What happens if we pull the plug on Lake Onslow?

Tuesday, 4 April 2023

power and electricity generic. Transpower. national grid

ANALYSIS: The Government and the Opposition have set out very different approaches to tackling the slowly-unfolding crisis in front of the electricity industry.

Energy Minister Megan Woods is pressing ahead with investigating the Lake Onslow pumped hydro scheme, despite officials estimating it could cost $15.7 billion, not including transmission and running costs.

But National Party leader Christopher Luxon has suggested all that is needed is to expedite resource consents for wind and solar farms by cutting “red tape”.

The looming problem facing the power industry was described by the Ministry of Business, Innovation and Employment (MBIE) on Friday, in its 200-page “phase one” report on what the Government has dubbed the NZ Battery Project.

A shallow lake nestled high in the Central Otago hill country could electrify the country.

* Lake Onslow estimated to cost between $8b and $28b, depending what's included

* Minister says $15b Lake Onslow investment decision should be above politics

New Zealand generates about 57% of the 40 terawatt-hours (40TWh) of electricity it consumes each year from hydroelectricity. But, during droughts, hydro can come up 5TWh short of what it needs to provide over a period of several months.

Until now, gaps have been plugged by burning gas and coal for electricity, but that can't continue if the country is going to phase out the use of fossil-fuelled generation by 2035.

MBIE identified 28 theoretical solutions to the problem and appears to have left no stone completely unturned.

It even considered laying a power line across the Tasman Sea to buy Australian electricity in times of shortage, before apparently ruling that out.

Electricity generators have been talking up 'demand management' incentives that would persuade consumers and industries to use less power when hydro was in short supply, as well as novel schemes such as perhaps stockpiling 'green hydrogen' in the form of ammonia.

But MBIE concluded neither could completely solve the dry-year problem.

National leader Christopher Luxon said cutting red tape would “drive a surge of investment in renewable electricity generation so New Zealand can double its supply of affordable, clean energy”.

In its view, the choices boil down to forking out for pumped hydro, continuing to rely on fossil fuels indefinitely, “over building” so much renewable generation that there are no dry-year gaps to fill, or just accepting there may be times when people just have to endure some power cuts.

It estimated renewable-overbuild would require enough spare generating capacity to “spill”, or waste, 4.3TWh of power each year.

“This option requires build-out of marginally-economic renewable generation and is unlikely to be realised without government intervention or underwriting,” it observed.

MBIE suggests it could be a toss up between building Lake Onslow, or tackling the dry year problem by building geothermal plants that would mostly lie idle, burning biomass such as wood, and having a “green hydrogen” plant that could be switched off, when power was short.

A smaller pumped hydro scheme at the southern end of the Kaimanawa ranges in the central North Island, could be an option, but the practicalities of that don’t appear to have been looked at in any detail.

Unfortunately, there is not enough unredacted information in the MBIE study to properly understand exactly how it came to the conclusions it did.

The unredacted report also sheds little light on what the geological studies of Lake Onslow showed, for example whether the vagaries of the local schist rock lie behind its high and uncertain cost estimates.

MBIE also didn't rule out just “doing nothing” about the dry-year problem.

Indeed, it suggested the do-nothing option should be explored further before any government pressed the button on Lake Onslow given its likely cost.

National’s intent to speed up the consenting of renewables could only be helpful in promoting more generation, even if the strict one-year cap on the resource-consent process it is suggesting raises a few questions.

Would the clock stop if a council was waiting on information from developers, for example, or could they run down the clock until consents had to be automatically granted?

But, more importantly, it couldn’t change the big picture.

Generators have every incentive to avoid “over building” renewable power stations that might only be used in a dry year.

That is evidenced by the fact they have sat on plenty of resource consents for large wind farms for more than decade without building them.

Under the current electricity market structure, overbuilding renewable generation would risk collapsing wholesale electricity prices to zero any time that hydro power was not in extreme short supply, which would be commercial suicide for any generator.

Regrettably, the politics of electricity now appear thoroughly polarised.

The National Party didn't see the need to wait for, let alone critique, MBIE’s expert report before denouncing any spending on exploring the Lake Onslow option.

Meanwhile, the Government could be accused of putting too many eggs into one basket and neglecting the issues surrounding market reform.

In the absence of a consensus on a realistic way forward, the likely outcome may be a 'not do much' scenario.

More renewable generation will be built, but it won't be enough to provide effective dry-year cover.

Fossil fuels will continue to be burnt for electricity well beyond the Government's aspirational stop date of 2030, and that may involve more of a switch to coal as supplies of natural gas inevitably become even less reliable in outlying years.

Better demand management will hopefully take some of the sting out of the problem and generators may muddle through most of the time, but with more volatile electricity prices and a growing risk-come-reality of periodic blackouts as each year goes by.