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Renewables shift may increase power price volatility

Renewables shift may increase power price volatility - Contact

By Gavin Evans

Aug. 14 (BusinessDesk) - Wholesale electricity prices may be more volatile for “a few years” as the country replaces more of its gas-fired generation with renewable supplies, Contact Energy says.

The company is preparing to decide early next year on the timing and scale of its next geothermal plant on the Tauhara field north and east of Taupo.

Chief executive Dennis Barnes says all the firm’s work to date suggested the new plant could deliver power at a gas-equivalent cost of $4.50-$5 a gigajoule, compared with the more than $6/GJ the firm is paying for gas.

If gas supplies remain unreliable and cost more than $6/GJ “that will seal the fate of TCC,” he said, referring to the 23-year-old gas-fired Taranaki Combined Cycle plant the firm runs at Stratford. Contact will need to invest more than $50 million if it wants to keep TCC operating beyond 2022.

New Zealand electricity generators are developing new renewable options as rising carbon costs and falling wind, solar and geothermal costs make gas–fired generation a more costly option for base-load supplies. Mercury NZ is due to start work on a 119 MW wind farm south-east of Palmerston North, while Genesis Energy has agreed to buy all the output from a 130 MW wind farm planned at Waverley as part of a strategy to stop year-round running of its biggest gas-fired plant within five years.

Barnes told analysts and investors yesterday that, in average terms, the decision to replace TCC with a new plant at Tauhara looks “very simple”.

But he reminded them that the industry is trying to replace flexible gas-fired plant – which can be required to run at “full noise” during peak hours of the day – with must-run geothermal plant that runs all the time.

Replacing a 300 MW gas-fired plant with 120-140 MW of geothermal capacity would tend to drive a bit more price volatility into those “tighter” supply periods and it will be important for the industry to try and smooth that as much as possible, he said.

New thermal capacity will be required to support renewables and the expansion of the Ahuroa gas storage facility, expected to be completed early next year, and the new 100 MW gas-fired peaking plant Todd Energy is building at New Plymouth, are signs that is happening, Barnes said.

Availability of gas remains a key question, he said. Contact also operates two gas-fired peaking plants at Stratford.

Power and gas prices surged last year when a series of planned and unplanned maintenance shutdowns slashed supplies. The government has banned new offshore exploration and in June Contact contracted to buy any new gas OMV is able to extract from the Maui field through a development drilling programme it plans there.

Contact is yet to decide how big its new plant at Tauhara will be. It plans to drill four appraisal wells in coming months and is expecting proposals from equipment providers in November.

Barnes said there is “huge momentum” behind the shift to greater decarbonisation of the economy, with the push coming from both policymakers and consumers.

That makes the development of the firm’s geothermal business – in a low-cost way – even more important.

But he also noted that, even with the recommissioning of the Tiwai Point smelter’s fourth pot line last year, national power demand increased only marginally to 41.4 terawatt-hours in the year ended June and has been flat at about 41 TWh since 2008.



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