Summary and key points
The electricity market is already different to what people think and will likely undergo radical changes in the next 1-2 decades or earlier.
Electricity consumption is not increasing as commonly thought, this impacts planning and assumptions people have about continued increases in capacity.
1.1 Solar power has become much cheaper lately and has already had a major impact on utility profits in Australia, meaning they may never recover some of their investments.
1.2 Batteries that could allow you to cheaply store nighttime electricity for use during peak hours are past the prototype stage in at least one case. This will also have a massive impact on electricity pricing.
Secondly, how has the present system performed, how would you expect it to perform given how it is set up, and what other options are there given the present and future uncertainties?
2.1 The market where electricity is priced at or above the most expensive generation cost rather than the average is not the only way things can be done. Healthcare and education of course don't work that way, neither does electricity in many different markets around the world with a range of political systems (even in some parts of the USA).
2.2 The objection that a given policy will destroy the value of power companies is not a valid argument. You need to look at NZ as a whole.
2.3 Efficiency and insulation are the most cost effective ways to ensure sufficient supply, wind is perfectly capable of supplying more if necessary with negligible risk to build. Centralized wind is cheaper than distributed solar, but because of the way the market is set up, that is not what will happen. Residential investors will install solar and save themselves some money, but not as much as they would have saved if the market was structured so that they could get full advantage of cheaper wind. If solar is built, this new distributed capacity will very likely still crash the wholesale electricity price meaning the "destruction of value" that people say they are worried about is unavoidable anyway.
1.1 Electricity consumption is hardly increasing unlike
what is commonly assumed
Here is NZ electricity consumption recently:
It is no longer rising, and
like many developed countries could fall.
This is widely not put down
to recessions etc, but a permanent shift in trends. It is not surprising either
that such a thing happens. Our electricity needs are not changing that much,
and with insulation/efficiency improvements the electricity required to meet
them reduces. Just like I don't eat exponentially more food each year, I don't
use more and more electricity.
(A similar thing happens
with petrol. http://www.psmag.com/environment/a-road-less-traveled-26524/
My need for that is not continually increasing with time, if I was given free
petrol for my car I wouldn't use that
much if any more than I already do)
So we can quite likely
expect the electricity requirements to be pretty stagnant now, and the
assumption of a steadily increasing need, and that being met by continuing
centralized investment can not be assumed at all.
1.2. Distributed generation,
that is rooftop solar power is having a massive impact already.
In fact it is happening in Australia Australia
Look at the massive drop in
price of solar panels recently
and the corresponding
increase in production:
This kind of steady
exponential increase in production and decrease in price is like what happened
for silicon chips/digital cameras/flat screen TV's etc. Any technology that has
seen this kind of continual increase in production and decrease in price has
gone mainstream with devastating effects on the incumbents e.g. analog cameras,
old CRT TV's etc. If it continues, profit margins for existing electricity
generators will pretty much disappear.
So what will this trend do
when it comes to little old NZ? well look whats already happening in other
countries:
NZ doesn't have as much sun
as Aus, so the panels need to get a bit cheaper before it becomes worthwhile.
The utilities are in some
kind of death grid spiral where they cannot recover their investments. A few
years ago, in Aus they made a decision to upgrade the grid to handle more centralized power that is now not needed. The power demand is not going up as
predicted, and to make it worse for the utilities, the supply from distributed
is going up quickly from solar. Now because of the way the market works, they
were guaranteed a return on their investment from higher power prices. However
if power usage drops then per KWh they need to charge more to make their money
back. As a result of that price increase people use less, either conservation
or solar, so they then need to charge even more per KWh to make the same
return, which of course makes even more people install solar because it is an
ever better investment. This was completely unexpected by the industry (but
perhaps not technologists) such an issues has never happened in the electricity
market, with 50+ years of data. What this should tell you is that what would
have been a safe assumption 20 years ago is very much not the case now.
1.3. Daily electricity
storage with batteries further changes things
It gets worse, because there
is another technology coming which will also shake up assumptions unchallenged
for as long as power lines have existed, that is that you cannot cheaply store
much electricity. As you know there can be over a 10c difference between
nighttime and daytime electricity with even more variation on the spot market.
This is how generators make much of their profit. They generate for say 5c, and
sell for 10-15. Users bid against each other, raising the price. However if you
could store electricity cheaply then this wouldn't happen. There is a massive
rush to make batteries capable of doing this, as there is such a huge gain if
successful.
Here is a company that can
deliver on energy storage: $160 per KWh, with 10,000 cycles.
Sure it isn't on sale yet,
but they have a lot more than just a prototype, and as I said there are many
other contenders. They may be currently focused on commercial, but there is
nothing stopping them from making residential size batteries as far as I can
see also.
What does $160 per KWH, with
10,000 cycles mean? Well, that's 27 years where you can buy at night and use
during the day. The cost per cycle is 1.6c. That is compared to 10c. Now because
of interest/installation costs etc it won't be quite that but you can see it is
enough to destroy the 10+c extra the generators and grid operators are used to
making for peak electricity.
If residential users do this
in combination with solar panels and the traditional generation/profit model is
quite undermined. Our house (and of course many others) receives enough
sunlight on average for us to supply our electricity needs that way. (Even
though the average is high enough, we would still need the grid in winter until
solar panels become more efficient) Users would just use the grid for backup,
literally on a rainy day not under normal operation. This is guaranteed to
produce fights about who should pay what and when, which isn't helped when some
peoples savings benefit by people paying too much for power.
So as you can see, the
situation over the next 20 years is very different to what many people think.
In 5 years, solar could be starting to make a large impact on electricity
supply/wholesale price if power prices continue to be high and within 5-10
years because of battery tech things could be very different indeed. These
trends need to be taken into account when considering future options.
2.1. How does the current
system work and what to expect
The current system works on
an auction where price is determined more by supply constraints than production
cost, and everyone gets the same price no matter what it costs to produce the
electricity.
Price range from 5-30c per
kWh averaging about 9-12c or so lately. Hydro costs anything from about 2-4
cents to run depending on how you price things. So if there is a glut, then prices
can drop to somewhere near the low cost of producing power from hydro, but if
there is a shortage, and another power source is needed, (e.g. gas) then the
power price will settle above the cost of that source so the operator can make
a profit. The upshot of this is that if there is say a demand of 9, with 10
units of hydro available, then the price could be 3c per KWh, however if there
is a demand of 11 with 10 units of hydro available then the price will shoot up
to over 10c/KWh. In terms of profit from the hydro operators point of view, you
can see that they could make 5-10* more profit per kWh when there is a
shortage, as their fixed costs are always the same. You can quite quickly see
that a hydro operator benefits massively when there is not enough cheap
electricity to meet demand.
2.2 To understand how things work, follow the incentives
(yes its money in this case)
It is a pretty well known
rule that if you want to understand a system, or organization, look at the
incentives of the players in it. Now in this case if it is a power company then
of course it is incentivized to make a profit. It has a legal obligation to
make a profit, that is its #1 directive. A stable cheap-ish economically beneficial
power price is not its incentive. It is
also directed to make dividends, MRP gives 90-110% dividend from memory I
think. So what will this obviously do? Well it will have two very good reasons
not to invest in new capacity. Firstly of course new capacity will reduce
future profitability, and secondly it is directed to pay dividends anyway. Even
if the power company is only say 15% of the market, with the massive profit
increases that under capacity gives, if its investment causes this under-capacity
to be reduced then its profit will be substantially reduced. It doesn't require
the power companies to collaborate or a power company to control over 50% of
the market, because hydro under-capacity can cause such a massive profit
increase.
Say a power company was
considering a large new project that would generate more income because of the
increased electricity production. It would always have to factor in the fact
that same project would reduce the times when electricity spiked to over 20c/KWh
and hence greatly reduce its profit margin. You can see that what would be best
for the power company would not be best for the country at a whole. Average
NZers and power companies therefore will have different ideas on what is the
optimum generating capacity, with power companies favoring less capacity with
the potential for massive profits on a dry year. This obviously isn't optimal
for NZ however as such massive price increases are distressing to low income
families and damaging for business.
2.3 What are the options
The most simple option is
some way of ensuring that capacity is chosen not to optimize the profits of the
power companies (this would be them getting together and spilling most of their
water out of their dams to always get the >20c per KWh prices) but calculating
how much capacity NZ needs from a cost/benefit perspective. This is going to be
a higher number than the power companies choose. Now because electricity usage
is hardly increasing, this will likely be a small amount of extra capacity that
will last 20+ years, but will have the benefit of hugely reducing the massive
price increases we are forced to put up with in a dry year.
How can this be built?
Wind is a good hedge to
hyrdo and can be built quickly and risk free. The benefit of
building extra wind is that as soon as it is built you are saving on natural
gas costs, and those natural gas power stations are still there to be used if
needed in a really dry year. There is
also no cost uncertainty going forward as there is no fuel needed. These
projects are very low risk and easy to do, but if you really are worried of
course, the govt can just open a tender to build sufficient capacity of wind
and it will be filled on budget and on time by an international company. This
is very common internationally and can be depended on.
New wind costs between $78
and $105 per megawatt in NZ
and it can cost less in
other locations:
However
because of efficiency often being cheaper than new construction it may not be
necessary to build much if any more capacity, as mentioned later
2.4. Will adding new
capacity “Destroy value” of the power companies?
Yes!
Of course it will “destroy the value” of the power companies, mathematically
this is unavoidable. It will reduce the massive profits that are beneficial to
them in dry years but far more damaging to NZ as a whole.
The
way to economic prosperity is not to have companies that supply essential
services make massive profits at the expense of everyone else. If it was, then
why not just charge everyone $100 per week to use NZ’s roads, $10,000 per year
for water etc and sell the rights to charge these prices to a private company?
That sure would quickly create a very valuable company, (and yes people could
buy shares in it too!) but of course would be disastrous to NZ as a whole.
Also, if someone invented
some semi-magical device to produce electricity for 1c/KWh then introducing that
into NZ would completely “destroy value” for the power companies also, but of
course be MUCH better for the NZ economy as a whole. Arguments relating just to
the value of the power companies are not valid at all, in this case it would
lead to the banning of importing such a device into NZ. It is the whole NZ
economy that we are trying to make work. However once peoples personal life
savings are involved, this argument will have political weight in spite of not
being a good one, leading to bad decisions all round.
2.5. What is the most cost
effective way to make sure there is sufficient capacity?
I mentioned wind/solar as
ways to increase electricity supply, however they are probably not in fact the
best and most efficient ways to start with. Energy efficiency and insulation
schemes have the same effect, and usually for a cheaper price with added
benefits. There is overwhelming evidence worldwide that energy efficiency
investments are often “cheaper than free”. That is they pay for themselves
quite quickly are give a good return on investment. This is because of well
documented “market failures”. For example in a renting situation landlords will
often not spend money on efficient heating/lights or insulation because they
won’t get their money back even though objectively the investment could make
very good sense for both parties. The tenant won’t pay extra in rent even
though it may make financial sense to do so. Incentives to avoid these market
failures save everyone money and make the country more prosperous.
Also from a social welfare
perspective this is a very effective way to spend money. Given that we already
have social welfare for poor families you can ask what is the most effective
way to spend it. Giving money to spend on heating (or other not so useful
stuff) or spending it on insulation to save money. There are also well
documented health benefits for low income families that have a $ amount many
times greater than the initial cost (Asthma attacks requiring expensive
hospital stays avoided etc). Spending money this way multiplies its beneficial
effect and helps to give a stable dependable power price for us all.
Cheap energy efficiency and
insulation alternatives should be exhausted before additional capacity is
built, where such efficiency is cheaper than building new capacity.
2.6 What to expect if there are chronic high prices
As has been noted, the price
of power is often much in excess of the price to generate it. This means that
things like rooftop solar which would not be competitive with the average price
of power will be competitive for homeowners. Therefore sooner or later the extra capacity
will be built anyway, but if it is rooftop solar instead of wind/efficiency,
then it will be several years later, and it will be more expensive. Homeowners
will buy the capacity instead of power companies; however overall NZ will end
up paying more as solar is more expensive than large wind or efficiency
measures. It is better to have additional capacity built sooner so cost drops
sooner and the overall cost is less. However with the current market, we will
get the higher prices for longer and have the more expensive rooftop solar
being built. This is not the optimum solution.
2.7 What will the sale do?
This deal has been sold as a
way for the government to raise some money, as a way for New Zealanders to
invest in their future, to encourage them to start investing in the share
market etc. Many of them will do this, however they have many false ideas about
what is going on, and have little idea of the risks involved and what to
actually expect from the power market. Information like whether power usage is
increasing, not to mention all the other technological trends are things people
should know when making investment decisions, however I have met almost no-one
who knows even about these issues. Those mum and dad investors are being sold
something that is completely different to the reality of the situation, and it
is only going to end badly for someone. The power industry is going through a
transition and it doesn't make sense to make it even more difficult by
polarizing the population and potential national and international investors by
giving them shares in a difficult situation. If there are personal finances at
stake that there is political pressure to protect, that is just going to
complicate things, and cause bad choices to be made to protect interests.
You are supposed to do
homework before investing, but how does the general public even get information
on this?
What hasn't been made clear is that investing in
a power company now is an incredibly risky long term investment, rather than
the solid one it once was. Because of
the combination of political and technological uncertainty you are essentially
making a wild guess rather than a stable long term investment. That is about
the worst way to get people into the share market and away from just investing
in housing.
So I see two possibilities:
1. Investors get screwed because of issues above,
and lose confidence in the whole share market business.
2 NZ including all businesses and residential
power users get screwed because of bad decisions taken to protect the “value”
of the shares owned by say 10% of New Zealanders, meaning needlessly high power
prices.
Distributed generation is only given one sentence in the risks section in the MRP share offer document as far as I can see, and battery storage is not mentioned at all. I think this is misleading as it stands.
Vector CEO thinks Labour-Green plan could work:
http://www.stuff.co.nz/dominion-post/news/politics/8575452/Its-enough-to-make-you-want-to-scream
Mr Parker says the single buyer will offer the wholesalers a reasonable price instead of an inflated one.
"Each generator will be paid a fair return for their actual costs. The fair return will be calculated by NZ Power on the basis of their historic capital costs, possibly adjusted by inflation, plus operating costs like fuel, depreciation and maintenance."
Many states in the US use similar models, he says.
Battery storage:
Germany exports more than it imports:
