Consumers may need to pay for electricity they don’t use

Saturday, 20 January 2024

The Electricity Authority believes the risk there won’t be enough generation on hand to meet peak demand will rise in the winter of 2025.

The country’s electricity regulator is consulting on whether consumers and businesses should pay for reserve power generation that may not be needed, in order to reduce the risk of power cuts.

Meridian, Mercury, Genesis and Contact Energy posted their largest-ever combined operating profit of $2.7 billion in the year to June, which broker Forsyth Barr described as “in many ways a perfect year for the sector”.

But the Electricity Authority (EA) believes there may be a case for offering power firms an incentive to provide a buffer that would better ensure there was enough generation to meet demand.

It cautioned that would come at a cost to electricity customers, who would then need to foot the bill for some electricity that never in fact needed to be generated.

There were relatively few scares over power shortages last winter, thanks in part to improvements by network operator Transpower to the way in which generators are kept abreast of expected supply and demand.

But the EA acknowledged in a report on Tuesday that the switch towards the greater use of cheaper but more intermittent renewable generation was creating difficulties maintaining the reliability of power supplies.

Genesis Energy, owner of the coal and gas-fired Huntly Power Station, has lobbied in the past for the kind of interventions the Electricity Authority is now considering.

The winter of 2025 could pose more challenges than either last year or this year, due to the planned retirement of Contact Energy’s ageing gas-fired Taranaki Combined Cycle Power Station, it warned.

The EA noted it could take several hours to fully switch on coal turbines, and it could be uneconomic for power companies to keep expensive gas and coal generation on standby, ready to offer power into the market just in case it was needed.

“The recent drive for electrification of the economy has seen a sharp increase in peak demand over the last two years. In simple terms, there is not enough capacity available to be delivered to ensure electricity supply meets demand,” it said.

The authority suggested Transpower could pay generators to keep power plants on standby when supply and demand was tight, or to offer all their generating capacity into the market at a price.

It said an alternative would be for Transpower to pay large power users to cut electricity usage when there was less than a 200 megawatt buffer of spare capacity being offered into the market, with the cost of that also ultimately being passed on to other power users.

It suggested incentive payments might only be needed for “the next two to three winters”, after which it expected more new power plants and batteries would come online, helping to reduce the risk of shortages at peak times.

All the potential market interventions came with significant drawbacks, including the risk of unintended consequences, and would cost consumers, the EA warned.

“They are effectively costly insurance products that shift the risk from industry participants to consumers.”

The EA appeared to suggest it might be better to simply live with an increased risk of occasional power cuts for a while.

“No power system can achieve 100% reliability,” it said in its consultation document.

Former Genesis Energy chief executive Marc England lobbied in 2021 for the EA to establish a “capacity market”, similar to the option it is now consulting on, to provide incentives for a generation buffer.

England said then that would have the bonus of smoothing out electricity prices during periods when the industry had to fall back on gas or coal generation.

A Genesis spokesperson said it was digesting the EA’s report and would make a submission in due course.

Karen Boyes, chief executive of the Major Electricity Users Group, which represents major power users, said the ideas in the consultation paper were worth exploring.

She said that some businesses, such as the Tiwai Point aluminium smelter, already had agreements with their power retailers that saw them reduce demand during times of tight supply, but the incentives needed to be right.

Bigger companies could have back-up power, but It was not really palatable for consumers or small businesses to experience power cuts, she said.

“You would certainly hope the market was able to balance the system.

“The issues with having a hydro-dependent country are well known, and we know an increase in intermittent generation is coming, so we need to figure out a way to deal with that.”