Frankly speaking

Energy NZ talks with Transpower chief Dr Patrick Strange (pictured) as he reflects on the past, present and future of the electricity market and the role of the state’s transmission company.

Q. What is Transpower’s current assessment of the electricity market after a decade?

A. Obviously the market is not perfect and it’s not always delivering winter security at the moment, but it just needs modification. There are those that argue we should go back to central planning, but I don’t think we would have seen wind power come forward or the re-generation of geothermal if the industry hadn’t been opened up to the private sector and multiple views. We tend to forget the power outages in the 1950s, 1960s, and 1970s, and the last big problem in 1991, when it was under central planning.

Q. What do you think is the most effective way to catch up with security of supply – both for now and the future?

A. Clearly we need more generating plant. To support that, we need an adequate transmission system. We have an investment project somewhere north of $3 billion dollars, going towards $5 billion, which is a catch-up on the lull in spending over the past 18 years. We are not in a dissimilar situation from other markets around the world where there was a wave of building in the 1960s and 1970s then everybody sat back and simply used the assets. However, our situation is worse because of the philosophical ‘flight-path’ decision, based on belief that distributor generation would eventuate so any grid investment would be stranded. It didn’t take the ‘cost’ into account, if that didn’t eventuate. 

Now when we look forward over the next 30 years we have to take in many scenarios and invest for the worse case. We might end up with more assets than we need, but if you under-invest the cost is massive.

Q. How would you describe your relationship with your watchdog – the Electricity Commission?

A. It’s not unusual or inappropriate to have a regulatory body to watch over a monopoly service. Regulation has been appropriate, but I think both parties need to acknowledge that it is not right yet. We did operate for15 years unregulated (through 1990s and until 2003) and there was massive under-spending. Part of the reason was that Transpower, at the time, had trouble getting its bills paid. Now, once we get the investment approval from the EC, we have certainty that we will get paid, and we have the means to go ahead.

Q. Transpower is obligated to submit its upgrade plans and proposals to the Electricity Commission’s Grid Investment Test (GIT). Is this an effective yard-stick for upgrading the national grid in this hour of need – or is there a better way?

A. The GIT is the right approach, applied with care. It’s early days of the GIT, but we have concerns that it doesn’t capture the benefits of a competitive energy market, which probably justifies more spending on transmission.

Because the GIT probably understates these benefits currently, we tend to be under-investing. While it is appropriate to have an economic test for major grid projects, we have to be careful we don’t end up under-valuing benefits. The GITs are just an approximation and the danger of the test is that people start to get lost in the numbers. Take Pole 1, for instance, with its calculated benefits of around $200 million – the accuracy is probably plus or minus a $100 million, so any one project being $50 million better than another is insignificant. And we have fallen into that trap a little so far.

We are looking at reinforcing the Wairakei transmission ring and the cost is probably around $70 million, but ask Doug Heffernan [MRP] or David Baldwin [Contact Energy] what they are spending around Taupo and it’s $2-$3 billion. The danger is ending up optimising our $70 million while the real cost is their $3 billion.

Q. Transpower and the commission have collaborated over the Grid Upgrade Investment Review Policy (GUIRP) over the past two years. Could you elaborate?

This was set up before my time when Transpower and the EC were new and had their communication issues. It is very detailed, involving very regular communication between the regulator and transmission company. While probably a good answer to get over a problem at the time, long-term it’s not an approach I am comfortable with, because it is ties the regulator and the planner at the hip and involves a huge cost duplication. To be blunt – I look forward to the day we don’t need GUIRP in a regulatory environment.

Q. The government has tasked the commission with approving a grid-pricing methodology for Transpower. How would you rate the commission’s approach to this to date?

This is a huge issue and not an easy one for the commission. The two most important roles for the commission are as a regulator of the market and transmission pricing methodology. They could throw the rest away, but it must get those two things right. We get concerned when they get dragged into the likes of energy efficiency. Transmission pricing methodology is about how our $600 million revenue a year (and climbing) is allocated. At the moment it is largely ‘postage stamp’ with the DC link being charged to South Island generators. It’s our view we haven’t got it right yet. Perhaps there will never be perfect solution, but we think there should be a better locational price signal than we have at the moment.

Q. Some industry critics say a coal/gas-fired power station positioned in the South Island would solve a lot of supply/generation problems. Would you agree?

No. It’s not a simple as that. The problem in the south is energy management – not  capacity. Most of the time our power flow is from renewable sources in the South Island to the north and Auckland –‘the great beast’. We have capacity issues in the North Island on a cold night, and the new Pole 1 will help with the transfer of power from the South, but more thermal generation down there won’t help that problem. We already have heaps of capacity in the South Island and we are very dependent in the north on that generation for peak supply. This is probably much more efficient than building thermal ‘peakers’ up north that only run for short cold spells.

Q. The South Island’s hydro generation has been short for four years out of the past eight and we have occasionally sent power south. What’s Transpower’s take on this?

A. We are open about this – we don’t think the market settings are right yet. The way it is set up now, the generators don’t really see the cost of running short of water. We say the market should signal the cost. What did the spot price get to this year – $289 for much of the time? We believe without the backstop of a savings campaign (where the savings are free), it might have got to $1000, because that’s the true cost of running short. If it did get to a high like that – nobody could afford to run short and we would see a different way of managing water. The suppliers would be all over the customers with demand side (savings) and smart meters and paying them to have a shorter shower. I’ve heard people say it’s OK to go the public and ask for a savings campaign every few years – I say why don’t we let the market do that? Let the market write a tariff so if the retailer is very short it’s worth the customer’s while to save.

Q. We have heard of Transpower’s ‘Transmission 2040’ presentation. Could you elaborate on what this is and what it hopes to achieve?

This is ‘Transmission 2040’ – an 18 month programme where we are talking far more openly about our plans than Transpower has ever done in the past. It’s about looking ahead at the next 30-40 years with transmission planning. We  have conducted workshops industry-wide to get views on various scenarios, and it takes in everything from energy consumption to transmission technologies. It’s about putting down a road map of options for the next four decades and – so far – brilliant!