"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.
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.