As Kermit the frog said, it isn’t easy being green.
A Select Committee yesterday heard how difficult it was for the country’s electricity grid operator, Transpower, to prepare for the electrification of New Zealand that will be required if we are to meet net zero carbon emissions by 2050.
Their task is not made any easier by a range of current challenges, including the short life expectancy of the Huntly Power Station and the need to replace the Cook Strait cable.
But what is already clear is that electricity consumers will provide much of the funding for the upgrades required to replace ageing electricity grid infrastructure and the new work to accommodate the massive, expected increase in demand.
Last month, the Commission approved a new revenue ceiling of $5.9 billion for Transpower.
That will mean the average household’s monthly electricity bill will rise by approximately $10 ($120 annually) for the first year of the five-year regulatory period, which starts on 1 April 2025.
After the first year, consumers can expect monthly bills to increase by an average of about $5 ($60 annually) for the remaining four years.
That is the cost of going green.
It may propel power prices to near the top of the list of political issues just as the Government enters election year 2026.
Transpower chair Keith Turner is a veteran engineer from the old New Zealand Electricity Department, and the first CEO of Meridian is now involved in a number of Australian and New Zealand energy companies.
But the first of his immediate problems is the future of Huntly.
The Government has rested its solution to this year’s dry year by opening up gas exploration to power Huntly.
Alternatively, it has proposed importing gas, but Huntly would be needed either way.
Contact Energy was expected to decommission the country’s only other large-scale thermal station at Stratford by the end of the year, but that has been delayed.
Huntly can deliver 1200 MW of power at any one time; as an indication of the value of that much power, Transpower said the peak demand last week was 5250 MW at 8.00 a.m. on Wednesday.
“We get dry years about once every ten years,” Turner told the Committee.
“Theoretically, it’s supposed to be once every 20 years, but I suspect it’s getting a bit more frequent.
“And my time in the industry, and that’s 55 years, I’ve seen about 9 or 10 dry years through that period.
“We’ve been lucky that we’ve had a big stockpile of coal at Huntly to provide additional generation when there’s low hydro inflows. “
“In the last six months, we had a big load reduction at Tiwai as well, so that was a really helpful demand management response.
“But we do feel sensitive to the looming challenges that are in front of us around dry years.
“Huntly has served the country well. It’s 40 years old. It’s not going to last forever.
“If you look around the world, there are not many plants like Huntly running beyond 50 years, and there is a lot of work ahead of us as a country to protect the energy security that we’ve had for the last 40 years and deal with our dry years.”
But Huntly’s approaching demise comes at a time of never-before-seen growth in electricity demand.
Transpower’s acting CEO, John Clarke, told the Committee that by 2050, electricity demand is expected to be 68 per cent higher than it is today.
Turner and Clarke made it clear to the Committee that they believed batteries would play a crucial role in meeting this demand by storing solar and wind power when there was excess production from those two sources.
In fact, batteries would likely replace Huntly.
“You’re talking largely about the intermittent renewables, that the wind may not be blowing, the sun may not be shining, “said Clarke.
“That will be signalled at the times of high prices.
“People who have fast-starting hydro generation or increasingly grid-scale batteries will say, here’s the opportunity.
Clarke said the operators would charge their batteries at times of low demand and, therefore, low prices and supply the power when the demand increased and the market prices increased with it.
The Prime Minister has made a feature of his speeches and media conferences of blaming the Resource Management Act for holding up future electricity generation.
But Clarke suggested the industry’s biggest obstacle was the lags in getting the new generation connected to the grid.
“We have three times New Zealand’s currently installed electricity capacity waiting, possibly looking to connect,” he said.
Inquiries had gone from five in 2019 to 125.
Currently, it takes 18 months to investigate, design, and develop the connection between the new supplier and the grid, but Clarke said Transpower hoped to reduce that to 12.
However, the background to this issue is who should pay for what in the electricity grid.
Currently, the pricing model says that the people who benefit from parts of the grid are the ones who pay for them.
“If there’s an upgrade, the cost is shared between the people who get access to cheaper generation and the generators that benefit from it.”
But this can have some hard-to-understand outcomes.
“For a significant grid upgrade like the one for $300 million that we’ve just had approved through the Desert Road, a portion of the costs go to the generators.
“And so in that case, in the South Island, they benefit from having more access to the North Island, and a portion of the costs go to those in the central North Island, Auckland, Hamilton North that benefit from being able to access that lower cost generation.”
The challenge is not only connecting the new generators but also maintaining the existing grid, which is now starting to age.
Transpower says it will spend $4.7 billion over the next five years and that money must be recovered from consumers or borrowed.
“We have a lot of assets that were built 50 to 70 years ago,” said Transpower Chief Financial Officer Catherine Shaw.
“And so while we can maintain them to a certain extent, there’s a level of replenishment that’s required, and we’re looking to stay on top of it without spending more than is necessary.
“But the costs are going up, and a delay will only cost more.
“We appreciate that it’s a difficult time at the moment, with many costs going up and many households suffering, and we appreciate that we are a part of that.
“And while it’s $3.50 a month on average for transmission costs that we see going forward, we appreciate that is on top of a number of other costs that households are wearing.”
The big ticket item for spending over the next five years will be replacing the Cook Strait cables.
“We’ve reached the point where the undersea cables between Wellington and Blenheim will be 40 years old by 2030, 2032,” said Clarke.
“We thought it would be a good time around 2027 to go out and find out what’s involved, to get a contract to do this.
“We were rather surprised when we made some inquiries and found that if we did not place some form of order now, we would not get manufacturing until the likes of 2029 and 2030. “
It will be a big job.
“You’re making a commitment not just to purchase 120 or 160km of cables, you’re also making a decision about the boat that’s going to install them,” said Clarke.
“It’s a lot. We’re doing a lot of really thorough work here because this is something that will actually happen in six or seven years’ time.”
All of this will be added to power bills, but the real issue about electricity prices this year is that wholesale prices skyrocketed during the dry hydro lake crisis in August.
Prices jumped from around $300 a megawatt hour to $800.
That was a consequence of the electricity market which is a complex system but which is designed to provide an early warning of a supply crisis through wholesale pricing.
However, after the August crisis, three timber and paper mills in the central North Island Auckland announced they were closing because of the high prices.
Turner had little sympathy for their plight.
“After they had taken the option of being exposed to a spot electricity price, that’s a risk decision they have made,” he said.
“So while we’re concerned and empathetic about the impact on businesses, you know, in a wholesale electricity market where the market signals are supposed to make things work, it’s actually important that people take the right insurance.”
He said those who did not hedge but who bought their power on the spot market also got great rewards when times were good, and spot prices were close to zero.
“It’s no different to foreign exchange markets or debt,” said Clarke.
“If someone takes out a big loan, do they want a float at the spot interest rate, or do they hedge it at a fixed rate?
“And the electricity wholesale market is exactly the same.
“The gen-tailers provide what’s called hedges.
“They insure the consumer against that volatility.
“If a company decides not to hedge, that is a risk decision that they have made.”
But the spotlight will now switch from commercial consumers to households.
That is likely to mean power prices will be a political issue before the end of next year.
