Genesis shoots down Contact's 'ThermalCo', says it has better idea

Friday, 27 August 2021

Genesis could be paid to keep its Huntly turbines on hand under ‘capacity market’ proposal.

Genesis Energy chief executive Marc England says a proposal from Contact Energy to pool the country’s fossil-fuelled generation into a new business dubbed ThermalCo can’t fly.

England is instead promoting the idea of setting up a “capacity market” to smooth out electricity prices during periods when the industry needs to fall back on gas or coal generation.

Both proposals stem from generators’ concerns over how to keep spare capacity on hand once the sector moves to a higher proportion of renewable generation.

Contact chief executive Mike Fuge said earlier this month that he believed ThermalCo could help generators reduce carbon emissions by optimising the use of coal and gas during periods when there were shortfalls of renewables.

Burning coal creates about 80 per cent more carbon emissions than gas, for the same amount of electricity produced.

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But it can be prudent to turn on coal turbines first, ahead of periods of high demand or low supply, as they take several hours to ramp up to full production.

Contact Energy was concerned that residential subdivision could lead to reverse sensitivity issues with infrastructure and processes related to its nearby Te Mihi Geothermal Power Station.

Fuge has said Contact has no views on who would own ThermalCo, “whether that is a current industry player or players, private equity, pension funds or whether the Government has a stake – we are not even going there”.

“What is important is the structure. What you don’t want to see is the chaotic exit of different pieces of kit because people don’t have the confidence or the capability to maintain them any more,” he has previously said.

But England said he did not think it was a plausible scenario that “five generators could get together in a room and agree a monopoly – it’s against our competition law”.

He said Genesis had not engaged with Contact on the ThermalCo proposal, which he speculated had come about because of investment decisions Contact was faced with.

“My hypothesis is they have a difficult choice to make around shutting down the Taranaki Combined Cycle gas plant.

“They have got a massive capital bill if they want to keep that for another four years, so are in a corner and they're trying to find a solution to back up their own portfolio.”

Genesis’ capacity market proposal would see power companies in effect paid a retainer to keep spare generating capacity on hand, working essentially as an insurance scheme.

In return for the payments, generators would commit to offering power from that capacity into the market at a fixed price, during a power squeeze.

“You have some fixed-cost recovery required that would be ‘socialised’ across the generators, retailers, consumers or taxpayers – there are different models – but you'd have a price cap for thermal generation,” England said.

He indicated Genesis, which is the country’s largest thermal energy producer, was not promoting the idea out of self-interest, saying it should not be assumed Genesis would benefit financially.

“My interest in it is not profitability or commercial returns, it's how do we create a stable backup capacity for New Zealand’s transition to a more renewable future,” he said.

A capacity market has been in place in the UK since 2014, but has proved controversial.

Britain’s Institute for Energy Economics and Financial Analysis (IEEFA) concluded in a 2018 report that its capacity market “almost entirely supports existing generation at present, including inflexible nuclear and dirty, ageing coal-fired plants”.

It recommended the country instead invested more in renewables, saying the scheme had done “little more than to protect the status quo” while distorting energy markets and subsidising outdated investments.

However, the IEEFA said Britain’s capacity market could be improved if payments were targeted to support new-gas peakers, power storage, and demand responses agreements that incentivised organisations to cut back power demand during a shortage.

Major Electricity Users Group (MEUG) chairman John Harbord said a capacity market should be on the “list of things” that should be considered to improve the power market, but along with other ideas such as a single buyer model for the power market and the structural separation of generators and retailers.

He said the MEUG had had “limited discussions” on a capacity market and indicated he did not necessarily see it as a major advance.

“My initial impression is it is worth looking at, but I don’t see it making a substantial difference.

“It might help, but in and of itself, it is not going to change outcomes,” he said.