“An electricity market based on trading kWh in the short-term will automatically provide a reliable and economic supply into the future”
In New Zealand, our electricity market certainly does not provide an economic and reliable supply. Instead, it is often unable to supply all the load and it produces wildly fluctuating power prices.
The prime objective of any modern power system is to deliver a reliable and economic supply over the long term whereas the prime objective of any market system is to maximise profit. For electricity markets to work, their rules must reward those who best provide reliable, affordable power.
The New Zealand electricity system is managed by a market that focuses on minimising day-to-day prices, on the blind assumption that low prices today will guarantee a reliable supply tomorrow. This assumption is wrong. Our power system is a complex, interconnected machine that delivers the lifeblood of our economy. It must deliver stable power at lowest cost not just today, but decades into the future. It has repeatedly failed to do this.
The fundamental error is treating electricity as a commodity like any other. It is not. Electricity must be generated at a rate that exactly matches demand, second by second, while keeping frequency and voltage within tight limits. The system must survive major disturbances — generator failures, transmission faults, and the rapid fluctuations inherent in wind and solar output. When it cannot, catastrophic cascading collapse becomes inevitable, as Spain recently demonstrated. Any system that subjects its customers to price spikes, blackouts, and unstable supply is incompatible with a functioning modern economy.
Current plans for future power supply increasingly rely on "demand side management" — a phrase that amounts to an admission that, when generating capacity falls short, consumers will be forced to reduce consumption. This ignores hard lessons from unreliable systems elsewhere: when electricity is scarce, many businesses don't curtail operations — they shut up shop or buy diesel generators. The latter results in higher costs and higher emissions, the opposite of what was intended.
An ideal power system is built around reliability, security, stability, and long-term least-cost design for the system as a whole. These qualities can only be achieved through rigorous engineering — careful long-term planning, comprehensive analysis of worst-case conditions, and the kind of disciplined foresight that experienced power engineers bring. When a system works well, success is invisible: the lights stay on, business operates efficiently, and everyone's expectations are quietly met. Failure, by contrast, is expensive and political dynamite.
Other factors — profit, market share, political targets, public perception — are legitimate considerations, but they are secondary. When they dominate over providing a reliable and economical supply, problems follow.
Short-term electricity markets are structured to optimise generation based on prices set by generators – the organisations that also control the supply. When there is surplus capacity, prices crash to zero. When there is a shortage, prices spike. As two departing New Zealand electricity executives openly acknowledged, the way to make money in the local market is to keep the system on the edge of shortage. This creates a perverse incentive: underinvestment in capacity becomes a profit strategy. High prices and forced demand reductions become routine features rather than emergency exceptions.
Short-term markets place little value on long-term resilience, adequate reserve capacity, energy storage, or system stability. The result is chronic underinvestment in precisely the assets that keep systems secure. The growing concentration on intermittent wind and solar compounds this problem – which is exacerbated by the fact that intermittent generation gets paid at the same rate as reliable generation. While wind and solar generation is often cheap at the station gate, the full system cost — backup capacity, storage, grid reinforcement — is borne by consumers, not by the owners of intermittent plant. Multiple independent analyses confirm the pattern: the higher the share of wind and solar on a system, the higher the ultimate cost to consumers. This fact has escaped many industry leaders in New Zealand.
Wind and solar development in most countries is driven heavily by political incentives and substantial subsidies. It is telling that while developers routinely claim their energy is now the cheapest available, they never argue that subsidies are therefore no longer needed. Without those subsidies, intermittent renewables would play a modest role in large-scale power generation.
When providing a reliable and economic supply are no longer treated as prime requirements, the risks don't disappear — they are simply deferred. Language shifts to conceal the retreat: "reliability" becomes "acceptable risk"; shortages become "price signals"; engineering constraints become "obstacles to be managed." The system drifts, steadily and quietly, away from everything that underpins it.
The solution is not to abandon electricity markets, but to redesign them around what the power system and the economy actually needs.[1] Long-term system performance — not short-term price — must guide both investment and operation. Engineers must be empowered to speak plainly about risks ahead, and their warnings must be taken seriously before failures occur rather than after.
If we want a reliable and affordable power system, we must make that a non-negotiable requirement. Markets should be the enabler of that goal, not the driver that overrides it. Ignore this reality, and high prices and shortages are not a risk — they are a certainty.
Bryan Leyland MSc, DistFEngNZ, FIMechE, FIEE(rtd) is a power systems engineer with 65 years experience in New Zealand and in many overseas countries.
[1] https://www.dropbox.com/scl/fi/r9etqqq0j1yl956tgqlkj/Leyland-Single-Buyer-Market-GWPF.pdf?rlkey=eqb0aq5oesh9hrrmd3i1x7eiw&st=3ocim0d6&dl=0
In New Zealand, our electricity market certainly does not provide an economic and reliable supply. Instead, it is often unable to supply all the load and it produces wildly fluctuating power prices.
The prime objective of any modern power system is to deliver a reliable and economic supply over the long term whereas the prime objective of any market system is to maximise profit. For electricity markets to work, their rules must reward those who best provide reliable, affordable power.
The New Zealand electricity system is managed by a market that focuses on minimising day-to-day prices, on the blind assumption that low prices today will guarantee a reliable supply tomorrow. This assumption is wrong. Our power system is a complex, interconnected machine that delivers the lifeblood of our economy. It must deliver stable power at lowest cost not just today, but decades into the future. It has repeatedly failed to do this.
The fundamental error is treating electricity as a commodity like any other. It is not. Electricity must be generated at a rate that exactly matches demand, second by second, while keeping frequency and voltage within tight limits. The system must survive major disturbances — generator failures, transmission faults, and the rapid fluctuations inherent in wind and solar output. When it cannot, catastrophic cascading collapse becomes inevitable, as Spain recently demonstrated. Any system that subjects its customers to price spikes, blackouts, and unstable supply is incompatible with a functioning modern economy.
Current plans for future power supply increasingly rely on "demand side management" — a phrase that amounts to an admission that, when generating capacity falls short, consumers will be forced to reduce consumption. This ignores hard lessons from unreliable systems elsewhere: when electricity is scarce, many businesses don't curtail operations — they shut up shop or buy diesel generators. The latter results in higher costs and higher emissions, the opposite of what was intended.
An ideal power system is built around reliability, security, stability, and long-term least-cost design for the system as a whole. These qualities can only be achieved through rigorous engineering — careful long-term planning, comprehensive analysis of worst-case conditions, and the kind of disciplined foresight that experienced power engineers bring. When a system works well, success is invisible: the lights stay on, business operates efficiently, and everyone's expectations are quietly met. Failure, by contrast, is expensive and political dynamite.
Other factors — profit, market share, political targets, public perception — are legitimate considerations, but they are secondary. When they dominate over providing a reliable and economical supply, problems follow.
Short-term electricity markets are structured to optimise generation based on prices set by generators – the organisations that also control the supply. When there is surplus capacity, prices crash to zero. When there is a shortage, prices spike. As two departing New Zealand electricity executives openly acknowledged, the way to make money in the local market is to keep the system on the edge of shortage. This creates a perverse incentive: underinvestment in capacity becomes a profit strategy. High prices and forced demand reductions become routine features rather than emergency exceptions.
Short-term markets place little value on long-term resilience, adequate reserve capacity, energy storage, or system stability. The result is chronic underinvestment in precisely the assets that keep systems secure. The growing concentration on intermittent wind and solar compounds this problem – which is exacerbated by the fact that intermittent generation gets paid at the same rate as reliable generation. While wind and solar generation is often cheap at the station gate, the full system cost — backup capacity, storage, grid reinforcement — is borne by consumers, not by the owners of intermittent plant. Multiple independent analyses confirm the pattern: the higher the share of wind and solar on a system, the higher the ultimate cost to consumers. This fact has escaped many industry leaders in New Zealand.
Wind and solar development in most countries is driven heavily by political incentives and substantial subsidies. It is telling that while developers routinely claim their energy is now the cheapest available, they never argue that subsidies are therefore no longer needed. Without those subsidies, intermittent renewables would play a modest role in large-scale power generation.
When providing a reliable and economic supply are no longer treated as prime requirements, the risks don't disappear — they are simply deferred. Language shifts to conceal the retreat: "reliability" becomes "acceptable risk"; shortages become "price signals"; engineering constraints become "obstacles to be managed." The system drifts, steadily and quietly, away from everything that underpins it.
The solution is not to abandon electricity markets, but to redesign them around what the power system and the economy actually needs.[1] Long-term system performance — not short-term price — must guide both investment and operation. Engineers must be empowered to speak plainly about risks ahead, and their warnings must be taken seriously before failures occur rather than after.
If we want a reliable and affordable power system, we must make that a non-negotiable requirement. Markets should be the enabler of that goal, not the driver that overrides it. Ignore this reality, and high prices and shortages are not a risk — they are a certainty.
Bryan Leyland MSc, DistFEngNZ, FIMechE, FIEE(rtd) is a power systems engineer with 65 years experience in New Zealand and in many overseas countries.
[1] https://www.dropbox.com/scl/fi/r9etqqq0j1yl956tgqlkj/Leyland-Single-Buyer-Market-GWPF.pdf?rlkey=eqb0aq5oesh9hrrmd3i1x7eiw&st=3ocim0d6&dl=0
14 comments:
I have thought that for a while. What incentive is there to build more power supply. Due to the lack of supply they are making good profits. This needs sorting out.
Our electricity infrastructure is another Moa Point waiting to happen. Call me a Marxist, but the State delivered our infrastructure such as electricity better than the present capitalist arrangement. Ideologies such as capitalism and co-governance are wrecking New Zealand: Rogernomics it simplistic and TPM policy isn't worth the paper it's written on. We need a more rational and realistic approach, without the slogans.
We could make New Zealand great again, but our Parliament needs to regain control of the nation and represent the people, not the interest groups.
Another insightful warning from Bryan Leyland. NZ was blessed with electrical pioneers that built hydro dams and successfully exploited our thermal fields. As our population grew rapidly over the years, successive Govt’s failed to accommodate our growing electricity needs. Our politicians had lost sight that cheap dependable energy is the foundation of economic growth and stability. The courage and foresight of our early pioneers has been replaced with tinkerers failing to make up for lost time. How can you have a grown up conversation with today’s politicians who are hell bent on duplicating the world wide failure of this green energy fantasy.
It still baffles me why a utility like electricity supply isn't treated the same as other utility supplies, like water, like internet! The unit price of those doesnt fluctuate depending on demand or supply, they are based on a fixed price.. sure, they go up with inflation or the like, but they dont rise and fall due to the change in price of data bits (internet), airwaves (mobiles), sewerage consistency, etc...
Electricity price should reflect a fixed cost of building the generation and transmission, with no increases, and a unit price for maintenance of that equip. What we have now is a black box rip off.
Why does NZF think that splitting generators from retailers will fix the electricity pricing system?
The market can provide all the supply needed, if any of the power companies were allowed to actually build new power generation. Every electricity company in New Zealand has applied to build wind farms, and they've all been knocked back by the environment court. Ditto for new hydro schemes, nuclear is illegal, searching for natural gas resources is illegal...
I don't see a failure of the market to provide, but the rules and red tape make it impossible to do so.
Anonymous at 12:59, you wonder why electricity is not treated like other utilities such as water and internet.
It is because electricity is energy and is similar to oil and other hydrocarbons (which are sometimes used to generate electricity). Electricity = Volts x Amps = Watts = energy. Energy can neither be created nor destroyed and energy which can be harnessed to power machines is a limited resource. So, it has a high variable cost, which is reflected in the price to the consumer.
While internet is electricity, what is being transported is information and the amount of electrical energy required is relatively small compared to mains supply.
I am also baffled as to why the Tekapo and Waitaki connected dam infrastructure does not increase their lake capacity by simply lifting the height of Lake Tekapo before spilling occurs .
The fact that lifting Tekapo capacity has a reoccurring increase in generation capacity of all the connected power stations seems obvious.
Question to Brian ;
Can we simply lift Tekapo capacity by a higher constructed dam adjacent to the outlet because the greater percentage of Lake Tekapo is landlocked ?
As always Bryan talks and writes the material that the big companies don't want you to see.
Thank you Bryan - your input is very much appreciated.
NZ pays its Maori "consultants" many millions of dollars each year to spout on about rubbish without any substance.
Meanwhile, people like Bryan seem to be rarely consulted, and every wise and experienced word should be regarded as extremely valuable.
I hope NZ pays Bryan decent fees for his contributions to our energy supply issues.
As an example of the way that "spot" energy prices can be gamed I give you this:
I recently got a visit from a solar electricity installer about a proposed system on my house roof. He was pushing the battery option and explained that at his house the battery wasn't primarily for use at night or for power outages. No, he explained that he had an app and a special contract with an undisclosed provider which allowed him to sell electricity back to the grid at a quite high price at certain peak times. Other times he could buy energy from the grid to charge the battery at a low price. So he was buying cheap and selling dear every day and making a nice tidy (un-taxed) profit. IMHO, residential solar is a scam. 7-9 years in electricity bill "savings" to pay for the system (which is only guaranteed for 10 years).
Barrie Davis said
"Energy can neither be created nor destroyed and energy which can be harnessed to power machines is a limited resource. So, it has a high variable cost, which is reflected in the price to the consumer."
This is gibberish and makes zero sense.
Everything on this planet is a limited resource except for stupidity and B.S.
And you said
"While internet is electricity, what is being transported is information and the amount of electrical energy required is relatively small compared to mains supply." What about data centers and the millions of hard drives in them (which is actually what the Internet really is, not "The Cloud"). At this point, its estimated that all these hard drives are sucking up about 15% of the Total electricity use on the planet. Not exactly small compared to "mains supply'" (whatever that is).
So Rob Beechey says “the world wide failure of this green energy fantasy”. Is this man blind? Solar panels and wind turbines are being established around this country and around the world like never before. Battery technology is being developed all the time. China is acerating the development of renewable energy, while Trump dismisses it as “a hoax” and frustrates its development. 80% of China’s car production, which now outstrips America’s, where mass car production began, is electric. The cost of renewable energy if falling all the time, and its uptake has received a tremendous boast, ironically, thanks to Trump and his disastrous Iranian war, which has given the world the greatest oil and gas shock in history. It’s hard to understand this luddite approach to renewable energy. It is the wave of the future, and the future is already here.
I might regret saying this but…..
It’s about time to split the generation and retail arms of the big four generators. Once that is done put all the generation into one State Owned company. Link it closely to Transpower so that generation and supply can be aligned.
This will smooth out generation price spikes because it will remove the gaming of the system by generation companies, producing a stable lower priced supply.
Sandy Fontwit, yes the data centers use a lot of mains power to process information, but the point I made was that it takes relatively little power to transport that information.
I did so because, for this discussion, it is useful to distinguish information on the telecommunications network from power on the national mains network.
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