A Just Climate Change?
Being warm and dry is a basic physiological necessity according to Maslow’s Hierarchy of Need
Summary of Article
- New Zealand needs a carbon zero economic transformation on the scale of the 1980s free market reforms or the 1930s creation of the social welfare state.
- For New Zealand to progress with this transformation it needs to invest in large scale energy storage schemes so that the country can achieve by 2035 the 100% renewable electricity carbon zero goal.
- Existing private sector electricity generation companies have been good investors in new renewable power schemes which will likely continue.
- The government needs to facilitate this renewable energy investment by investing in electricity transmission and energy storage to ensure security of supply.
- The $4bn Lake Onslow pumped hydro storage scheme is a competitive example of energy storage needed for security of supply.
- Pumped hydro storage is mature technology that is immediately viable for the 100% renewable electricity target unlike the mooted hydrogen economy which is reliant on further technological innovation.
Introduction
New Zealand passed the Zero Carbon Bill with near unanimous support. The legislation has been called a “historic moment” by the Prime Minister Jacinda Ardern.
Yet the legislation is only scaffolding for potential zero carbon reforms to come.
To tackle the twin crises of climate change and rising inequality (mostly a housing crisis) New Zealand needs transformational change on the scale of the creation of the social welfare state in the 1930s or the free market reforms of the 1980s. Even further back in history, as New Zealand developed its modern national identity there were several other turning points, these included the 1890’s agrarian democracy reforms and the little considered ruptures of the Maori Wars and Vogelism.
Societal pressure from climate change and increasing inequality demands this transformation. Much like, the loss of the UK export market in the 1970s, the 1930s Great Depression and the 1880s Long Depression led to change.
The US faces many of the same pressures, including the social outcry coming from the climate emergency. Their proposed transformation is called the Green New Deal.
New Zealand’s history has been characterised by relatively brief periods of intense change, in response to social pressure, breaking longer periods of slumber.
New Zealand’s free market reforms were definitely transformational but many considered them unjust. For the electricity industry the free market reforms removed political interference from determining when and where new generation capacity was needed.
Less positively the result of the free market reforms on the electricity industry was to burden residential electricity consumers with significant real price increases (inflation adjusted). Rising residential electricity prices compared to static or falling prices for industrial and commercial users indicates who paid for the free market transformation.
The question this paper asks is -who will pay for the transformation that climate change requires? It is mooted that a zero carbon economy should have a ‘just transition’. What would that look like?
An examination of New Zealand’s electricity industry shows some options.
Analysis of the Electricity Industry
The Huntly Power Station is one of the biggest carbon dioxide greenhouse gas emitters in New Zealand.
If Huntly is permanently mothballed this will be a big step towards New Zealand achieving its 100% renewable electricity by 2035 goal. New Zealand will only terminate Huntly when it is confident it has enough generation and stored capacity so that it can produce 100% of its electricity from renewable sources regardless of adverse conditions.
The Huntly Power station is operated by Genesis Energy Limited, a publicly listed company (currently 51% owned by the New Zealand Government), and is capable of supplying over 31% of the country’s electricity needs.
Huntly is the largest electricity generation facility in New Zealand by capacity. It is made up of two modern gas fired and two gas/coal fired generating units. The power station has access to a huge store of energy in the form of coal and gas supplies that are not affected by adverse weather conditions. Huntly is therefore frequently the electricity supplier of last resort.
Genesis has announced a plan that from 2025 it will only use coal thermal generation in abnormal market conditions. Probably meaning some combination of high demand and low supply, so a fairly meaningless statement, as that is what they currently do. Genesis further announced that they intend to stop using coal completely from 2030. Genesis has made no announcement about discontinuing the use of gas fired generation.
In other words, Genesis is not planning on stopping its Huntly Power Station greenhouse gas emissions, but it will transition over the next ten years to a less emitting option (gas).
Will the electricity market deliver more renewable generation? For new generation the answer is yes. New wind power generation only costs $60 per MWh versus $200 for gas.
Electricity market analyst Neville Gluyas -author of Market delivers the power and cuts carbon for the NZ Herald -states that renewable generation now makes up 84% of generation compared to 71% 20 years ago. He notes that wind and geothermal power are much cheaper than 10 years ago and much cheaper than the current forward wholesale price of electricity. It is predicted that renewable generation will increase to over 93% by 2035 in a business as usual scenario by the Interim Climate Change Committee.
The way the electricity generation market works in New Zealand, the marginal provider -the last most expensive bidded generation needed to meet demand -in every half-hour period, sets the wholesale price for all generators for that period.
Whenever demand for electricity is high and supply is low, then the high wholesale prices are likely to have been set by thermal generators, such as Huntly. At other times, when prices have been low, it is likely to have been set by renewable generation.
Eventually, over time wholesale prices filters through to the retail price.
Whether the low renewable generation price or the high gas and coal price dominates retail pricing will depend on how frequently the coal and gas backup generation is required.
Since the market was deregulated it is estimated that $10bn has been invested in new generation, mostly in renewables. The electricity market has successfully matched supply with demand. When demand has increased supply has followed. When demand settles so has supply. In the coming decades there will be tens of $billions of further capital investment into renewable power generation.
In summary, the electricity market has effectively allocated resources for new generation capacity and is likely to continue doing so. In this sense the free market reforms have been effective.
Unfortunately the market is less effective at allocating resources for transmitting and storing electricity.
Older readers may remember the anger about the five weeks in 1998 when Auckland’s central business district lost power. At that time there was a more laissez faire attitude to the electricity market. Since then electricity retailers and government transmission provider -Transpower have been more diligent about ensuring transmission infrastructure is maintained and upgraded.
Transmission costs are set nationally and users are charged equally regardless of distance and cost of supply. Some users such as Rio Tinto argue this is unfair as they are paying for the transmission capital costs of New Zealand’s expanding population. In reality it is residential consumers who are paying the most and energy efficiency efforts have minimised demand growth in recent years, so the issue is not as unfair to Rio Tinto as it makes out.
Rio Tinto has threatened to close down its aluminum smelter at Tiwai Point unless they get cheaper power. There would be economic and environmental costs for closing down a clean energy aluminum smelter but there would also be gains. The smelter uses 13% of New Zealand’s electricity supply and if this was released onto the market, electricity prices would fall for residential users, especially in the South Island. Potentially other industrial users could also utilise this energy to become less polluting -such as replacing Fonterra’s coal fired milk dryers -if they had secure access to lower priced electricity. An international commentator has said that drying milk using coal is insane.
There is a policy making effort by the Electricity Authority to move to a more free market users pays system for allocating transmission costs, but the issue is hotly contested, even among the big industrial major energy user group.
Storage capacity is another flaw in New Zealand’s electricity market. Existing generators have little incentive to increase storage capacity because that would lead to lower prices for the electricity they supply.
New Zealand doesn’t have high electricity prices compared to many OECD countries but Norway the country most similar to New Zealand from a electricity perspective has much cheaper prices.
Norway uses a similar marginal pricing market model to New Zealand and it has a high proportion of its generation capacity as hydro power too. The main difference between the two countries is Norway has over a year of stored generation capacity and New Zealand has a little over a month i.e. if the feeder rivers dried up, the hydro lakes in New Zealand would be empty in about 5 weeks versus a year in Norway.
Norway’s greater storage capacity means electricity supply is more stable and so is its marginal prices. It has been suggested that Norway’s hydro-electrical system could be Europe’s battery that could soak up all its excess wind and solar power and release it on demand. To do this means researching how hydro power can more efficiently ramp up or down its power supply, which the layman’s physics paper titled -Norway could be Europe’s green battery -interestingly describes.
Low electricity prices, high gasoline prices and generous support for buying electric vehicles mean that over half of Norway’s car sales in 2019 have been plug-in electric.
The effect of New Zealand’s lack of lake storage capacity can be seen on its wholesale spot prices in the above and below graphs.
The sudden increase in hydro storage capacity at the end of March 2019 is an example of how storage affects marginal wholesale prices, as it led to a quick price drop to around $120 per MWh. In other words, if electricity storage had been at 3,200 GWh from the start of March then prices would have been $80 per MWh cheaper.
There was also an environmental effect because it meant more coal-fired power generation. In the two weeks prior to the flood events the rate of coal burning at the Huntly Power Station was never less than 7,000 MWh per day.
In this scenario, if a carbon tax was implemented, then the coal might not have been burnt but the electricity price would have been even higher.
Policy Reform Options?
Taxing carbon or tightening up the Emission Trading Scheme will increase the cost of emitting greenhouse gases, such as, the thermal backup power coming from Huntly. Because of the marginal pricing model that the electricity industry uses, increasing the costs for the last most expensive bidded generation, increases wholesale spot prices for everyone. Over time higher wholesale prices will affect retail prices.
If Huntly is discouraged from providing backup electricity but no other storage capacity is added to the grid this will lead to price increases and potentially power shortages. Some consumers will be priced out of using electricity when demand is high and supply is low.
Higher electricity prices due to carbon taxes is a “just transition” problem for New Zealand moving to a zero carbon economy. Because carbon taxes or the emission trading scheme will not be regarded as “just” if they result in higher electricity prices and power shortages.
Another option would be building more hydro storage capacity.
Pumped hydro storage schemes increase storage capacity by pumping water up to a storage lake when there is a surplus of generating capacity (and low prices) and reversing the pump to generate electricity when there is a shortage of electricity supply to the grid (when prices are high).
A proposed pumped hydro storage scheme in Lake Onslow, Central Otago near Roxburgh has a realisable potential energy of about 5,000 gigawatt hours that could buffer the country’s electricity system during a dry year.
The Lake Onslow scheme could also address intermittency for new North Island wind generation, such as Turitea Wind Farm, that may be required for growing North Island demand. But that would necessitate an upgrade of the Inter-Island HVDC link. Smaller backup generation near the wind generation sites may be the better option for the intermittency issue, as the scale of the required backup generation for wind power is much less than for the ‘dry year’ hydro problem.
With an estimated capital cost of up to $4 billion the Lake Onslow project has a strong economic case, due to its low kilowatt per hour capital costs for storing energy. It would be large ‘battery’ that is more competitive than any of the other storage options, especially for longer-term storage, at the scale New Zealand needs. The economic competitiveness of the Lake Onslow scheme is acknowledged by the April 2019, Interim Climate Change, Dry Year Storage Options Analysis report.
Pumped hydro storage would have low operating costs. Because it has an 80% round trip efficiency rate. This means, for example it could buy power for $60 MWh from a wind power generator when they have surplus power and later sell the electricity for $75 MWh when grid power supply is short. This would be the pricing that breaks-even when considering only the ‘energy loss’ factor. Note $75 MWh is much cheaper than $200 MWh that thermal generators would charge for backup power.
Potentially the pumped hydro storage option could provide a transition to 100% renewable electricity whilst delivering lower and more stable electricity prices than the business as usual option. Compared to the carbon tax option it provides lower priced electricity and no power shortages. So pumped hydro storage has the potential to contribute positively towards a just climate change transformation.
As discussed earlier, it is unlikely that any existing generator would build a dry year energy storage scheme, because it devalues their future revenue by lowering wholesale electricity spot prices.
The government might choose to build a large scale energy storage scheme as a project of national significance and then gift the scheme to Transpower to run on a cost neutral basis with respect to operating costs. The overall aim being to ensure security of supply as the electricity market delivers more renewable generation capacity.
Alternatively, Transpower could build and operate the energy storage scheme as a special purpose vehicle, borrowing for the capital costs and repaying the debt by either adding a ‘security of supply’ line charge, or by increasing the spread on the storage scheme’s electricity buying and selling prices to cover capital as well as operating costs.
The special purpose vehicle option would add $14/month onto household electricity bills over a 35 year term, if all of the infrastructure cost was added to a ‘security of supply’ line charge. In exchange for this higher line charge, per unit charges would be lower and more stable, as wholesale electricity spot prices would not rise above $75MWh, possibly even lower if renewable generation costs continue to fall, and of course electricity would come from 100% renewable sources.
Financing figures based on the estimated $4bn infrastructure cost of the Lake Onslow pumped hydro scheme, New Zealand having approximately 1.5m households, the debt having a 5.37% interest rate and a 35 year term. This financing option would be a similar to the arrangement given by ACC for the Milldale special purpose vehicle infrastructure financing structure.
Many people make a big deal about the lower cost of borrowing that governments can make and this is true governments can borrow cheaply. But the reason for the lower interest rates is the taxpayer is guaranteeing the risk that the debt will not be repaid (because sometimes infrastructure projects turn into white elephants). The risk that infrastructure debt providers would take in the Transpower special purpose vehicle option is that Transpower could become defunct over the 35 year life cycle of the loan. Say if households collectively switched from the grid to their own personal renewable generators (solar?) and battery systems. That is a probably unlikely to happen but not impossible.
Both the government and the Transpower build options would evenly spread the cost of the electricity industry achieving its carbon zero target across society. Although the government build option would lower electricity prices the most (low connection fee and low per unit charge) which would benefit low income earners who might struggle paying higher connection fees.
Lower electricity prices and more stable supply will lead to a faster ‘electrification’ of the economy, for example by the greater uptake of electric vehicles, as seen in Norway or by big industrial users, such as Fonterra converting from fossil fuels to renewable electricity.
$4 bn in capital costs for the Lake Onslow storage scheme may seem like a lot of money but if it is evenly spread across New Zealand’s roughly 1.5m households it is less than $3000 per household. Because such a large scale energy storage project would be an intergenerational piece of infrastructure, it should be considered like a mortgage that is paid off over many years. This means New Zealand transitioning to 100% renewable electricity wouldn’t be a significant burden on the public in any one budgetary year.
A spokesman for Energy and Resources Minister Megan Woods said to the Otago Daily Times that the Government would announce by the end of the year who would investigate the potential for pumped hydro storage in New Zealand.
The Minister also considers green hydrogen as one of the potential tools that will help assist New Zealand to reduce greenhouse gas emissions. Megan Woods has released a Green Paper -A Vision for Hydrogen in New Zealand that examines this proposition.
Megan Woods has talked up the benefits of using hydrogen to transfer and store renewable energy.
For this scenario to reach the 100% renewable electricity target by 2035, business journalist Jenée Tibshraeny reports an over-capacity of renewable energy (hydro, geothermal, wind, solar and biomass) should to be built so that coal and gas wouldn’t be needed when demand peaks and/or supply slumps.
It is not clear why over the next fifteen years an over-capacity of renewable generation will be built by the electricity industry. That is not how the electricity market operates and currently producing green hydrogen in its own right is not financially viable.
The technology for commercially producing and storing green hydrogen is still work in progress. The capital costs are unknown unlike pumped hydro storage which is a mature technology. The operating costs for storing hydrogen is significantly higher than for pumped hydro. Hydrogen’s round trip efficiency is less than 50%. That means electricity purchased at $60 MHh has to be sold at more than $120 MHh just to cover hydrogen’s energy loss factor when it is used as a grid battery.
Hydrogen may well have an important part to play in the just transition to a zero carbon economy. It could fit the roles unsuitable for ‘electrification’, such as, heavy vehicles, seafaring shipping, trains where it is uneconomic to electrify the tracks and carbon neutral steel making.
In Conclusion
A hydrogen economic transformation might be a good long term 2050 target for the whole economy achieving zero carbon. This is because the hydrogen economy is reliant on technology to mature. In contrast, pumped hydro storage is already mature technology making it an immediate viable option for achieving the earlier 2035 target of 100% renewable electricity.
In my opinion pumped hydro storage is an easier, more just and more certain way for New Zealand’s electricity industry to transition to zero carbon.
Addendum
- A description of the Lake Onslow pumped hydro storage scheme written by Prof Earl Bardsley who originally proposed the scheme can be read here.
- If New Zealand could have a Green New Deal what would be the first practical step? My vote is to replace Huntly with pumped hydro. Integrating affordable housing with mass transit would be a close second (declaration of bias I am an advocate for a particular rail integrated with housing scheme in Christchurch). What do readers think should be the first step?
- EleVisionNZ have an interesting proposal for a more fact based decision making process for electricity policy making decisions. Although I haven’t tried it out for pumped hydro (I am a bit of a computer technophobe).
