Last Month the electricity in various parts of the North Island was deliberately turned off on Monday evening 9 August. The finger-pointing and blame-game started early the next morning and has been the topic of conversation and media attention for the past week. It is not over yet and nor should it be. The official investigations are under-way. My August elocal article1 talked about power bills and the many organisations involved in getting power to our homes and businesses. This system failed a reported 35,000 families on a cold winter night.
So what happened? In simple terms it started with not enough power being available to meet demand and stop the whole system crashing2. Local network companies were urgently requested to decrease load. Counties Energy, our local distributor achieved this through turning off controlled load (hot water cylinders and the like) whereas in several other areas of the North Island all power was cut.
Transpower in its role as System Operator requested the local distributors to reduce load. They did this to maintain stability on the grid. Had they not done that the laws of physics mean this situation could have been a much worse i.e., a total black-out for the North Island or worse the country – a situation not easily recovered from. Many fingers are now pointing to blame the System Operator. Transpower openly acknowledged in the industry debrief session the following day that some of their calculations in the heat of the moment were overstated and it requested some distributors to take off more load than necessary. It is also apparent there are learnings to be had from what and how the System Operator communicated with the industry (and perhaps the public).
Minister of Energy, Megan Woods, jumped into the controversy blaming Genesis Energy and in doing so confirming that she did not understand how the electricity market she has responsibility for actually works. I am not known to be a fan of the large Generator / retailers and the profits they have managed to extract from electricity consumers over the years, but top marks to Marc England, the CEO, for educating the Minister.
The Minister said Genesis had allowed commercial considerations to withhold generation that should have been available to meet the supply gap, including not having the third 250MW coal/gas fuelled Rankine unit at Huntly fired up and ready to go. In a way her “commercial restraint” comment was correct. For the last 25 years our electricity system requires generators to compete on a half-hour basis to sell electrons (or reserves) to the market. No one pays them per se to have generation available.
In fact, a number of factors contributed to the potential generation short fall the System Operator had flagged as early as 6.40am that day. Early in the evening the wind dropped, Genesis experienced a problem with lake weed blocking inflows to its Tokaanu hydro station, and the cold weather saw a kick-up in load that was higher than predicted.
Wholesale spot market prices are an important part of the scheduling and dispatch process overseen by the System Operator. Generators bid energy at a nominated price for each half-hour. The highest accepted price sets the price paid to all generation dispatched (used). Basic economics of supply and demand explain why limited available generation pushes prices higher. The shortage of generation offered on Monday evening caused the pricing system to have a melt-down. The prices applying for Monday evening are yet to be finalised, but interim numbers are $11,000/MWh for a two hour period. To put this into perspective, the $0.14/kWh average number for energy for our household bills I referred to in the August article equates to $11.00/kWh ie the cost of running a one bar heater for an hour. However, don’t panic we won’t get charged that, unless you are one of the very few (generally very large) consumers who are on spot pricing and even then financial hedges may offset this cost.
Analysis of the events leading up to and the outcome that evening demonstrate just how complex the NZ electricity system is and how fine the tolerances are. The Industry Regulator, the Electricity Authority has produced terms of reference for a review3 and this sets out a fuller picture to what happened.
Transpower has its own review underway. MBIE, and as mentioned the Electricity Authority, also have reviews underway. There will be valuable operational learnings to be had from these processes. However, these reviews are unlikely to identify the governance, structural, and performance issues that implicate the Electricity Authority, MBIE, and the Minister.
In their own words “The Electricity Authority4 is an independent Crown Entity with a statutory objective to promote competition, in reliable supply by, and efficient operation of, the electricity industry for the long-term benefit of consumers.” Since inception it has continued what is seen as a slavish adherence to economic theory that ‘the market’ will deliver the necessary outcomes to provide electricity for New Zealand households and businesses.
The system stumble on Monday evening is apparent to all. While the reviews will no doubt identify scapegoats for the events of Monday night, a much wider review is required to highlight the factors that are not so apparent and relate to performance issues of the Authority in their role of overseeing operation of the market. The mantra for the Authority has been that the market will deliver new generation. In reality we have gone from a situation 5 or so years ago of surplus generation to at times now barely adequate generation even with a return to coal fired generation5.
There is lack of confidence that there will be abundant and affordable electricity, compromising initiatives for further electrification of transport and process heat. These initiatives form much of the base of the Climate Change Commission report and our ambition for a net zero carbon New Zealand by 2050.
The wholesale market is malfunctioning with average prices still running at double what they were 3-4 years ago, and well above the cost of electricity that would come from new renewable generation. While renewable generation is starting to be built, uncertainties hamper investment decisions. Overhanging all this is the fact generators are incentivised to keep supply tight and in so doing prices high. Ironically the super high prices of Monday night failed to provide incentive for load reduction, yet this is a key platform around which the Authority has built the new Transmission Pricing Methodology.
Over-viewing the energy regulators (Electricity Authority, Gas Industry Company, and Commerce Commission) is MBIE. Their window to the world is opaque. The question needs to be asked is MBIE asleep at the wheel?
The Minister should rightly be able to rely on the advice of her advisors, but some of her actions, and those of her parliamentary colleague, have certainty not helped in the lead up to Monday evening. These include the 2018 ban on oil and gas exploration permits, flip-flops relating to the future of Tiwai Point, unrealistic requirement of net zero carbon electricity by 2030, and myopic focus on the Lake Onslow pumped-hydro scheme which has not yet had a feasibility study and is at least 10 years off. In additional it is ironic for her to chastise Genesis Energy for not having fired up on Monday morning a further fossil fuelled gas and coal unit in case it was needed that night.
The evening of Monday 9 August caused unnecessary hardship for many New Zealanders. The reviews underway are essential and operational improvements will result. However, this also needs to be a get-real call to action for the Electricity Authority. Market theory can only go so far in delivering what we want and need as a country – abundant, reliable, affordable and environmentally acceptable electricity. If we are to minimise the chances of a repeat of Monday evening, MBIE and the Minister have a heavy responsibility to ensure the necessary structural changes are made to the way the market functions and that it’s achieved within an acceptable timeframe.