All-blackout

New Zealand has major problems with its power supply. There are three underlying reasons: the weather, a flawed electricity market and a drive for ‘net zero’.

Sixty-five percent of New Zealand’s electricity is provided by hydropower, and the remainder by geothermal, gas, coal, wind and some solar. In a dry year, hydro’s ability to deliver falls away, and we lose about 10% of our generation. In the past, we always tried to have the reservoirs full by the end of summer to guard against this possibility. But, when we switched to an electricity market, this was forgotten.

This year, we failed to refill the reservoirs, and levels are now unusually low, and declining fast. They could bottom out if it does not rain heavily in the next month or so.

The ability of our fossil fuel power stations to step into the gap has been severely restricted. We used to get 20% of our electricity from gas-fired power stations, but six years ago, as part of their decarbonisation policy, the previous government banned further exploration, and we are now desperately short of fuel. The new government is encouraging new exploration efforts, but it will be too little too late.

And the situation has been made worse by poor market design. New Zealand was one of the pioneers of electricity markets, and chose a risky model, which has proved to be seriously flawed – it has failed to deliver sufficient generating capacity to get us through a dry year.

As a result, the problems this year have led to wholesale market prices rising to ridiculous levels – as much as £1/kWh. This has already caused some factories to shut down; others are under threat. The politicians are beginning to realise that the energy crisis could have serious effects on consumers, and there is speculation that they will be forced to intervene. This could mean forcing our gas and coal-fired power stations to run flat out day and night – assuming they have got enough fuel, which is not at all certain. Failing this, the only solution in the short term may be rolling blackouts. That will cause major disruption all over the country.

How did we get here?

Firstly, the electricity market is simply not fit for purpose. The underlying propositions are that ‘electricity is a commodity like any other’ and that ‘when the price goes up, the demand goes down’. But electricity is not a commodity like any other, because it does not have an alternative good and it does not have significant price elasticity. So it isn't a market that Adam Smith would recognise. As two departing CEOs said, the way to make money in the market is to keep the system on the edge of a shortage. Which means that disaster is inevitable if a dry year occurs.

An article I wrote that explains why the market is a failure can be found here. It recommends a single buyer market, a design which I believe would work because all it does is add genuine competition to the old integrated system, which did work quite well.

But another cause is the blind pursuit of ‘Net Zero’, which is what has driven the closing down of gas exploration and the desire to shut down our coal fired station, which, right now, is doing a vital job in keeping the lights on.

The long-term problem

If it does rain heavily and soon – within a month or six weeks – we could be out of trouble. But then the long-term problem rears its head: empty storage lakes that need to be refilled, not a lot of snow pack to melt in the springtime, declining supplies of gas, and the imminent shutdown of a 380 MW combined cycle station, which needs a gas supply for the next 20 years or so. None can be solved in the time available.

All we are doing is building more wind and solar, which means that, more and more, the price will skyrocket when they are in short supply and crash when they are abundant. This means that they will not be making enough money to pay for their construction and operation. As New Zealand does not directly subsidise wind and solar power, we can't even be sure that the generators will be stupid enough to continue building them. To be economic, wind and solar must be supported by low-cost long-term storage. But there is no technology that can deliver this right now. Batteries are too expensive by a factor of 50 or so.

The expectation is that the demand is going to increase, as domestic and industrial heat and road transport are electrified (although the extent to which this will happen in the face of rising power prices is debatable). However, we will get certainly get more and more data centres, which are a 24-hour per day load and need a reliable supply.

So the load will go up but, compared to now, our ability to keep the lights on when wind and solar are not delivering will reduce. Australia is 2000 km away, so there is no chance of importing from there, even if they did have power to spare.

We could build more geothermal stations, but that takes time, especially as the oil rigs they need to drill production wells have all departed overseas. There is probably 1000 MW so of known geothermal potential, and there is the possibility that more could be found with exploration. But this is not a quick solution.

The only quick solution is to buy more turbines running on diesel. Not a nice prospect.

In the long-term we could consider more hydro generation, but that is blocked by the environmentalists, even though there is probably 2000 MW of potential left in the South Island. For those who do not believe in dangerous man-made climate change, more coal and gas generation are an obvious solution.

For those who believe that man-made global warming is real and dangerous, we could be urgently considering nuclear power, which is the only practical and economic way of reducing CO2 emissions from thermal power generation. I suspect that in spite of a long-held opposition to nuclear armed and propelled ships, the New Zealand public are more sympathetic to nuclear power than they are believed to be.

Whatever happens, New Zealand faces a very uncertain future with its power supply. I strongly suspect it will be just the first of many countries to run into this kind of trouble.