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(Photo: Getty Images)
(Photo: Getty Images)

OPINIONPoliticsAugust 11, 2021

Hey Clint! Is it time for our electricity regulators to revisit NZ Power?

(Photo: Getty Images)
(Photo: Getty Images)

To this day, the phrase ‘NZ Power’ reminds Clint Smith of his involvement in an embarrassing political gaffe. But he still thinks the idea has merit – even more so after this week’s blackouts.

“Hey Clint”, Gareth Hughes asked me as the camera rolled, “are we pleased?”

The year was 2013 and we were standing in his office, as he was being interviewed by Tova O’Brien about whether the newly announced Labour-Green “NZ Power” policy was intended to damage National’s asset sales plans, and if we were pleased about that (in fairness to Gareth, he was thrown into the interview as the lead spokesperson, Russel Norman, was away).

Being asked a question while the cameras rolled was a new one in my political advisor experience. Pitching my voice low and quiet – but, it turned out, still clearly audible on the piece Newshub ran that night – I replied “That’s not why we did the policy.”

I’ve never lived it down. The moment went viral, inspired the #heyClint hashtag on Twitter, and went on to be named one of the top political gaffes of the year.

If you were on NZ twitter in 2013, you probably remember this meme

But I digress. Why, eight years ago, did Labour and the Greens announce a plan to radically reform the electricity market put in place by National in the so-called Bradford reforms of the late 1990s? And what’s it got to do with the blackouts we experienced on Monday?

Part of the answer is in the way that market failed during the cold snap this week. Part is in the way the electricity gentailers make their money by charging gas peaker plant prices for the essentially free water running through their hydrodams.

Briefly, most of our electricity comes from hydrodams and is very cheap to make. The cost of the dams themselves was borne by the taxpayer decades ago. Now, it’s just a matter of maintaining them and the equipment, and running the water through the turbines as needed. But the owners of the dams, the gentailers, get to sell that electricity for whatever the spot price is in the market at present. That’s usually set by the most expensive form of electricity in our system, which usually includes gas.

The market works with gentailers, bidding in how much electricity they will supply and at what cost. Transpower, the system operator, tells the gentailers to dispatch their power starting with the lowest cost bids up to the point where enough supply is bought to meet demand. Crucially, all suppliers are paid the spot price set by the most expensive electricity that is needed regardless of their bid price. If some gas is needed to reach that point, the generators using hydro (often the same companies) make a mint.

Rentier profits (gained simply for owning a resource) aren’t good for an economy and the fact these rentier profits hinge on the continued use of gas to hold the market up at a high floor price isn’t good for the environment.

Nor is it good for grid stability. The incentive for gentailers is to build the cheapest new generation possible (which is usually wind, sometimes hydro, geothermal or solar) so they can extract the greatest super profits. But they are also incentivised not to build so much new generation that gas won’t be needed – if that happens, the spot price falls and those super profits evaporate.

There is currently 3000MW of new renewable electricity generation consented or planned. That’s enough to increase our generation capacity by a third and replace most, if not all, of our fossil fuel generation. But little has been built recently – the total generation capacity of the country has been static since 2007.

There’s little market incentive to build, although the prospect of surging demand from the electrification of transport and industrial heat is starting to see more generation built. In fact, the incentive is to err on the side of building less rather than more, and force the system to rely on those expensive gas power plants more often.

As demand increases (and the electrification of transport and industrial process heat will only increase it further) the system is being dragged closer and closer to the edge where there isn’t enough supply to meet demand, because that’s where the profit is to be had. When you’re close the edge, it only takes a small confluence of problems – a record cold night spiking demand, and a problem with dispatching enough generation due to a gentailer not bringing power plants online – for blackouts like we saw on Monday.

NZ Power was an attempt to address this by changing the spot price market dynamic. The idea was a “monopsony” – a sole buyer that would buy all electricity from the generators, split from the retailers. NZ Power would pay for electricity on a “cost plus” basis, where each generation option gets paid its actual costs of production plus a fair profit. We would still use the cheapest electricity first, but it wouldn’t be paid the same as the most expensive power.

No rentier profits for hydro, lower prices overall, and no incentive to keep the gas plants in the market.

NZ Power could prefer renewable sources over fossil fuels by giving them a higher profit margin than coal and gas, and setting an end date for when it would stop buying fossil fuel power. The profit margin would encourage new generation to be built, without the incentive to keep the market at the edge of shortage. NZ Power would be able to increase that profit margin for new generation if necessary to get new capacity built.

That was the theory, at least, but the public was not willing to trust the opposition with such a dramatic reform back in 2014.

Years after being unceremoniously dropped as a policy following the 2014 election, does it turn out that NZ Power was the solution all along?

Like Gareth Hughes, I don’t know the answer.

But it’s clear that the Bradford reforms aren’t working.

The government is reviewing the electricity system currently and the blackouts will only add urgency to that work. They should take this opportunity to fix the market and put our electricity system on a more sustainable path.

Clint Smith is a former advisor to the Green and Labour parties and the director of Victor Strategy and Communications

New government biofuels mandates hope to change the fuel landscape in NZ (Image: Tina Tiller)
New government biofuels mandates hope to change the fuel landscape in NZ (Image: Tina Tiller)

PoliticsAugust 10, 2021

Government takes aim at ‘commercial decision’ by Genesis Energy for blackout

New government biofuels mandates hope to change the fuel landscape in NZ (Image: Tina Tiller)
New government biofuels mandates hope to change the fuel landscape in NZ (Image: Tina Tiller)

It wasn’t errant seaweed (this was a serious theory) or a lack of natural gas that caused a massive blackout yesterday, but ‘commercial decisions’ by Genesis Energy. The government is demanding answers. Justin Giovannetti reports.

A blackout that plunged parts of New Zealand into darkness during a cold winter night yesterday wasn’t caused by a failure of the country’s electrical system, but a power company’s decision to disregard an emergency order to produce more.

While the country’s electrical system was pushed to its limits by all-time high demand, energy minister Megan Woods said the blackout was preventable and the result of “commercial decisions” by Genesis Energy not to fire up a third boiler at the Huntly power station, the country’s largest.

The government is now demanding answers from Genesis and blaming the company for causing the country’s electricity market to fail.

“All New Zealanders would have an expectation that when we’re putting out emergency notices, that we’re in a situation where we are in the middle of a storm and cold snap, I think New Zealanders rightly have an expectation that all that can be generated will,” she said.

Not only was their a boiler staying unused at Huntly at the same time as thousands of New Zealanders were in the dark, but the electrical cable linking the North Island with the massive generating capacity across the South Island was only running at half capacity.

On Monday morning, Transpower, the agency responsible for running the national grid, had forecast massive demand and warned the private companies that provide New Zealand’s electricity to be prepared for an emergency. In a statement, Genesis said it looked at the situation and chose not to turn on the boiler because it expected generation would meet demand.

“There was sufficient generation capacity available to the market prior to the loss of generation at Tokaanu and sudden decline in wind generation that coincided with peak demand,” the company said in a statement.

The Tokaanu power station saw a sudden fall in generation when seaweed entered the dam’s water intake, while powerful winds stilled, stopping turbine blades across the country. Huntly uses coal and gas, the type of power station usually used when demand is at its peak and all generation is turned on. However, the company said because it chose not to activate the third boiler when it got a warning earlier in the day from Transpower, it would have taken several hours to get it ready, so it wouldn’t have helped with the blackouts.

The company’s explanation doesn’t wash with Woods. For starters, while Genesis might be a large power company, only Transpower actually has a firm sense of what’s happening across the power system. Power companies aren’t supposed to second-guess an emergency order from the grid operator and then ignore it.

“They only have line of sight into what they are doing,” Woods said of Genesis.

Once Transpower saw that demand was exceeding generation, it asked local utilities to start shutting off water cylinders and other big users of power. Once that wasn’t enough, entire neighbourhoods were cut off. In the end, it looks like the operator turned off about twice as many connections as needed.

That decision is one of a “very long list of questions” the minister has over what happened yesterday. She’s also looking into why the public was given no notice of the situation when power companies had all day to prepare.

Woods is also asking Genesis if they chose not to fire up the boiler to increase power prices on purpose. The company did not make a spokesperson available for comment. If an investigation by the grid operator finds out that Genesis reduced power to make a buck, Woods said things would not end well for the company.

“I don’t think that’s a tolerable situation. If there was a situation where there was such a constraint so that New Zealanders couldn’t be sure of their ability to keep the lights on and heaters on, then we have serious questions,” she said.

The entire electrical system is currently under review and the minister wouldn’t say whether she thought it was a functioning market that’s serving New Zealanders well.

As the country continues to add more electric vehicles and larger appliances to the grid it will face additional pressure in the coming years. There are currently no realistic proposals to build large-scale power stations that don’t rely on the wind or sun, neither of which would have been useful in the middle of a still, cold night. To ensure the power market stays stable, experts say the country will need to look at ways to reduce demand for electricity in the future, including much more insulation for homes.

A proposal to strengthen the power system is the government’s Lake Onslow project, which centres around the idea of turning an artificial lake into a big battery for the country. The $4 billion project would see water pumped into an enlarged reservoir when power prices are low and let to drain out, spinning a turbine, when prices surge. While it could be tapped in times of emergency, the proposed volume of water is large enough to back up the energy supply over an entire dry season when dam levels are low.