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The Jenny Ruth Column

Wednesday 19th July 2006

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Electricity retailer and generator TrustPower (NZX: TPW ) has a veritable pipeline of generation projects on the go on both the wind and hydro fronts and while a number are already into the resource consents stage, others are still just on the drawing board.

However, two hydro projects and a windfarm proposed in the South Island, which are at the consents stage now, may never be built, according to chief executive Keith Tempest.

The company has plans for a 46 megawatt station at Arnold on the West Coast and applied for resource consent in March. Consent hearings on its application to build a 72 megawatt station at Wairau in Marlbourough began last month. And it has just applied for consent to build an up to 300 megawatt windfarm at Waipori in Otago.

But a major obstacle to making these projects economically viable is the Electricity Commission's recent decision to continue charging only South Island generators for the costs of the HVDC cable linking the North and South Islands, Tempest says.

Currently, that decision has a negative impact on the Arnold, Wairau and Waipori schemes of $50 million, Tempest says. Should the commission go ahead with its plans to upgrade the Cook Strait cable, "those schemes would have to overcome a $100 million NPV (net present value) from somewhere," he says.

The generally accepted wisdom is that the South Island, with its many major hydro stations, exports electricity to the North Island.

While the South Island generators do export power to the North Island, there's also traffic in the other direction, Tempest argues. In the early months of this year, "the DC link for quite a lot of days was flowing South. They have got a lot of generation capacity down there but when it doesn't rain, they don't have any and they have to import energy from the North Island, which happens more and more."

Particularly in the north of the South Island, demand for electricity has been growing significantly from the likes of wineries, tourism and dairy farming, Tempest says.

His company's Arnold and Wairau schemes are in areas (Marlborough and the West Coast) that have to import electricity from elsewhere and would still have to do so, even if both schemes are built.

"All that energy will be consumed locally. You're not ever exporting out of those regions. They will always be importing. It's just irrational to expect two small hydros in constrained areas at the top of the South Island to pay DC charges," he says.

"It's a huge issue. It just says no one will build any generation in the South Island."

Electricity Commission chairman Roy Hemmingway says there were two principal reasons behind the decisions to have the South Island generators continue to pay the costs of the cable.
"South Island generators get a big benefit by virtue of being able to access North Island prices," he says. Without that benefit, rather than having the North Island thermal generators acting as the benchmark for electricity prices, South Island generators would be pricing off the much cheaper producers in their own region, he says.

One of the things the commission is trying to do is reduce transmission costs by encouraging the industry to build power stations closer to demand, so it would rather see further development of stations using renewable resources, such as water and wind, occurring in the North Island, Hemmingway says.

Another lesser reason was that the commission estimated that charging everybody in the industry for the cable would raise prices to consumers by about 2 per cent. Given the price increases consumers have already had to bear, that was something the commission wanted to avoid, he says.

While the commission calls its decision "final," it could be revisited. "We certainly might re-evaluate this if we discovered that thermal generation might be coming in (in the North Island) ahead of South Island renewables," Hemmingway says.

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