New Zealand

New Zealand

Market economics favour green choice

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New Zealand's wind market is taking off as rising electricity prices, fears of hydro shortages and carbon constraints make development of wind power stations an economic option for companies in the business of power plant construction

After years and years of chanting the mantra "New Zealand is the Saudi Arabia of wind," the country's wind energy business looks as if it has finally hit its stride, with a spate of medium and large scale wind farm developments in the pipeline. Proponents are hopeful the business has finally come of age in New Zealand, where significant increases in the price of electricity and fewer generation options are creating a market for wind power, along with the early start of carbon credit trading. While the relevance of wind's carbon offsets for its future growth remains an issue about which many are strongly sceptical, the general feeling is up-beat.

The sector is finally taking off, says James Glennie, CEO of the New Zealand Wind Energy Association (NZWEA). "It's very bullish." He believes New Zealand economics have finally come around to wind's favour, particularly following huge, highly publicised price hikes in wholesale electricity prices over the past 18 months.

Glennie and others see the New Zealand wind scene as likely to progress down two different paths. One is further development of large scale farms by the large electricity generators, assisted by international investment through carbon credit trading. The other is small scale, community based development which supports the concept of distributed generation, aided by concerns over failing national infrastructure.

Carbon credit caution

Sale of the carbon credits associated with wind generation have been hailed by some as providing a means for wind farms to become economically viable, with a number of new projects citing them as vital in the decision to proceed. Others describe them as "cream" or "icing on the cake." There are concerns that they are too hard to trade and too illiquid an asset to be useful. While the financially strong major players can put out hundred-page reports to the international market to gain interest and income from the tradable credits, other smaller companies with less financial clout, or those new to the market, are seen as far less likely to benefit from them.

Industry pundits are watching with interest to see how useful the 500,000 or so carbon credits awarded to NZ Windfarms, a subsidiary of Windflow Technology, are likely to be. The company is planning a 50 MW installation in the Manawatu and won the credits in the government's first carbon credit auction. Development of the project has since fallen behind schedule so it may take a while before any clear indication as to the utility of carbon credits for smaller players is determined.

A new carbon tax set at NZ$15 per tonne of carbon, to take effect from April 2007, was recently announced by Pete Hodgson, Convenor of the Ministerial Group on Climate Change. It is seen as a precursor to a full emissions trading scheme and as positive market development for wind power. "It's not bringing [developments] forward quickly, but it will help," says Glennie.

Renewable energy consultant Ian Shearer says the first of the "environmental taxes" has been a long time arriving, but he sees this and polluter-pays principles as likely to play an increasingly important role in future development -- provided there is no change of government in the country's forthcoming election later this year. National, the major Conservative opposition party, has announced its intention of repealing the carbon tax, but its prospects for gaining the government benches do not look promising.

Of greater concern to the industry than a political about turn has been the lack of investment in power system infrastructure. Contact Energy, Meridian, NZWEA and others have all warned that two decades of under-investment has made very real the prospect of black-outs and major interruptions in electricity supplies, alongside limited access to back-up power sources and likely significant failure in the national grid. A factor holding wind back is the distance from centres of population of most of the country's best wind sites, as well as the distance from connections to the national grid.

"The future is in more small-scale, local distribution systems," says Shearer, adding that carbon credits are essential to encourage diversity of supply and community control and buy-in to local developments. He sees partnerships between landowners and local bodies as a strong route for wind development at the 10 MW level, too small generally to be considered economic by the major players. "Farmers all over the country are waiting with bated breath, interested in [what happens with] Windflow's attempt to raise community capital," he says.

Shearer thinks that a certain amount of distrust of the "big boys," in particular where there is only one major player in a region, has made locals reluctant to get involved. He cites early developments where greater community involvement and control was possible as a better model. "Bigger is not going to necessarily be better in this case," he says.

There have been increasing calls for greater support for distributed supply, particularly in regions outside the major population areas. Typical of the vulnerability to power shortages is the Gisborne area, where Transpower has just one line feeding in power. Rural citizens are increasingly turning to diesel generators as a stop-gap measure where lines are no longer provided or are proving unreliable. It is no coincidence that the attention of the wind business has turned to this region recently with the proposal of a number of small scale wind farm developments.

Utility scepticism

Genesis Energy sees its small Hau Nui wind farm as demonstrating successful distributed generation. Its 15 Enercon turbines provide 9 MW in South Wairarapa, with no grid connection. As with many New Zealand sites, it is seen as too far removed from transmission routes and a large-enough population base.

The company's commitment to wind has been a talking point in the wind power community, with some claiming that its proposed 19 MW Awhitu wind farm has been set up as a high profile, expensive development doomed to failure. Genesis has a diverse generation portfolio, focusing on coal and more recently gas, with the bulk of its attention on the new Ep3 365 MW combined cycle gas fuelled plant at the Huntly Power Station. A failure with the Awhitu project could be seen as likely to put pressure on the government to push for further thermal development instead of wind power.

Genesis' Richard Gordon says the company is still pursuing wind projects, but "we don't see it as the great salvation for New Zealand." A government report from April notes that Genesis had invested NZ$40 million in wind generation, but is "unlikely" to invest further in the near future." It adds that "Genesis feels that other generators are better placed to take the lead in wind generation."

At present, Genesis is continuing to pursue the Awhitu development. Currently it is appealing the rejection of the 19 MW wind farm's resource consent before the Environment Court. While not commenting about the likely outcome for Awhitu itself, Gordon is pessimistic about the future. "In general the consenting process for wind is only going to get harder," he says.

As larger companies look to bring wind closer to their sources of demand, they are encountering more resistance to developments, based on concerns regarding visual pollution and noise generation. While there are good economic reasons for building large wind farms, they also produce the greatest amount of opposition.

Policy problems

Gordon says it makes sense to have a balance of wind and hydro, seeing them as a complementary fit -- water can be saved when the wind blows, to be used in periods of quiet weather. At the moment, however, the balance for Genesis is around 500 MW of hydro to 8.65 MW of wind. He acknowledges they have "some way to go."

But matching wind power with hydro has been made even more difficult by the release of a draft water allocation plan for the Waitaki catchment, which proposes significant restrictions relating to limits on lake levels and flow rates through Meridian's huge hydro power facility. The plan has sparked accusations that pandering to the interests of jet boaters and fly fishermen is likely to jeopardise the development of wind energy in the long term. The Waiktaki Power Scheme provides a quarter of the nation's hydro capacity and more than 60% of the country's hydro storage.

NZWEA has waded into the debate, commenting that flexibility of both storage capacity and operational flow rates are required in the system if it is to function efficiently with wind generation. Higher minimum lake levels and higher flow rates, both seen as recommended primarily in response to recreational demands, could reduce the national hydro storage capacity by around 15-18%.

Security of supply will therefore be reduced with a consequent increase in dry year risk. This is likely to significantly increase volatility in wholesale electricity prices, argues NZWEA. "Reduced flexibility in the Waitaki Catchment will also significantly reduce the nation's ability to use its substantial hydro resource as a cost effective way to balance short term intermittency in output from wind turbines. This means that the economics of wind will worsen and the nation will be forced to rely on more expensive hydrocarbon based forms of electricity generation."

Glennie says the really big challenge facing New Zealand -- and most other countries -- is that of establishing long term energy policy planning. He was pleased, and a little surprised, to see new energy minister Trevor Mallard recognise, as the number one issue in the sustainability sector, the need for a "long term, collaborative approach to energy policy across government and industry."

With the threat of blackouts in the country's largest city, rising electricity prices and a series of hard winters putting demands on low hydro lake levels, that approach may be one step closer.

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