Submitted on June 23, 2017

With the storage lakes falling fast, it got me thinking about other ‘dry year’ events we’ve experienced, which really helps to put the present, and the market, into context.

By Greg Sise, 23 June 2017

One of the advantages of being involved with the electricity market for almost 21 years, and the electricity industry in general for even longer, is that I can usually recall some past event that seems either much better or much worse than current market conditions.

Hydro storage in the South Island has fallen steadily since February and is now well below average for this time of year, based on data for the last 20 years of the deregulated electricity market (which opened October 1996).  In the South Is, inflows into the major hydro lakes for the period 1st Feb to 21st June of this year rank as fourth lowest out of the historical data we have going back to 1931, though the inflows into Lake Taupo rank 11th highest over the same period.

On 22nd June South Is storage was 1,400 GWh and storage in Lake Taupo was 353 GWh.  This is second only to the worst dry year event of the market which occurred in 2008:  at the same time of year in 2008 South Is storage was 1,162 GWh and North Is 159 GWh.

But in the early 1990s I worked in energy management, at a time when the Electricity Corporation of New Zealand (ECNZ), an SOE, owned and operated almost all generation in the country and the national grid (now owned and operated by Transpower).  In 1992 we faced a very cold winter caused by the eruption of Mt Pinatubo in the Philippines which threw vast quantities of volcanic ash into the atmosphere, causing the opposite of global warming, a kind of mild ‘nuclear winter’ in which global temperatures dropped by 0.5 °C on average.

It may have been coincidence, but at the same time the whole country experienced a prolonged period of lower than average inflows.  Storage might seem low now at 1,753 GWh, but in the middle of June 1992 total storage was below 700 GWh and still falling, as shown on this chart from the report that followed the ‘hydro crisis’ later that year.  South Is inflows from February to June weren’t quite as low as they’ve been this year, but inflows into Lake Taupo were considerably lower.1992 Storage Chart

Emergency measures were put into place at the end of May including calls for voluntary savings, starting in early June and achieving 15% - 20% reductions in consumption.

Ironically, it then started raining early in July and on 7th August the call for savings was cancelled.

But things were looking dire for a while.  How did we get into that situation?  After the event, a Royal Commission was appointed to review the electricity shortage of 1922, which found a number of factors contributed to the shortages.

The unusually cold winter caused much higher than expected demand.  But in addition, ECNZ had operated the lakes to a ‘1-in-20’ standard which means that they expected there to be calls for electricity conservation one year in 20 on average, due to prolonged dry periods.  This standard was based on economic analysis which included assumptions about the value placed by consumers on having a secure supply of electricity.  As it turned out, these assumptions underestimated that value.

Back in 1992 there was 60 years of historical data for the water inflows into the large hydro lakes, and a key recommendation of the Royal Commission was to raise the security standard to 1-in-60.

I and my colleagues have tracked the operation of the hydro lakes every week since October 1996.  When ECNZ was split into three SOEs  in April 1999 to create Genesis Energy, Mercury NZ and Meridian Energy, we observed the effective security standard raise above the 1-in-60 operated by ECNZ to a significantly higher value, difficult to estimate for sure, but probably in the order of 1-in-100.

Why the sudden increase in security?  When ECNZ owned most of the generation it had large thermal generation assets to help it through a prolonged dry period.  But not so Meridian Energy, which since 1999 owns and controls the largest hydro storage lake (lakes Pukaki, Manapouri and Te Anau) and the largest hydro stations (Manapouri and Benmore).  Consequently, Meridian has a great incentive to operate its storage lakes to avoid being caught short of generation in a dry period:  if this occurs it must buy out of the spot market at very high prices to supply its customers, resulting in large losses.  The same goes for any other generator exposed to the risk of dry years.

So, from my perspective, the current structure of the market provides key players with incentives to manage the hydro lakes in a manner which aligns very much with the overriding interest that consumers have in maintaining a secure supply of electricity.

In addition, Transpower monitors inflows and storage, routinely assesses the probability of shortage, coordinates any industry response that might be required and, in the unlikely event that voluntary savings become desirable, coordinate savings campaigns.

That’s not to say that we consumers don’t have a role to play in the market prior to a savings campaign.  Many large industrials, and now many small consumers on spot-based pricing plans, are watching spot prices and making decisions that reduce their exposure to those prices by either reducing consumption or by moving consumption into periods less likely to cause capacity constraints in the market.  As a Flick customer, my household has reduced showering times (but not too much yet!), paid more attention to turning lights off, and made sure the dishwasher is full when we turn it on, which is now when we go to bed at night.  We’re even turning our hot water cylinder off when we get up and turning it back on when we turn in at night.