Government to take Lake Onslow power project forward despite $16b price tag

Thursday, 16 March 2023

The existing lake would be expanded to provide back-up power for ‘dry years’.

The Government will develop a detailed business case for a pumped hydro scheme at Lake Onslow, despite estimating it would cost $16 billion to build.

But Energy and Resources Minister Megan Woods indicated that it would continue hedging its bets for now by also continuing to examine the viability of an alternative, “multi-technology” plan to achieve the same goals as Lake Onslow.

Both Lake Onslow and the alternative would be designed to ensure the country had enough electricity in “dry years” when normal hydro generation was low and once the use of fossil fuels to bridge any gaps and meet peak demand was phased out.

Woods told a select committee on Thursday that the continued use of fossil fuels was unsustainable both from an environmental and an economic viewpoint.

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

* Megan Woods brushes off 'hurry along' from Environment Commissioner

* Govt awards $11.5m contract to investigate feasibility of Lake Onslow power scheme

If the country instead relied on burning coal to ensure supply matched demand, that would cost $2.2b in a dry year by 2050, including $1.1b for the coal and $1.1b in carbon prices, she said.

“You can imagine what that would do to electricity prices. We are considering what is best for New Zealand” she said.

If the Lake Onslow scheme goes ahead, the artificially-expanded lake high in the hills of Central Otago would in effect provide a massive battery with a charge equivalent to the total amount of power the entire country uses in six weeks, that could be drawn down when needed.

Woods said investigations showed a pumped hydro scheme at Lake Onslow would take about seven to nine years to build, at an estimated construction cost of $15.7b.

The alternative it will explore could see “biomass, flexible geothermal energy and hydrogen” and a smaller pumped hydro scheme at Upper Moawhango in the central North Island used to bridge the gap, but that pumped hydro scheme would need to be subject to agreement with iwi, Woods said.

Genesis originally floated the idea of a pumped hydro scheme at Upper Moawhango in 2021.

Officials have estimated the total construction costs of the alternative plan would be a bit cheaper, at about $13.5b, but would have “significantly higher ongoing operating costs”, Woods said.

“We always knew that any dry year battery storage solution will require significant investment, that’s why it’s important we thoroughly test these scenarios and get it right,” she said.

“Until we address the dry-year problem, we will continue to rely on burning expensive and polluting fossil fuels to produce our electricity. That’s bad for the climate and our power bills.”

A dry year solution would be “a huge step towards our mission to move towards more renewable energy generation”, Woods said.

Waikato University professor Earl Bardsley, who first identified the potential of the natural rock basin at Lake Otago to create an artificial lake, said the business case for the scheme would need to take a “wide view of the national benefits”, given the cost.

That could include the economic gain from electricity being cheaper than it otherwise would be, and the general advantages of the green transition, he said.

National Party energy spokesperson Stuart Smith says the electricity market is “well-functioning”.

Bardsley said the October election could make a fork in the country’s history, given National’s opposition to the scheme.

National Party energy spokesperson Stuart Smith questioned at a select committee whether the possible spending was “tone deaf in the middle of a cost-of-living crisis”.

Smith said last week that any solution to the dry-year problem could be left to the market to deliver.

Lake Onslow was “a return to the bad old days of expensive government investment in a well-functioning electricity market”, he said.

“National will immediately cancel the Lake Onslow project if elected in October and focus on making it easier for renewables to be consented and built,” he said.

Woods said a detailed business case was expected to be developed by the end of next year, but that it might then take a further two years to make a final investment decision.

She has not yet provided any comment on who might own or operate Lake Onslow.

State-owned enterprise and national grid operator Transpower has been tipped as one possible candidate.

Enerlytica analyst John Kidd forecast in 2020 that Onslow would be “a 1000-pound gorilla” that would tip the electricity market on its head if it proceeded.

John Carnegie, chief executive of Electricity Resources Aotearoa, whose members include businesses involved in oil and gas, said Lake Onslow would make investment in new generation harder and push up energy prices, describing it as “a cloud hanging over the energy system”.

“The idea of a government-owned, taxpayer-funded behemoth dominating the market is bad for business and households,” he said.

The Ministry of Business, Innovation and Employment has so far spent $24m investigating the potential of Lake Onslow, much of which has gone on engineering studies.

Woods said the next phase, which it has previously allocated $70m, would “dig even further before we look at spending such a huge amount of money”.

“But one thing we do know is that doing nothing to plan for climate change is not an option,” she said.