The Onslow power price cap problem
Quote:
Originally Posted by
Snoopy
Very interesting article on Onslow here.
https://www.newsroom.co.nz/trade-off...-nzs-lights-on
And the comments below the article are possibly even more interesting than the article itself. Here is a fraction of one comment from Ciaran Keogh of Environmental Consultants Otago Ltd.
"If we need to store more water for dry years, we can do it simply by maintaining an emergency buffer in the existing headwater lakes. That would cost nothing and have a better result because it would not consume any electricity."
"How many wind turbines could be built for $4billion? Working on a cost or $2Million per megawatt of capacity that equates to two gigawatts of generating capacity, all of which could be built in the North Island closest to the source of demand."
"The biggest flaw in the pumped storage idea is that it contains the expectation that dry spells will alternate with wet years but that is not how the climate works. The Interdecadal Pacific Oscillation causes a long-term drier and wetter phases, particularly in the South Island. NIWA notes in an item on its website titled “Long-term fluctuations in river flow conditions linked to the Interdecadal Pacific Oscillation” Flow data from 2000 onwards in the South Island support the idea that flows in those rivers are lower during the negative phase of the IPO. The data suggest that the post-2000 reduction in flow has been of the order of 10%. It is unclear for how long the IPO will remain negative, but previous IPO phases have lasted 20-30 years, so the current negative phase may last another 10-20 years. Pumped storage might just make the problem worse – not only does it use more electricity than it produces but it will suffer exactly the same problem as the existing “batteries” in the system in the lakes at the head of the Waikato, Clutha and Waitaki. Dry years happen in a multiyear series so what happens in year two once the water in the “battery” is run down in the first dry year? Back to where we started but with less electricity and $4Billion poorer?"
I have spent some time on the Contact Energy thread looking at how a staggered price cap plan at Onslow might affect the profitability of Contact Energy. But there is a far more serious consequence of choosing the wrong price cap at Onslow that will affect the future viability of the entire electric power system.
The problem is that the construction of new power stations becomes viable as the future wholesale power prices rise. This is very apparent from the Mercury Energy Annual Reports. The Property Plant and Equipment section of these reports contains a section reporting on 'assets carried at fair value'. At Mercury, these 'fair value' changes reached an extreme in FY2021 when suddenly $938m worth of 'new assets' appeared on the balance sheet. In fact these 'new assets' were not new in the bricks and mortar sense. This astonishing amount of money 'came into being' in just one year, based solely on the revised future earning power of Mercury's legacy power generation assets.
To some observers, this $938m materialised out of 'thin air'. However it was based on a model that foresaw future wholesale energy price rises to a level of $74MWh to $180MWh. If Onslow reduces these high price expectations, then this so called 'thin air capital' (created from future energy price expectations) will disappear. And with it, so will the economics that makes the building of certain new power stations viable.
Therein lies the 'balancing problem' for Onslow. Make the power price cap too high, and consumers will continue to be ripped off by gentailers manipulating the wholesale power price market. But make the power price cap too low, and suddenly the economics of the much needed new renewable power stations no longer work. I.e. they will not be built! Therein lies the fine balance that 'the great NZ battery Project' (for which Onslow is the favoured front runner) must strike with their 'market intervention' power pricing.
SNOOPY