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The ongoing evolution of the electricity market provides a better option than intervention for ensuring security of electricity supply, writes Fraser Clark, chief executive of the New Zealand Wind Energy Association.
Brian Leyland, in “Why the EC has got it wrong” (EnergyNZ Vol 4 N0 3), suggests the Commission has underestimated both the scale of the shortfalls and when they are likely to occur. Seeing a more pressing need for action than the Commission, he suggests a centralised and interventionist solution, but perhaps the ongoing evolution of the electricity market will prove a more robust solution for ensuring security of electricity supply? Concerns about energy shortfalls relate to the availability of traditional fuel sources. The electricity system is highly dependent on hydro generation. Rising gas prices have seen baseload gas generation sometimes run at a loss. The fixed costs of keeping the ageing Huntly available as dry year reserve are increasing. Given these fuel constraints we need to diversify our energy sources. Peak demand is rising and often approaches total available generating capacity, leading to capacity concerns. While there is a nominal surplus of capacity, generators are not always making it all available. Optimising the use of existing capacity will help, but if that is not enough new capacity will be required. How can we ensure investment to provide diversity and capacity proceeds? An interventionist approach could see yesterday’s solutions locked in, however inappropriate they are for addressing today’s and tomorrow’s problems. Whirinaki provides a case in point. New Zealand needs an electricity market that enables demand to be met at the lowest cost, that enables the use of existing assets to be optimised and that appropriately values energy and capacity to encourage the necessary investment. The current path of regulatory reform and market enhancement is a step in the right direction, as they create price signals about the value of energy, capacity and flexibility in the electricity system. Changes to the market design such as scarcity pricing and consumer rebates acknowledge the significance of energy shortages during dry years to the economy. The development of the hedge market provides more options for retailers to manage the risks these new measures create. Recent changes to the reserve energy scheme and the removal of disincentives for offering instantaneous reserves will enable market participants to see the true value of flexibility and peaking generation. The ongoing development of a market-based system will also allow the participants to see and adapt to the changing costs and availability of fuel. Historically, traditional ‘baseload’ generation has been the cheapest option for meeting ‘baseload’ demand. However, this is not likely to be the case in the future as the sources and costs of fuel for electricity generation are changing. Wind and geothermal are likely to become our lowest-cost sources of energy. As a result, wind energy’s contribution will continue to increase, contrary to Mr Leyland’s suggestion that there will be no significant increase in wind generation. This suggestion is based on the incorrect assumption that wind farms are uniformly uneconomic. The cost of wind generation is very site specific, being largely dependent on capital costs and wind resource. Factors such as the exchange rate and proximity to transmission have a significant influence on a project’s capital costs. A site’s wind regime determines a project’s yield, with a one metre per second difference in average wind speed influencing annual generation by as much as 20 percent. Far from being uneconomic, wind energy is already competing successfully and without subsidies with other forms of new generation. Wind energy now provides about four to five percent of our electricity, up from 2.5 percent at the end of 2008. With three wind farms under construction, and as developers are continuing to seek consent for new projects, this contribution will only increase further. As wind and geothermal generation increases, hydro capacity and valuable water resources will be freed up to make a greater contribution to meeting peaks in demand. Demand response and an improved transmission network, including the HVDC upgrade, will also play a role in ensuring demand is met at the lowest cost. Further market developments, such as a more liquid hedge market, wind energy and demand forecasting and inter-island ancillary services, will enable us to measure, understand and respond to risks related to both energy and capacity adequacy. These developments will also enable increasing amounts of wind generation to be managed cost-effectively. The electricity market is moving in the right direction to address energy and capacity concerns, but changes affecting the electricity system continue to emerge. The challenge now is to develop a system that is flexible and adaptable to enable ongoing development of the lowest cost options.
Energy NZ Vol.4 No.4 July-August 2010 |
The Electricity Commission’s Annual Security Assessment identified pending shortfalls of both energy and capacity in New Zealand’s electricity system.