 90 percent of the country’s electricity generated from renewable sources by 2025 to something far more sensible and aligned to an objective of power price affordability, National has adopted this extreme position as their own. As a result, power price rises will outpace inflation as future electricity needs will be provided through more costly renewable generation methods, instead of being balanced by thermal generation that these days is clean, efficient, and affordable.

The reality is that with around 73 percent of electricity generated from renewable sources, New Zealand already has one of the highest rates of renewable energy generation in the world. We rank a commendable third in the OECD behind Iceland and Norway. Last year of the more than 43,000 gigawatt-hours of electricity generated in New Zealand, 56.4 percent was from hydro dams, 21.2 percent from natural gas, 12.8 percent was geothermal, 4.5 percent from coal, 3.7 percent from wind, and 1.4 percent from other sources such as biogas, waste heat and wood. It was largely generated by 57 hydroelectric power plants, 11 geothermal power stations, 13 thermal power plants, 13 co-generation plants, and 16 wind farms.

By focussing the Energy Strategy on increasing the percentage of renewable energy generation to 90 percent, the government is virtually guaranteeing that more expensive energy options are pursued. As a result, of the more than 40 proposed power generation plants projects that are in the pipeline, almost 90 percent will generate renewable energy, with 19 of the projects being for wind farms, 12 for hydro plants, 3 for geothermal plants, and 3 for tidal energy plants. Of the remaining 5 thermal energy projects, 3 will be fuelled by gas and 2 will run on diesel.

The poster child for renewable energy throughout the world is of course wind power. New Zealand presently has some 16 wind farms either operating or under construction with around 450 turbines. These wind farms are capable of supplying about 4 percent of the country’s annual electricity needs. However, for those New Zealanders who intensely dislike the thought of more and more of those monster windmills – with their associated pylons and power lines – marching across our 100% Pure landscape, then the government’s Energy Strategy is very bad news.

With the playing field tilted in favour of wind power, over 1200 new turbines are expected to be built in the coming years as the 19 planned wind farms get underway.

The problem with such a growing reliance on wind power is, of course, what happens when there is no wind. The unreliable nature of wind generation adds to the cost of wind power since back-up stand-by generation must be available at all times to ensure security of supply. That’s why power systems need base-line thermal coal or gas fired power stations to be available during periods of high demand and to supplement supply when the wind doesn’t blow and the dams are dry.

But it isn’t just statements in favour of renewable energy that are driving power generation investment decisions – it is also the penalties on thermal generators that have been imposed by the National government through their Emissions Trading Scheme. And as we consider the impact of the ETS on electricity prices and power company behaviour, it is important to remember that National is the only government in the world to have penalised its citizens by including household electricity generation in its Emissions Trading Scheme. So much for their claim that New Zealand’s ETS would not lead the world!

The Energy Strategy states, “The economic competitiveness of new renewable electricity generation will be enhanced by a price on carbon”. What this means is that a price on carbon has been imposed by the government on thermal power generators, as a penalty for their production of carbon dioxide. This cost was passed on to consumers through a power price hike of 1 cent per kilowatt-hour from June 1st 2010 when the stationary energy sector was introduced into the ETS. As a result, electricity consumers will be paying more than $400 million extra for their power. In reality, this amounts to a subsidy to thermal energy generators to compensate them for having to pay the cost of carbon. But the increase in the price of power also represents a massive gain for those electricity generators who do not need to pay a price on carbon. As a result wind farms and other renewable generators are essentially reaping the benefit of a lucrative subsidy funded by electricity consumers.

What’s worse is that under the ETS, there will be another 1 cent per kilowatt-hour price increase in January 2013, which will drive up the cost of power even further. Renewable energy generators will reap even bigger profits – something that will not have escaped the notice of the National Party and those eagerly lining up to buy shares in power companies, if their partial privatisation plan goes ahead after the election.

At the present time there are nearly 2 million electricity consumers in New Zealand, ranging from households to large industrial users. Over 1.7 million of these users are residential consumers, 160,000 are commercial users, 75,000 are business users working in agriculture, forestry and fishing, and 40,000 are large industrial users.

According to the Ministry of Economic Development, in 1974 residential electricity users paid 1.15 cents per kilowatt-hour for their power, commercial users paid 2.08 cents per kWh, and industrial users paid 0.90 cents per kWh. By 2010, these costs had escalated dramatically: residential users paid 25.50 cents per kWh, commercial users 15.35 cents per kWh, and industrial users 10.40 cents per kWh.

The figures show clearly that it is residential power users who have faced the greatest escalation in the price of power. In the decade from 1990 to 2000, there was a 43 percent price rise, but in the decade from 2000 to 2010, prices soared by 92 percent.

Essentially by kow-towing to the agenda of radical environmentalists, the New Zealand government will ensure that crippling power price increases will continue to be a feature of everyday life. As it stands, the price of power is being relentlessly driven up jointly by the policy settings in the Energy Strategy and the Emissions Trading Scheme.

Logic would have it that the 5 percent increase in the cost of power imposed last year would be removed in 2012, once the binding Kyoto Protocol expires. Without a binding agreement the government would have little justification for keeping their massive ETS bureaucracy in place. However, as President Ronald Reagan warned, “a government bureau is the nearest thing to eternal life we’ll ever see on this earth!”

If Kiwi lethargy allows the government to leave the ETS in place, then on January 1st 2013 electricity prices are scheduled to rise by another 5 percent as the subsidies that are presently in place are removed. This will also apply to the increases in the price of fuel, which rose by 3.5 cents a litre on July 1st last year and will increase by another 3.5 cents a litre from January 1st 2013.

This week’s NZCPR Guest Commentator Bryan Leyland, a consulting engineer who specialises in the electricity market, in his article, New Zealand’s Energy Strategy – the good, the bad, and the ugly has this to say about the government’s 90 percent renewable energy goal:

“Maintaining a strategy for 90 percent renewable energy – which, technically, is virtually unachievable – really demonstrates an ignorance of the fundamentals of so-called ‘climate change’. The government’s belief that man-made greenhouse gases cause dangerous global warming is unsupported by any evidence. It is only hypothesised by computerised climate models which, for the last 20 years, have failed to correctly predict future temperatures. It is supported by many people who, misguidedly, believe that ‘economic growth is incompatible with the environment’. (In fact, as anyone who’s been to Africa will know that belief is the reverse of the truth. Only rich societies can afford to look after the environment.) It is also supported by those with vested interests who hope to make a fortune out of carbon trading and those who are pushing renewable energy or growing forests.

“The tragic thing is that the few officials who advise the government on climate change still cling to their faith in models and continue to ignore the sunspot evidence. So we could say that the whole renewable part of the Energy Strategy is driven by the fact that those few key advisers to government have blind faith in climate models. Because of them, millions – perhaps billions – of dollars is being squandered and the economy is being seriously damaged.”

The problem with a 90 percent renewables target is that power generators are ignoring the affordability of electricity in their investment decisions. The end result is that power prices in New Zealand will continue to rise. This will increasingly make New Zealand a more and more expensive place to live and do business. That will no doubt contribute to a further downward slide in New Zealand’s global competitiveness rankings. Last week’s competitiveness survey specifically identified the quality of electricity supply as a major weakness for the country.2

New Zealand’s Energy Strategy, which provides a framework for investment decisions in all energy-related sectors of our economy, will be the subject of more commentary in the future. But for those New Zealanders, who are hoping that the escalation in power price rises experienced under a Labour-led government will come to an end, will be disappointed. National’s Energy Strategy is going to make the situation worse, not better.