The Future of Generation

Posted 25 August 2015 by Chris Hargreaves

The New Zealand energy market is shifting sands once more with recent announcements concerning the future of energy generation.

OtahuhuB

Following the new deal for the Tiwai Point aluminium smelter with Meridian, Contact and Genesis, a series of announcements have been made regarding our thermal baseload generation.

Contact has been quite vocal about the recent announcements with chief executive Dennis Barnes saying “The role of thermal plant in New Zealand’s electricity future is to support renewable generation and the growth of new technologies. This is best met by fast-start, gas-fired peaking power stations rather than large base-load plants.”

Genesis announced the intended 2018 closure of the remaining coal turbines at Huntly. More recently Contact has announced that Otahuhu B will be closed next month. Last week’s set of announcements were concluded by Genesis announcing the cancellation of their Solid Energy contract for the supply of coal, coming on the back of Solid Energy being placed into administration.

The big change was the decision to close and or reduce thermal generation stemmed from the energy market as opposed to government legislative intervention.

The underlying fundamental for this is that national demand remains relatively flat compared with pre GFC levels despite our more favourable economy. The Electricity Authority conducted a study on this earlier in the year and concluded that demand was in fact increasing, however transition to alternative energy sources, such as natural gas, and an increase in the uptake of solar for residential hot water had counterbalanced electricity demand.

It seems incredible that after 2018 there will be no large scale generation in the North Island above MRP’s central Waikato hydro system. This is despite more than one third of the population living and working in the Auckland region and the projected growth of another million people expected to live in the region by 2030.

That being said there is an ongoing trend for large energy users vacating the Auckland region in favour of more cost effective sites in other parts of the country or overseas. Pacific Steel is a recent example of this, vacating their Penrose site upon sale to Blue Scope and shifting operations to Glenbrook.

In turn, an announcement today suggests that NZ Steels’ Australian owners may look to close or mothball the Glenbrook site if savings targets cannot be met. Despite Glenbrook remaining profitable, the closure or mothballing would be used to prop up the viability of NZ Steels larger off shore operations. This follows a disturbing trend over recent years where NZ operations have been shut by overseas based companies in order to make their companies appear more competitive in larger markets.

Contact noted last week that even with the closure of Otahuhu and Southdown, the country’s generation capacity exceeds forecast demand, including a capacity margin, until 2019. After that date the closure of the Huntly coal units leave the market with about 300 MW of spare capacity.

Current Generation

With new technologies on the horizon, the big question is does New Zealand require new large scale generation moving beyond 2019?

New Zealand is a long skinny country with a dispersed population, more than one third of our generation capacity is roughly 1500kms from our main centre. Transmission and distribution losses average around 5% throughout the county however peak at around 10% north of Whangarei and around 8% in some areas on the outer edge of the central national grid. This is not the ideal scenario for traditional baseload generation with large transmission cabling.

Nuclear is never going to be an option for NZ, either geographically and politically. Maybe smaller scale projects placed closer to areas of demand are more ideal. Tidal generation has been proposed for the Kaipara Harbour with the view to supply the growth of North Auckland. This project was tied up in the environmental court for 3 years and eventually abandoned given uncertainty in the market at the end of 2013.

Small scale hydro, pumped hydro and or wind remain a good alternative, however barriers remain around resource consents. There is always the question of who has the right of use for river systems, especially the case in areas where river systems are used by farmers for irrigation.

Distributed generation such as solar is most useful in areas where traditional forms of generation are unavailable or untenable. They can be installed at or near to demand with fewer compliance issues. In most cases they are relatively quick to build and for the most part do not impact on their surrounding environment.

For C&I customers where they own their site or have a long term lease arrangement, solar generation remains most effective when they intend using the energy themselves. This reduces dependency on imported energy and reduces peak demand. With the right design, essential services can be covered in case of a wider network fault or outage.

There are some draw backs however with any exported energy flowing back into the local distribution grids due to frequency and harmonic distortion. This should improve over time, especially if any stored energy can be exported in a controlled and considered manner. With recent advancements in photo voltaic technology, smart products and battery storage is there a long term strategy that could keep national demand flat, removing the need for expensive (time consuming) large scale generation projects?

In the immediate term and on the back of recent announcements, ASX Energy futures have become slightly more volatile. Since last week 2016 ASX prices have jumped more than $8/MW at Otahuhu closing in the early to mid-$80’s.

ASX

Looking ahead, over the counter retail pricing will most likely follow the ASX trend upwards despite wholesale market pricing remaining relatively subdued. With less thermal baseload back up in the system, there will be more opportunity for fast start peaking plants and in the future, potentially distributed generation.

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