Moving away from coal and gas burning towards wind and solar farms is an urgent and necessary transition. But if not managed properly, it may lead to higher prices in the short term, writes Rosie Collins. 

There are bumpy times ahead for New Zealand’s electricity market as we move towards 100% of electricity being generated using renewable energy sources by 2035, and leave natural gas and coal sealed in the ground. That’s because we need stable alternatives to meet peak energy demand and to keep the lights and heaters on when there’s not much water in our hydro dams during winter.

But this could mean higher electricity prices for you and me. 

Managing an electricity market is one of the more complicated problems out there. Essentially it’s a game of matching supply and demand at every instant of the day and night. You want to send enough electricity to the people who want to use it, when they want to use it. But this has to be perfectly matched by what the electricity generators are producing at that instant in time. Send too much and you get damaging increases in frequency. Send too little and you get black-outs.

But when you increase the amount of wind and solar generation, matching becomes more difficult. You can’t guarantee there is going to be enough wind or sun to meet all the electricity demand when and where you need it. What does the country do when the sun isn’t shining or the wind isn’t blowing? 

Because wind has only ever made up 5% of our electricity supply, with solar barely registering, intermittent generation hasn’t been a major problem here. We’ve always been able to quickly gush water out of hydro dams, use relatively stable geothermal steam, or burn coal and gas to smooth over any shortfalls in generation. That’s changing with our push to get to the 100% renewable electricity goal. But as the land of the long white cloud, Aotearoa may need to depend a lot more on wind rather than solar to help us get there.

Batteries are a partial solution, but they’re still very expensive and they don’t last long enough to get us through the winters that see low inflows into our hydro reservoirs (what we call a dry year). 

In the coming years, we could see electricity demand increase by about 70% because of increases in electric vehicles and electrification of industrial heating. That takes us from needing about 40TwH of electricity a year to 70TwH. We need to find a way to generate a lot more with renewables while making sure we can reliably meet peaks in electricity demand and troughs in our hydro generation.

The recent polar nights have been easily handled at my flat – we blast four heaters and hope our leaky Wellington rental can contain some of it. But when you amplify this demand for heating across the country, you can see how winter nights are a crunch point for power consumption. Then there’s the EV revolution. Imagine what happens to the grid when millions of New Zealanders come home from work and plug their EVs in at the same time.

The afterwork peak demand has traditionally been met by gas and coal generation topping up other hydro and geothermal generation. Unlike wind and solar, and to a lesser extent hydro, which only “go” when mother nature says so, these fossil-fuel generators are more reliable. They more or less work when you dial them up from a low burn. However, recent bans on offshore gas drilling and high emissions trading scheme (ETS) prices mean these generators are becoming more expensive to run.

As these policy changes bite, we can expect less investment in and more exits from these fossil-fuel generators in coming years. 

Managing this period of change is made harder by a few changing dynamics. First, wind is cheap and getting cheaper, as is solar. Once you have built a wind turbine or solar array, using the wind or sun is essentially free. But as South Australia, with its 60% of sun and wind power, has taught us, you also need batteries and reliable generation to cushion the effect of unexpected windless or cloudy days. 

To guarantee this reliable generation, we will have to pay for it. The recent high prices in the electricity spot market, caused by a confluence of a dry year, a gas shortage and a period of windless days, tells us what could be in store.

The government is investigating options to manage the renewable electricity transition. One of the proposals is pumped hydro storage, a massive “water battery” at Lake Onslow in Central Otago. The lake could store almost 20% of the electricity we need in a year now and 10% of what we will need in 2050. 

However, electricity market commentators fear this could be a disincentive for investment in new generation. High electricity prices are meant to signal to new players that it’s time to get involved. A giant water battery could depress these prices, because it could kick in when there are generation shortages. This sounds good for consumers, unless it deters investment in renewable generation in the first place, leading to higher prices in the long run. 

How and when would Lake Onslow operate? How do suppliers of back-up generation get a return on their investment if we don’t pay a premium for their services in dry years? 

This balancing act certainly deserves some credit. Getting to 100% renewable energy is possible. It’s just trickier – and more costly – than you think. 

Rosie Collins is an economist with Sense Partners