October 16, 2007
New Zealand

Charges threaten power plan

South Island generators say the government’s energy strategy will fail because charges for Cook Strait transmission are too high.

Meridian Energy and TrustPower are scaling back generation because of what one says are “extraordinary” Transpower charges that make running at full capacity uneconomic. The government wants those two companies and Contact Energy to pay all the $1 billion cost of upgrading the link.

With charges to more than double again, generators say they won’t proceed with planned energy projects or will reduce the size of future investment, calling into question the viability of the government’s energy strategy, announced last week. They say security of supply will also be threatened.

The government wants to lift generation from renewable sources, such as wind and hydro, from 70% of total supply to 90% by 2025 and will rely on the South Island generators to lift renewable generation to meet that target.

But TrustPower business development manager Peter Calderwood said increased Cook Strait charges would result in reduced generation and would inhibit future investment.

Meridian Energy chief executive Keith Turner said his company had already scaled back output from its Manapouri hydro station by 110 megawatts because of the charges, and would assess options for its other South Island projects.

South Island companies have to pay the full cost of transmission across the Cook Strait cable and the cost to Meridian this year jumped 44%, to $78 million.

When national grid owner and operator Transpower replaces the decommissioned Pole One, which handles around a third of the national transmission, the annual charge for Meridian alone will be more than $150 million a year. Charges for TrustPower and Contact Energy will double to around $80 million.. The three companies have to bear the full cost of replacement because, it is argued, they benefit from selling electricity to the north.

Transpower chief executive Ralph Craven said the replacement of Pole One was absolutely vital if the government’s renewable energy targets are to be met.

A 700MW transmission pole was needed to handle the diversity and intermittency of new generation. “It’s as plain as the nose on your face,” Craven said, but he would not be drawn on the transmission cost issue. Generators pay Transpower but the Electricity Commission sets the charges.

Turner said a new pole “is the right answer for New Zealand” but all generators should pay the cost, around $1 billion.

While southern generators traditionally were “exporters”, electricity flow has in recent years been a two-way traffic.

The government, he said, cannot deliver 90% renewable energy without the South Island but its regulator was providing disincentives to invest in new projects and generate at full capacity.

Calderwood said South Island investment would be abandoned and transmission flows would reverse, with the North becoming a net supplier to the south.

But there were insufficient sites in the north, he said, to meet future energy needs, let alone the government’s 90% renewable target.

“It’s commercially extraordinary,” Turner said of the decision to make the southerners pay the full cost. Because the charges are set at the maximum output of each power station, Meridian had decided to scale back its generation because to run full capacity was uneconomic.

Another energy company spokesman, who declined to be named, said the southerners were reconsidering existing and future commitments to renewable energy projects because of the charges.

Energy Minister David Parker said Contact’s announcement yesterday it would build a 650MW wind farm south of Port Waikato showed the renewable energy target is achievable.

Turner was also highly critical of the decision to abruptly decommission Pole One. He said it was without consultation and in breach of an agreement signed in 2001 between Meridian and Transpower.

There was a significant risk of failure, said Turner. “I fully expect more major failures than we had last year.

“It’s not reliable and of a standard expected of top OECD countries. It’s very damaging of New Zealand’s reputation internationally.”

Craven acknowledged the grid operator had breached its agreement with Meridian but said an independent assessment showed significant risk of catastrophic failure leading to the total loss of the pole and damage to other grid equipment.

This danger negated the agreement, Craven said. Further, the transformers were capable of handling the load and although old “are not going to fail or blow up”.

By Nick Smith
Independent Financial Review


17 October 2007

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