Bryan Leyland
MSc, DistFEngNZ, FIMechE, FIEE(rtd), MRSNZ
Bryan Leyland is a Power Systems engineer with many years of experience in New Zealand and overseas.
Power prices are higher than they should be because the gentailers control the supply and the price. Nothing less than a comprehensive rethink of the whole electricity market will solve this problem.
Until 1987 electricity was under government control with the New Zealand Electricity Department and its predecessors’ building, owning and operating most of the power stations and the transmission system. Our power prices were among the lowest in the world.
Senior NZED people and others recognised the problems caused by government ownership – political interference, the difficulties with building new power stations using public service rules; over manning and reluctance to adopt new technologies.
These problems led to the reform of the industry starting off with the formation of the Electricity Corporation of New Zealand in 1987 which took over generation and transmission for about $6.3 billion – a very low price. As a State Owned Enterprise it was owned by the taxpayer but managed by an independent board largely isolated from political interference. If we had stayed with it consumers would be better off than they are now.
The ultimate objective of the reforms was to privatise the power stations and form a number of companies that, it was hoped, would compete and lower prices. Transpower was the first to be separated off but was left under government ownership because it is a monopoly business.
The Wholesale Electricity Market Development Group (WEMDG) was set up to decide how the electricity business could be made competitive. Its consultants recommended a “Single Buyer” market with central coordination and privately owned power stations. Existing power stations would have long term contracts to supply electricity at a price determined by their asset value and operating costs and with a reasonable margin for profit. New generating capacity would be obtained by competitive bidding on an open international market.
This would have three advantages: its prime objective would be to minimise the long-term cost of electricity to the consumer; existing hydropower stations would continue to generate low-cost electricity and new stations would be built only if they offered the best combination of long term cost and security of supply.
WEMDG was told that a market where stations competed to sell kWh was more risky. Sadly, WEMDG chose this option. This “market” paid all generators at the price bid in by the most expensive generator. In power systems based on gas or coal fired generation, this market induces generators to build modern low cost power stations that kill off older and less efficient power stations and so drive the price down.
In New Zealand, with 65% of power generation coming from old, efficient and low-cost hydropower generation and new generation being much more expensive, it does not work because the spot price needs to climb to several times the cost of hydropower generation to induce a generator to build a new power station. The high spot price brings huge windfall profits to the hydropower generators who hide them by jacking up their asset valuations. As a result power costs have risen faster than inflation and we no longer have cheap power by world standards.
Our market pays the same amount (per kWh) to a geothermal station that generates reliably 24 hours a day as it does to a wind or solar farm that generates much less electricity with an unpredictable and fluctuating output and needs to be backed up with reliable generation – paid for by the consumer, not the developer.
Meeting short term peak demand is expensive because of the high cost of the generating plant, transmission lines and distribution system needed to meet it. Before the reforms, New Zealand had a very successful control system that switched hot water heaters off during peak demands and so flattened the demand. The reforms killed it off and now we have a peaky demand curve that costs the consumers millions of dollars per year. The problem would be solved if the market provided targeted rewards for those who manage their demand during peak demand periods and for those who generate reliably during peaks.
In a low rainfall year hydro output drops by about 10% of annual generation. Keeping the lights on in a dry year was the major preoccupation of the power planners of old who ensured that Huntly had a large coal stockpile to make up the dry year shortfall.
Proponents of our “market” have faith that the generators and retailers will act together in the public interest and keep the lights on even though there is no real inducement do so. If a dry year strikes and power cuts are needed all consumers will be affected equally and many generators will make additional profits from the high prices caused by the shortage. The fact that high prices and blackouts will seriously damage the economy does not seem to concern the Electricity Authority.
What we need is a thorough and independent review of the electricity market that also examines where we would be now if a single buyer or other market model had been adopted and suggests ways of achieving a reliable and economic supply.
What we are likely to get is continuing high prices until a dry year strikes and the lights go out. Then the consumers will be in an uproar and the politicians will panic. The chances of a sensible long term solution coming out of that are very low.
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