Our national grid pricing needs solutions. And after 10 years of pondering its navel, the Electricity Authority (EA), the Government agency charged with ensuring an efficient and effective electricity industry, plans to release a paper that may or may not gain industry consensus and may or may not actually be the right answer.
A decade in, the EA claims it is past the point where it is seeking an industry consensus, and advises that “you’ll have to show a factual error in our assumptions to change our views.”
This paper attempts to address the question, who pays how much for the right to access the electricity transmission backbone that is the national grid.
Just how we derive economic efficiency by perpetuating monopolies, stifling innovation and transferring the costs of transmission to regional small businesses and consumers, is beyond me.
This backbone is owned and operated by a Government-owned monopoly called Transpower, and connects our generation assets to the whole country.
The trouble with essential monopolies like the national grid is that they exert enormous political influence. Combine this influence with that of other essential monopolies such as the electricity generators who own our hydro dams, and massive energy consumers like the Bluff aluminium smelter, and the EA’s findings are wholly predictable.
This draft report, citing “economic value created”, suggests transmission costs be moved away from certain major users – notably the Bluff aluminium smelter – and should instead fall most heavily on domestic consumers and small businesses farthest from the point of generation. Meanwhile the hydro dam owners (the generators) will continue to utilise the transmission network without paying anything like the true cost of doing so.
When justifying their recommendations, the gurus at the Electricity Authority have estimated net economic benefits to all parties involved in the electricity market, of between $200 million and $6.4 billion by 2049. There are clear signs of an agency that has lost track of the most basic financial disciplines, when they can seriously suggest that a business case benefit that has an estimated range of $6.2 billion over 30 long years is somehow rational rather than looking suspiciously like a complete guess.
Virtually all these barely-credible benefits are assumed to come via increases in market efficiency. Just how we derive economic efficiency by perpetuating monopolies, stifling innovation and transferring the costs of transmission to regional small businesses and consumers, is beyond me.
Disincentives to use the national grid
The EA’s proposed pricing mechanism builds in disincentives for those seeking to find alternative methods of transmitting, storing and using electricity. The EA will do this in the following two ways:
By offering special discounts to people considering using innovations such as battery and solar to avoid using the grid. These discounts will be funded by transferring these costs to other consumers (in other words, not by reducing Transpower’s profits); and
By reducing peak load pricing. This is the mechanism whereby we pay more for electricity transmission at times when the grid is most heavily used: think winter cold snaps and dinner time. Peak load pricing offers a price incentive to those who want to store and use their own electricity at a time when it is most expensive on the national grid. No peak load pricing, no incentive to innovate.
The national grid was bought and paid for over decades by all the taxpayers of New Zealand. This asset was designed to reliably transport one of our most essential services, electricity, and to share the costs evenly to the benefit of all.
Perhaps the Electricity Authority should be paying more attention to mechanisms and policies that have seen electricity prices soar over the past two decades, instead of continuing this futile, decade-long attempt to fix a transmission pricing problem that didn’t exist in the first place.
Most of us now agree that climate change is all too real and we therefore all need to do something about it, sooner rather than later.
However, some impulsive political changes in the past 18 months, like unilaterally banning all new offshore oil and gas exploration, can be environmentally counter-productive. For example, NZ coal usage in 2018 was the highest for a decade! Undoubtedly, this is a decision our political leaders didnt want to see happen.
Wood biomass however is a great renewable resource and therefore represents an important and growing energy solution.
At this time, NZ needs a genuine cross-party accord on the best way to tackle climate change, much like the superannuation accord back in the 1990’s. The superannuation accord worked well and served to de-politicise a potentially highly contentious area. A similar approach is needed now.
Richard Gardiner – Managing Director of Total Utilities
The following was a recent press release from Azwood Energy. biomass
Azwood Energy welcomes the Interim Climate Change Committee’s “Accelerated Electrification” report, which investigated the potential of electricity in greenhouse gas reduction. Azwood Energy agrees with the Committee’s view: “The challenge is clear – it is not so much about reducing emissions from the generation of electricity in a narrow sense, but it is about using low or zero-emissions energy to fuel the economy.”[1]
Whilst we find its investigation into electrifying our vehicle fleet commendable, we question whether the Committee’s reliance on the wholesale electrification of process heat is an outcome that truly promotes carbon neutrality and greenhouse gas emission reduction.
Azwood Energy is of the view that the increased utilization of woody biomass, a renewable, carbon-neutral energy source, in the transition from fossil fuel use in process heat makes sense, both economically and environmentally.
Energy expert, Dr. Martin Atkins,[2] has noted that “Biomass will play a vital role in providing process heat, particularly in producing process steam for medium to high process temperature demands. Biomass will be the lowest cost fuel switching option by a large margin when compared to electricity.”[3] He notes that complete electrification of process heat demand is not economically feasible.
Process heat needs are highly-situationally dependent and site-specific. However, from an operational and Capex perspective, high temperature hot water and steam requirements are best met using biomass as a fuel source in place of coal or diesel.
It seems big players in the industry agree. A video was released for the Climate Leaders Coalition showcasing Fonterra Brightwater’s switch to co-firing with biomass.[4] Speaking, in May, at the New Zealand Minerals Forum, Tony Oosten, Fonterra’s Energy Manager, noted that capital outlay and fuel costs for new wood versus coal boilers are now the same, and the viability of wood fuel has been proven in their Brightwater pilot.[5]
He explained Fonterra’s cheese plants use lower temperatures and can be run on electric technologies. Oosten says milk-drying plants prove more complex, (given their mixed high-heat requirements), but indicated new plants will be designed to meet their low heat energy requirements with electricity, allowing biomass-fueled boilers to be used for higher temperature requirements. Oosten says electrode boilers may be used for peak loads as they are more responsive than wood boilers, but they are twice as expensive to run as current systems.
Oosten raised issues of wood fuel supply, however, stating, based on the locally available supply in each region, Fonterra could access 15 megawatts of wood into each of its 32 manufacturing sites. Given Fonterra has now put a stop to installing any new coal boilers or increasing capacity to burn coal,[6] their energy requirements, 40% of which is currently met by coal, are set to supercharge demand for wood fuel.
More recently, French multinational food-products corporation Danone announced they would invest $40 million to convert their Balclutha milk drying plant to 100% biomass, cutting CO2 emissions by 96% or 20,000 tones per year.[7]
Brook Brewerton, General Manager of Azwood Energy, welcomes this, stating that the current constraint in demand is at the heart of stated perceptions of constrained supply. He says there is ample forestry residue left unutilized on hillsides and the commercially unproven fixation on industrial electrification is hampering the switch to biomass fuel and confusing the low-emission messaging.
Azwood Energy sees key areas of this report’s findings as an exacerbation of the problem. The ICCC should encourage thermal heat plant users to firstly reduce energy demand, secondly reduce the low-temperature heat demand on boilers and then encourage the feasibility of fuel switching to biomass for high-temperature water and steam.
Biomass for high-temperature water and steam is the most cost-effective option, at about one-quarter of the cost to produce steam, when compared with electricity, and does not require a huge investment in electrical networks and infrastructure.
Until increased demand ramps up the supply chain logistics, however, the perception of scarcity will continue. Azwood Energy is poised to scale their operations at viable sites across New Zealand and has been commercially supplying biomass to large heat plant systems for almost 20 years.
Scion has reported that there is sufficient biomass in New Zealand to replace in the order of 15PJ of coal consumption with its associated GHG emissions reductions.[8] The Bioenergy Association states there is potentially enough biomass available from plantation forestry to replace 60% of coal used in existing heat plant over the next 30 years. It notes that the biomass fuel market is under-developed because the current demand for wood fuel is low, but that “there are enough suppliers with commercial and technical capability to expand supply if demand for wood fuel increases consistently and in an orderly manner”. [9]
Brewerton notes that the recoverability of wood energy in the scenarios underpinning the Scion and Bioenergy Association data is conservative, and not based on 17 years of residue recovery and methodology improvement. “There is far more out there if the market is willing to pay for it. Recoverability modeling is on the low side, but it is a good place to start.”
Azwood Energy eagerly awaits the PHiNZ report due to be released later this year by MBIE, which addresses process heat directly. It is hoped the regulatory and policy settings changes it advocates will provide the priority for wood fuel it deserves, as a proven, economically viable local energy source with both up and downstream environmental benefits.
[2] Dr Martin Atkins, Senior Research Fellow with Waikato University’s Energy Research Group, has advised some of New Zealand’s most iconic companies on their path towards lower emissions, from dairy giant, Fonterra, to pulp and paper processor, Oji.
“A society grows great when people plant trees whose shade they know they will never lie in.” – Greek Proverb
I spent the best part of Saturday planting trees, flaxes, and ferns along a stream bank with my son, Tom, and his best mate. The task was “wholesome” according to Tom, as the plantings should facilitate the recovery of a stream that was once badly polluted but now runs mostly clear following positive steps by my dairy farmer neighbor to abide by the Fonterra clean stream accords.
As I patted my own back for my newly enhanced green credentials, I turned my thoughts to the wider question of how governments wrestle with the challenge of leaving behind a better place for our grandchildren.
As part of its efforts to reduce emissions, the Government asked the Interim Climate Change Committee to provide advice on planning for the transition to 100 percent renewable electricity by 2035. The Government has also set a target for New Zealand’s economy to produce net-zero emissions by 2050.
Admirable goals, for sure, but does this approach stack up? When I run the numbers it is questionable whether going after more renewable energy is even worth it beyond a certain point.
Hang on a minute
At current rates of clean energy build, New Zealand should reach around 93 percent renewables by 2035, well short of the target set by the current Government. Going faster towards renewables would come with an uninviting economic burden. It is unlikely we will see much public demand for more hydro dams, so we are likely to be building out solar, wind and geothermal sources of energy. This would prove very costly on a national scale.
The closer we get to a reliance of 100 percent renewable energy, the more expensive it becomes to generate each unit of additional power. It’s a law of diminishing returns. The net result is that the consumer will end up paying ever-increasing energy prices as we strive for ecological nirvana.
The Government could, in this scenario, tax fossil fuels at an ever-increasing rate to keep electricity competitive, while passing laws that force consumers to switch. In the end, this would be political suicide and a market-distorting approach that could yield all sorts of unintended consequences.
Light bulb moment
On the other hand, fossil fuels used in transport and process heat offer a sensible, more economic option for change. These activities account for six times the greenhouse gas emissions of electricity production. Under this scenario, electricity prices would remain affordable and the emissions savings would be substantially higher from day one.
It was with this in mind that the Commission recommended that the Government amended its 100 percent renewal electricity future vision for the more realistic and attainable transport and process heat transformation approach. It is telling to note that this approach also offers incremental benefits, with every new electric vehicle or process heat facility reducing emissions on day one and into the future.
There are three major initiatives recommended by the Commission that, as I see them, make economic sense and deliver positive results in the short-, medium- and long-term. Those sensible recommendations are:
Phase-out of fossil fuels for process heat by deterring the development of any new fossil fuel process heat, and setting a clearly defined timetable to phase out fossil fuels in existing process heat facilities.
Set a target and develop incentives to reduce emissions from transport by converting to electric vehicles.
Investigate the potential for pumped hydro storage to eliminate the use of fossil fuels in the electricity system.
Meanwhile, I am off to plant another tree or two. My great-grandchildren might enjoy it’s shade one day.
New Zealand has set a target under the Paris Agreement to reduce its greenhouse gas emissions by 30% below 2005 levels by 2030, and to adopt increasingly more ambitious targets in the future.
Per capita, New Zealand’s emissions are one of the highest in the world with an output of <1% of the total world’s emissions.
Business New Zealand recently released a report which concluded that “opportunities to improve our performance in productivity and renewable penetration lie in every part of the energy supply chain. While productivity and renewables are not necessarily mutually exclusive, we need to consider the best policy balance. Our country is richly endowed with resources so should our focus be primarily on economic growth with a reliance on carbon prices to guide renewable penetration, or do we need stronger policy support for low-carbon economic output? With an economy heavily driven by trade, the cost of our choices has direct consequences for our international competitiveness. And, since our future is uncertain, how do we remain responsive and resilient to changes in the world around us?”
There is no doubt that the current Government’s policy strategy is being geared to meet the targets under the Paris Climate Accord.
The Insights Behind Sustainable Business Growth
Centrica recently published the following survey of businesses in 10 countries (UK, Ireland, Germany, Italy, France, Hungary, Belgium, Netherlands, USA and Mexico) and across 7 verticals (manufacturing, retail/ wholesale trade, healthcare/ medical, education/schools/universities, construction/ trades/ property development, travel/tourism/hospitality and property/real estate).
The survey identified some interesting trends:
Customers are driving change
Perceived risks are growing
Energy is an increasingly vital part of an overall business strategy
Yet only 1 in 8 businesses are doing it successfully
They concluded that in today’s fast-changing world, businesses need to find an innovative way to balance their financial performance and environmental policies using the following key focus areas.
What does this mean for your business?
Becoming a supportable business isn’t something that can be achieved overnight, and the journey can be challenging. Many successful businesses are complementing their internal expertise by engaging a third party, like Total Utilities, to help them understand the energy market and associated technologies, build business cases and engage stakeholders.
I lit my first fire at home for the year on the unusual date of May 31, just one day before the official beginning of winter.
I live in the sunny north side of Auckland, but I would have expected to see my dog sleeping in front of the fire by around late April.
There are some of us who believe that to the detriment of future generations the planet is suffering from global warming and others who feel that the scientific consensus is still a long way from being agreed. Either way, I do believe there is a general accord that we can’t keep consuming the planet’s resources at the rate we are, without very dire consequences.
Whether it is to save the planet or to drive efficiency, businesses are now using technology to reduce their carbon footprint. Some of these are unexciting and some are just plain cool. Either way, I describe below a few to pay attention to.
Tech to reduce the footprint
Methane co-generation
Very few people realize that Auckland’s largest landfill is also an energy park. The rubbish that goes into Waste Management’s Redvale Landfill captures more than 95 percent of the methane gas that is generated from the waste, which is then used to generate up to 14MW of electricity. Last year this meant it generated enough electricity to power 12,000 homes, making it the largest producer of renewable electricity in the Auckland region.
Heat recovery
Energy-intensive businesses, supported in some cases by subsidies from the Energy Efficiency and Conservation Authority (EECA), are now placing increased emphasis on the reuse and reinjection of heated water and steam in their industrial processes. We at Total Utilities have, as a result, seen excellent improvements in energy efficiency at factories and larger campuses.
Heat recovery is also used for go-generation where energy is converted to electricity and put back on the national grid.
Sensors, monitoring and the Internet of Things (IOT)
There is a difference between managing and monitoring business activities. A simple analogy is parents in the park: one couple hovers over their beloved children, constantly checking and rechecking their safety while exhausting everyone in the process; meanwhile, over at the park bench, another couple enjoys the sun, chats and drinks coffee while watching their young ones interact safely with the world and only interfering when they observe a real problem.
In the past, businesses used product-specific sensors to monitor equipment and processes. These sensors tended to be expensive, proprietary and clunky in their outputs (think: complex graphs on green screens).
Today an edgy new cousin has turned up, reducing the cost of monitoring, and providing rich insights via web-based applications that run on almost every device. This is called the Internet of Things (IOT). These simple, useful sensors provide streams of meaningful data about electricity consumption, temperature, process efficiency, humidity and more.
Artificial intelligence
While the Internet of Things sounds a bit like Nirvana, it does have one significant flaw: complexity. In theory, we could provide an IoT connector to every grain of sand on Earth without consuming all the available capacity.
Making sense of all the data it reports is the big problem. This is where Artificial Intelligence (AI) comes in. Capable of analyzing billions of bits of data from multiple data sources, AI is being used by many businesses to sift huge data pools and deliver the insights and activities that deliver competitive advantage and reduce wastage.
The Government has set a target for New Zealand’s economy to be net-zero emissions by 2050. Does our current approach stack up?
Methanex – adding 15% to national electricity demand?
In a recent submission to the Ministry of Business, Innovation and Employment (MBIE), Methanex, New Zealand’s largest single gas user suggested that should the company transition from gas-based manufacturing of methanol to electricity, this would increase New Zealand’s national electricity demand by around 15% (5,800 gigawatt-hours). In other words, there would be a Rio Tinto Aluminum Smelter-sized electricity user in Taranaki.
Methanex currently consumes around 88 petajoules of gas and 84 gigawatt-hours of electricity and produces about 2.4 million tonnes of methanol per year.
Located away from New Zealand’s main generation sources, this would place increasing pressure on the North Island generation mix. With only limited new baseload generation planned for the North Island, electrification of methanol production would require more coal and or gas being used by thermal generators.
Methanex says that should conditions become nonviable to remain in New Zealand, they would relocate to China. Because of China’s current generation mix and energy sources, this could increase global emissions by four to six million tonnes of carbon dioxide a year.
The hydrogen solution
Last year the New Zealand Government signed a memorandum of understanding with Japan to develop hydrogen production in the Taranaki region with the view to pave the way for a transition away from Natural Gas and LPG.
However electronic hydrogen production will further strain the New Zealand energy system as 41.4 kWh of electricity is required to produce 1 kg of hydrogen from water.
In a recent article, Centrica (owner of British Gas) warned a move to make the gas grid run on hydrogen is “unlikely to be practical”.
Centrica chief executive Iain Conn said natural gas would be “crucial” in the transition to reducing carbon emissions, and that Britain and other countries would need to start using more of it before it could wean off the fossil fuel.
“It is quite clear that we cannot get from A to B without using more natural gas,” he said at a speech at the Aurora Spring Forum in Oxford.
“I don’t believe in the mass use of pure hydrogen, I think it highly unlikely to be practical,”
Iain Conn
Conn said, but said he was open to injecting around nine per cent hydrogen into the grid.
“We have done a lot of decarbonising power generation, but heating and cooling will be key,” he added.
Heating and Cooling in Britain
The remarks come just a week after chancellor Philip Hammond announced a plan to ban fossil fuel boilers from new homes built after 2025.
“We will introduce a future homes’ standard mandating the end of fossil fuel heating systems in all new houses from 2025, delivering lower carbon and lower fuel bills too,” Hammond told parliament during last week’s Spring Statement.
Conn said that heat pumps would eventually start taking British homes off the gas grid. He also said the world would be able to add around one gigawatt of renewable power capacity each day for the next 30 years.
Heating and cooling in New Zealand
Heat pumps in New Zealand have only added to electricity demand in recent years as more are installed and being used for cooling in Summer as well as heating in Winter. While more efficient than electric fan heaters, gas heaters and oil column heaters, the added cooling load has counteracted the savings in many cases as large numbers of New Zealand homes are moved away from wood burners.
These concerns were echoed in New Zealand by Paul Goodeve, First Gas Chief Executive, saying that, “A key element is affordability. We need to find affordable ways to meet winter electricity peak demand and maintain the competitiveness of large industries that use gas for production. Would New Zealanders find it palatable to pay substantially more for their electricity to upgrade infrastructure which will be underutilised to cover large energy use sectors and peak winter use? These are considerations we believe policymakers need to take carefully into account when making decisions.”
