Submitted on April 24, 2017

I was once again privileged to speak at NZWEA’s annual conference held in Wellington on 12/13 April, updating some aspects of my talk in 2016 and posing a paradox for 2017 and beyond.

By Greg Sise, 24 April 2017

The NZWEA’s annual conference was held in Wellington on 12th and 13th April and featured talks on a fascinating array of topics.  I was asked to speak again on scenarios for electricity demand and generation and was able to update my predictions for the coming years.

The data used last year was up to date to the 2014 calendar year, and demand for electricity rose strongly in 2015 but then only rose slightly in 2016, partly due to 2016 being the warmest year on record since 1909 (according to NIWA data), but perhaps more importantly due to the east coast of the South Island being wet at both ends of the year, which kept demand for irrigation down to minimum levels.

In my talk, I looked at the residential, commercial (including primary sector) and industrial sectors. The underlying driver for residential demand is the number of occupied households, in other words population, but there is evidence that this sector responds increasingly to rising electricity prices perhaps by being more efficient in its use of electricity.

Demand chart

The commercial-primary sector demand is strongly driven by domestic GDP (also a function of population with changes in economic activity per capita at the margin), with additional drivers being gas prices (commercial consumers may have switched to electricity as gas prices rose even faster than electricity prices,  possibly household income (I’m not sure why this appears!) and climate change, possibly due to the demand for irrigation rising with temperature.

Industrial demand is the hardest to call as industrial production has domestic and international drivers.  The nation’s largest load, the Tiwai aluminium smelter, accounts for about 12% of annual demand, but has been in doubt due to the weak aluminium market.  But since my NZWEA talk in 2016 aluminium prices have risen by 21% and prices are up 37% since March 2014, which makes for a more positive outlook for the survival of the smelter.

On the supply side, the big change over the last year is the delay in closing the two steam turbine units at Huntly, which last year was scheduled for end of 2018 but is now scheduled for end of 2022.  These units can run on coal or gas, and coal is stockpiled at the Huntly power station, which makes these units very valuable in prolonged dry periods.

But these units will also be 40 years old in 2025 and they can’t remain in service indefinitely.  For the foreseeable future we need fossil-fuelled thermal generation to cover dry periods, but there is a “paradox” here:  rising carbon and gas prices make thermal generation more expensive, which could lead to more renewables being built as they become relativley lower cost, in particular wind and geothermal.  But if enough renewables are built (so that the percentage of renewables exceeds about 90%, up 10% from where it is now), then spot prices will start to fall, which would mean that no one could afford to build the new renewable generation.  So we’d need to build more thermal generation as demand grows, but then rising carbon and gas prices …. and so on.

How this paradox will be resolved remains to be seen.  But we can be sure that the uncertainty it creates, combined with competition to build new generation, will spur innovation in this key sector of the electricity market.