Monday, September 6, 2021

Bryan Leyland: The underlying cause of the blackouts.

"You set the rules, we’ll play the game!" - the underlying cause of the blackouts.

The blackouts on the night of 9 August happened because we did not have enough generating capacity and we were unable to shed enough non-essential load. The spot price reached $300,000 per MWh - more than 1000 times normal. According to market theory it should have substantially reduced demand. It didn’t.

The immediate cause was lack of generation. Tokaanu hydro station shutdown because the intake screens got blocked by weed and starved the turbines of water. Huntly power station didn’t get enough warning of the need for more generation. Wind power dropped rapidly and substantially as the peak demand approached. Taranaki combined cycle station was not available for generation and, anyway, gas supplies were marginal. Not all our water heating load was shed because the industry reforms have decimated this previously world leading demand management system.

All of this, combined with unusually miserable weather conditions left the System Operator with the need to demand load shedding.

“You set the rules, we’ll play the game” is the real cause of the power failure. It is the market rules that are at fault, not the players.

The market rules ignore the need for forward planning and inducements that would ensure that generation is available when needed. We didn’t have enough reserve capacity to keep the lights on because the market does not reward those who hold energy in reserve for contingencies.

As two electricity industry CEOs pointed out in their retirement speeches, the way to make money from the electricity market is to keep the system on the edge of a shortage. So that is what they do. So when we get an unusually high demand exacerbated by a few things going wrong, we get blackouts.

Other significant problems are:
  • the market does not signal the real cost of peak demand and does not provide inducements to manage peak demand and reward those who contribute to meeting it.

  • managing the risk of dry years was once the major consideration for power planners. The market fails to recognise the need to reward generators who hold capacity in reserve for dry years so Genesis is not paid an annual sum for holding sufficient coal on its stockpile.

  • the market pays all generators the price paid to the most expensive generator thus leading to windfall profits for hydro generators.
Consumers see a relatively small peak demand charge even though the real cost of meeting peak demand is much higher. It includes providing extra generating plant, extra transmission capacity and extra capacity in the distribution system. A realistic peak charge would reward generators for generating when needed and provide a substantial reward for those who reduce demand.

Managing the risk of dry years means that we need reserve energy amounting to 10% of annual consumption available for a 1 in 20 dry year. Providing this should be regarded as a national insurance policy reducing the risk of the huge economic damage that would result from a dry year shortage. One option is to pay generators an annual sum to hold energy in reserve.

The electricity reforms deprived the lines companies of the money needed to expand, operate and maintain their water heater control systems and this largely destroyed our once world leading and universal water heater control system. We should adopt advanced water heater control systems that could control anything from one water heater to every water heater in the country, help manage system frequency, ameliorate transmission constraints and dump load when needed to avoid the price spikes that are now common. It would save consumers millions of dollars. The problem is the market rules, not the technology.

The government’s ban on new gas exploration and consequent destruction of the gas industry will only get worse as existing fields rapidly run down. We should be exploring and drilling for gas including shale gas in the North Island and in shale and coal seam methane in the South Island.

The present market is not fit for purpose because it leaves the choice and timing of new generation to the generators and fails to provide a reward for those who hold capacity in reserve for dry years or emergencies. It also fails to recognise the value of reliable generation over wind and solar generation that are intermittent and unpredictable.

It all goes back to the Wholesale Market Electricity Development Group who chose a market design unsuited to the situation in New Zealand instead of the single buyer market that was recommended.

The existing market incentivises the generators and energy traders to maximise short-term profits rather than provide a reliable and economic supply in the long term. In order to encourage new generation, the spot market price has to be lifted well above the actual cost of generation at our existing hydropower stations. All generators are paid the spot price so every time it increases to encourage new generation, the hydro generators reap huge windfall profits. The consumer pays.

We should consider a single buyer independent of government interference running a market that coordinates generation to ensure a reliable and economic supply would result in international competition amongst generators to build the best and lowest cost new generation when it was needed. Any new generator would be selected on the basis that it best contributed to providing a long term economic and reliable supply.

If this market had been adopted the country would be billions of dollars better off. The Electricity Authority flatly refuses to contemplate the possibility that a better market design might exist.

The Climate Commission advises that we should rapidly increase the number of electric cars on the road and convert coal and gas heating to electric. An engineering analysis of this reveals that it cannot be achieved technically or economically in the timeframe they contemplate. The initial result will be more coal burning at Huntly and the long-term result would be blackouts and high prices.

So what could we do?

The first step would be to delay promoting electric cars and electric heating until the system is substantially fossil fuel free.

Emissions free generation would need thousands of MW of wind and solar power which will take time to get through the RMA and to build. It also also needs huge energy storage facilities to keep the lights on when the wind is not blowing and the sun is not shining. Nobody knows how to provide the storage or how much it will cost. For many technical and economic reasons Lake Onslow is not a solution.

I believe that we should adopt a single buyer market and concentrate on increasing geothermal and gas generation to reduce coal consumption. We should also contemplate adopting nuclear power using small modular reactors that have virtually no emissions, are safer than any other major form of power generation and are less expensive than wind and solar power once the need for backup capacity is taken into account.

At the very least, we should put a realistic price on peak demand and institute a competitive market for dry year reserve. These changes would go some way towards providing a reliable and economic supply.

Bryan Leyland MSc, DistFEngNZ, FIMechE, FIEE(rtd), is a power systems engineer with 60 years experience in New Zealand and overseas. He and his wife are majority-owners of a small hydro power station that reaps windfall profits from the market.


Terry m said...

That all looks like a resonably intelligent assesment by an intelligent person, so we'll get rid of that and continue down the "climate crisis" path.The government must be aware of the situation but once again their ambitions get in the way of their ability plus they can probably claw more tax the way things operate now. Intelligent anticipation is not one of their strong points.

DeeM said...

Bryan, you've fallen into the trap of looking at the problem from a technical, engineering, scientific and economic perspective and then proposing a solution which appears sensible.
Our government and the Climate Change Commission frown on this kind of blatant reasoning, logic and practicality. It flies straight into the face of their ideology and rhetoric, coupled with the fact that they likely just don't understand what you're talking about.
No, it's much better to wait for a dry year or some other major problem then blame the blackouts on "climate change" and tell everyone that we need to cut our emissions back even more.
Obviously, it will have nothing to do with the government's policy to strangle the coal and gas industry, encourage much higher usage of electricity then fill the gap by building wind and solar farms, no doubt paying Maori a huge royalty into the bargain.
Now do you see where you went wrong Bryan?

Ray S said...

Why was the electricity sector split up in the first place?
Competition and cheaper power was touted as the answer to a perceived problem. Their was no "problem", a rehash of the many power boards was a good thing by reducing the costs associated with each one. Turning all the generators into profit centres turned the whole industry up side down and made the generation of electricity purely profit driven.

New Zealand is a totally captive market and as such is not suited to a so called competitive environment. The high prices paid for peaks is exactly what was the case before all the changes.

With regard to generation and system management, base load should be generated by thermal, be it geothermal, coal or gas. Forget wind or solar as they are not reliable due to being reliant on suitable weather conditions.
Have a base load thermal generator and spinning hydro reserve allows a fast response to load increases.
Consideration to having a sole entity responsible for generation would enable more cohesive management of all generation.
The way I see it is that generators have no interest on supplying cheap electricity because the "market" can at times give them cash windfalls that are totally unwarranted. AS Brian pointed out.
Will it be fixed, not in my lifetime.

Geoff said...

This, when we only have a sprinkling of electric cars to charge up when they get home from work. The future looks interesting, not very bright, not very cheap, but interesting. Having worked in the power industry for many years I have always believed that it is far too important a national strategic asset to fall into the hands of a bunch of short sighted accountants ànd electricity market traders.

John said...

Bryan’s comments on the electricity market need correction – in particular his comments that hydro generators make super profits when prices spike.

Whilst a popular view with social media and many commentators - it is simply not true - and demonstrates a lack of understanding of just how the market operates.

All generators ae required to inject their outputs into the grid and are paid the spot price by the half hour. They then withdraw from the grid sufficient for their customers demands and pay the same price.

For a generator who has a balanced book ( Generation = demand ) the wholesale price is totally irrelevant - other than to maybe signal future investments over longer time frames,
For a generator who is currently long ( More generation than demand ) - they will benefit from higher prices. This is the scenario his own generator operates under with no retail customers.

Conversely a generator who is short will be financially impacted.

Remember the great bulk of consumers have contracts with a gentailer for typically two – three years - again they are not exposed to wholesale prices in the short term.

Big consumers who buy off the market are exposed - but they have the option of forward cover - negating the impact of higher prices. Some will have interruptible contracts which offer them an advantage to shut so in fact may benefit from higher prices.

They will only benefit from lower wholesale prices.

A generator's book will change during the year - basically the South Island hydro’s are snow fed in spring. The North Island rain fed in winter. Geothermal is constant throughout the year.

Both Meridian and Contact had exercised their swaptions with Genesis indicating they were short generation. Yet last November 2019 both were spilling water indicating long generation.

The recently announced financial results for these two hydro based companies clearly shows the negative impact that high prices have had on their financial results as a result of the short position – exactly what you would expect from hydro generators in a dry year situation.

This is the exact opposite of Bryan’s argument and perfectly predictable.

It is simply incorrect to say hydro generators benefit from higher wholesale prices.

In the much longer term yes - but we are talking over a period of many years.

Wholesale energy prices have been stable in real terms now for over a decade.

The extreme prices Bryan refers to simply indicate the allocation model is delivering non-feasible solutions – indicating insufficient generation. These are not the clearing prices which are capped at $2000 when this situation occurs.

Demand growth is quite low and now with a massive investment in solar going in - there is no current scenario where demand will expand dramatically. In fact with a Tiwai closure demand could fall.

In short - generators can only profit from higher prices if they can pass these on via consumer contracts which is very difficult in what is effectively a commodity market with zero switching costs. The EA web site whatsmynumber delivers that.

Currently New Zealand runs an energy only market, and with the expanding role of renewables it may well make sense to introduce a capacity component as Bryan has indicated.

In brief - if Huntly is only going to run for three months of the year, then it has to charge prices four times higher for that brief period it does run to remain viable over time.

These capacity charges would be included on every customer’s monthly power bill and passed through to Huntly which in return would only be allowed to charge constrained prices based on their marginal fuel costs.

In effect a guaranteed return for guaranteed availability and overall dry year supply security.

Allan said...

Some really excellent comments so far. So I have nothing to add except, "When you have lunatics running the asylum, don't expect a solution any time soon".

DeeM said...

Very enlightening comments. It would be good to see a reply from Bryan answering your points so the rest of us who are less-informed can get a clearer overall picture of just how the whole system works.

Bruce said...

You made a good point there Bryan when you mentioned the wind dropping as being a major cause of the low supply, in fact the straw that broke the camel's back. Here is our Government pushing Electric vehicles presumeable to use this wind generated electricity that everyone will plug into when they get home from work, before turning on the electric heaters and cooking dinner on their electric range.