$4 billion Lake Onslow pumped hydro scheme could 'tip electricity market on head'

Saturday, 1 August 2020

Lake Onslow project could make looming gap in North Island energy supply harder to plug in short term, analyst warns.

The Government’s proposed Lake Onslow hydro scheme would be likely to lower and smooth out wholesale electricity pricing, but could tip the industry on its head, an energy analyst says.

Energy Minister Megan Woods announced last week that the Government would spend $30 million investigating a multi-billion-dollar pumped hydro scheme which could be in operation by 2030.

It would, in effect, turn the South Island rock basin into a massive 5000 gigawatt rechargeable battery to power the country during periods of little rainfall or wind, ending its dependence on gas and coal generation.

Enerlytica analyst John Kidd said the “sheer scale” of the proposed scheme had left the industry shell-shocked.

Tiwai Point Smelter is looking likely to close after its owner Rio Tinto annouced plans to wind down operations yesterday.

* A prudent approach to New Zealand's renewable energy goals

* Industry figures say Lake Onslow hydro project not worth it

“It is so big that the entire market would need to reconsider how it behaves in a market with Onslow present,” he said.

The development came on top of the possible closure of the Tiwai Point aluminium smelter next year that could leave South Island dams “spilling water” for years, and regulatory action against Meridian Energy which the Electricity Authority has accused of market manipulation.

At 5000GWh, Lake Onslow would be capable of storing about the same amount of energy as all the country’s existing hydro schemes combined.

It would store about 25,000 times as much power as the largest actual battery in the world – South Australia’s 194MWh A$90m (NZ$97m) Hornsdale lithium battery farm, which was built by Telsa in the wake of Adelaide’s 2016 power black-out.

Waikato University associate professor Earl Bardsley has forecast that even though its main purpose would be to serve as a battery, the Lake Onslow scheme would probably be a net generator of electricity overall.

That is because some of the power used to pump water back up to the lake would come from water that would otherwise be spilled from existing hydro schemes.

Kidd said many questions were unanswered, including who might own and operate the Lake Onslow scheme and whether it would run on a commercial basis.

Transpower could own the scheme and use it to balance the grid, or the Government could own it directly but that would be a “complete departure from existing arrangements”, he said.

Energy Minister Megan Woods says investment could help NZ reach 100 per cent renewable goal.

“This project, on face value, does have the potential to tip existing pricing arrangements and market structures on their head.

“For existing operators and potential investors in the sector it is very destabilising.”

Other pumped storage schemes around the world tended to sit with existing market arrangements, but Lake Onslow had the potential to “fully crowd out existing price signals because of its scale”.

“It is the 1000-pound gorilla that can come into market and swamp all else ahead of it.

The Lake Onslow scheme would store 25,000 times the power of South Australia’s Tesla battery bank, which is the largest manufactured battery in the world.

“It has the potential to bring a ‘hard ceiling’ to prices.”

The Government’s decision to investigate the Lake Onslow scheme follows slow progress by the industry in retiring existing fossil fuel generation, including the coal and gas Huntly power station which owner Genesis Energy had originally slated for closure in 2018.

It could build a foundation for increased investment in cheap wind generation whose contribution – without a means to store grid power – can be constrained by its uncertainty of supply.

According to the Wind Energy Association, over the next four years, resource consents are due to lapse on about 1.9GW of proposed wind farms for which power companies including Meridian, Genesis and Mercury obtained planning approval up to 15 years ago, but which they have not built.

That consented capacity compares with about 1GW of wind generating capacity that either has been built or is under construction.

In 2018, the Productivity Commission concluded, after getting “high level” advice from consultant Sapere, that the costs of a Lake Onslow pumped hydro scheme might be “comparable” to using fossil fuels to power the country during periods of low renewable generation.

But it said the scheme would have “challenging environmental impacts that would make obtaining resource consents extremely difficult”.

It also forecast opposition from existing generators because of the impact it would have on their “economic viability”.

“The environmental and economic risks for a single project of such a magnitude would make it unattractive to private investors,” it also said.

Kidd said that whether or not the project went ahead, the simple fact the proposal was now in play could dissuade electricity companies from investing in other generation that could be needed within the next few years to avoid power shortages in the North Island during periods of peak demand.

“Even with Tiwai backing away from the market, there is going to be an ongoing need for new peaking generation to come into the market well ahead of when Onslow would potentially be built.

“The signals for operators who might be considering building that plant are now deeply confusing,” he said.

The market was already “in turmoil” with the withdrawal of Tiwai, and how generators would respond was deeply uncertain, he said.

- An earlier version of this story reported that Professor Bardsley worked at Otago University, rather than Waikato University.