Risky business in wind energy – a load of hot air?

14 September 2018

Electricity is a fascinating market, particularly in New Zealand. We increasingly want electricity that is better for the planet, and wind generation has a part to play. This article examines the opportunities and risks of wind power in the electricity industry.

In Aotearoa we have an energy only market, with no reserve market or maximum/minimum prices, and demand and supply factors cause higher risk (with higher return). These are the key factors that complicate things:

  1. Demand fluctuates greatly throughout the day and throughout the year. The majority of consumers have no spot market price exposure and therefore no incentive to smooth consumption into off-peak hours.
  2. Supply is controlled by five gentailers - vertically integrated firms that control over 90% of generation and retail. The industry requires government regulation because electricity is a necessary utility.
  3. Supply is dominated by renewables – in 2016 renewables made up 84.8% of electricity generation.
  4. Generation is not created equally. We have baseline plants and peaker plants on a scale of upfront investment vs marginal cost. Logically, firms will only build plants they believe will make a profit, and will fit into the rigorous legislative ratios of generator types and locations required.

The energy supply chain has many conflicting objectives around security, pricing, and profit. It’s a risky market that encourages strategic capacity management.

Wind cannot be controlled. If it doesn’t blow you don’t have power. Hydro, on the other hand, gives operators the ability to alter dam levels. This can be a good thing for security of supply, and a bad thing when artificially high prices are drawn out due to hydro storage. Accordingly, large wind farms are a less attractive form of renewable electricity than small hydro stations; there’s the associated risk of lost profits to the operators as well as the security of supply factor (currently wind is not classified as baseline generation able to contribute during peak periods).

Using simulated windspeed data from NASA in conjunction with historic hydrology data, we can get a pretty good picture of the potential generation of power in New Zealand over the past twenty years, including the wet years of cheap electricity and the dry years with rolling brownouts. Potential wind farm sites are abundant in New Zealand, and if built across the country (i.e. not concentrated in just one place) the wind data tells us that the supply of electricity would be reasonably constant. The security of supply risk can be well managed. Knowing this provides an opportunity for legislative change to allow greater windfarm uptake.

New Zealand has a goal of 100% renewable generation by 2025, and wind farms are a very viable option to help us achieve this goal. By building wind farms that are already consented for across the country, NZ could move to 100% renewables while still meeting security of supply targets, under dry year conditions and “still” wind years.

There are interesting times ahead for electricity firms to manage their supply and their investment decisions. Given supply can’t be strategically withheld, the simulated spot market prices will decrease, an undesirable outcome for firms. Undoubtedly wind farms are a great consumer opportunity: cleaner/greener power that won’t cut out, and we could all save a bit on our power bills.

Caity Butcher
University of Auckland