Economic Assessment of Puketoi Wind Farm doc

Economic Assessment of Puketoi Wind Farm Report to Mighty River Power July 2011 8 Halswell St, Thorndon P O Box 3479, Wellington Tel: +64 4 472 1880 Fax: +64 4 472 1211 econ@nzier.org.nz www.nzier.org.nz NZIER’s standard terms of engagement for contract research can be found at www.nzier.org.nz. While NZIER will use all reasonable endeavours in undertaking contract research and producing reports to ensure the information is as accurate as practicable, the Institute, its contributors, employees, and Board shall not be liable (whether in contract, tort (including negligence), equity or on any other basis) for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. About NZIER NZIER is a specialist consulting firm that uses applied economic research and analysis to provide a wide range of strategic advice to clients in the public and private sectors, throughout New Zealand and Australia, and further afield. NZIER is also known for its long-established Quarterly Survey of Business Opinion and Quarterly Predictions. Our aim is to be the premier centre of applied economic research in New Zealand. We pride ourselves on our reputation for independence and delivering quality analysis in the right form, and at the right time, for our clients. We ensure quality through teamwork on individual projects, critical review at internal seminars, and by peer review at various stages through a project by a senior staff member otherwise not involved in the project. NZIER was established in 1958. Authorship Prepared by: Peter Clough & Daisy Shen Quality approved by: John Yeabsley Date: 27/07/2011 3:16 p.m. Version: 5 Acknowledgements: NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM i Executive summary This report provides an assessment of the economic effects of the proposed Puketoi wind farm by Mighty River Power, for the purpose of informing application for resource consent. Given the focus of the RMA (RMA) on sustainable development, economic efficiency of resource use in section 7 (b) and on the benefits of renewable energy in section 7 (j), it uses a framework of cost benefit analysis for assessing these effects. The proposed Puketoi wind farm is likely to inject $138 million to $171 million expenditure into the local economy directly, and create 500 jobs locally during the construction phase, and also add $12 million to $21 million per year of direct expenditures once in operation. Such economic impacts can be significant in stimulating economic activity more widely, but they are not unique to a given development, and they are not informative about efficiency of natural and physical resources. More relevant for RMA considerations is the stream of benefits derived from the new wind farm once it is operational, which stem from the harnessing of a hitherto free resource (wind) to create a valuable commodity (electricity). This has implications for those involved in supplying electricity, the consumers of electricity, and also third parties dealing with its effects on the wider environment. The fact that Mighty River Power wants to invest in Puketoi wind farm indicates that the company regards it as an efficient use of its resources. The critical question for RMA purposes is whether Puketoi wind farm would create effects external to the company’s consideration that are so significant as to outweigh the efficiency benefit of its use of natural resources. In summary, the new wind farm would alleviate electricity supply risk caused by recurring dry years, and contribute to stated government objectives for increasing renewable generation and reducing greenhouse gas emissions, as expressed in the New Zealand Energy Strategy and the framework for greenhouse gas emissions trading. Its economic effects can be expected to be: Recovery of the wind farm operator’s long run costs from the viability of the project as they would from any other investment, with a share of this going as enhanced benefit for those who receive rentals for the land it occupies; Minor benefits for power consumers, through: • suppression of price rises, due to displacement of higher cost generation sources; • Defered grid investments and reduced transmission losses, any savings from which would potentially pass through to all power consumers; NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM ii • More than minor benefits from displacement of long distance power transmission with associated losses; Benefits, probably of substantial value, from the displacement of thermal generation and avoidance of greenhouse gas emissions which comprise: • benefits to the wind farm operator to the extent the emissions trading scheme exposes emitters to the full cost of emissions under the Kyoto Protocol and any successor international agreement; • benefits to third parties (e.g. New Zealand tax payers) to the extent that emitters are shielded from full cost of emissions by the government taking some responsibility for meeting international obligations (as is currently the case given the cap on emission prices under the emissions trading scheme), or should the current government policy change in ways that shift liability for greenhouse emissions away from the emitting sectors; A balance of third party effects including: • Potential disruptions to the site, mostly temporary, internalised in landowner agreements and hence less than minor; • Potential displacement of recreation and tourism activities, likely to be less than minor, and possibly beneficial should the wind farm site attract sight-seers; • Potential impacts on visual amenity, wildlife habitat etc (not assessed in this report). Quantified estimates are provided based on the assumed installed capacity of 159- 326 MW. The value to New Zealand of this new generation is indicated by the costs of the next best alternative, assumed to be thermal generation. NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM iii Contents 1. Introduction 1 2. Framework of analysis and assumptions 3 2.1 Economics, Policy and the RMA 3 2.2 Components of economic assessment 4 2.2.1 Components of cost benefit analysis of a wind farm 4 2.2.2 Components of economic impact analysis of a wind farm 5 3. The existing environment 7 3.1 Electricity supply and demand in New Zealand 7 3.1.1 Forecast growth in electricity demand 8 3.1.2 Expected increase in generation capacity 10 3.2 The role of wind in meeting electricity demand 14 3.3 National objectives and policy for electricity 16 4. Assessment of actual and potential effects 20 4.1 Puketoi Wind Farm and the local economy 20 4.2 Value of wind generation obtained from Puketoi wind farm 24 4.2.1 Wind power effects on the electricity system 27 4.2.2 Other potential effects of Puketoi wind farm 29 4.3 Assessment of costs and benefits relevant to RMA 29 4.3.1 Effects on producers 30 4.3.2 Effects on consumers 31 4.3.3 Effects on third parties (environment) 33 4.4 Assessment of the proposal against RMA’s criteria 35 5. Conclusions 38 Figures Figure 1 Current generation across New Zealand 7 Figure 2 Electricity consumption forecasts 2009-2025 9 Figure 3 Mean monthly wholesale electricity prices 10 Figure 4 Recent trends in fossil fuel prices 12 Figure 5 Employment in national and local economies 23 Figure 6 Thermal generation and emission Costs 27 Figure 7 Summary of economic effects 36 Figure 8 Summary of national and local benefits 39 NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 1 1. Introduction This report sets out a comprehensive economic assessment of the proposed Puketoi wind farm development, with particular reference to matters contained in Part II and section 104 RMA. The proposed wind farm would be located along a ridge of the Puketoi Range to the east of Woodville and Pahiatua. The electricity it generates would feed into the national transmission grid at the Linton Substation located between Palmerston North and the northern Tararua Ranges. The proposed wind farm development envelope has 53 turbines, giving an installed capacity of 159-326 megawatts (MW). Depending on the wind resource and efficiency of operations, wind farms in New Zealand can achieve utilisation of between 33% and 45%. Existing wind farms at other nearby locations have achieved utilisation rates at the upper end of this range, and due to the exceptional quality of the wind resource the same is expected for the Puketoi wind farm. Current expectation is that it is capable of producing 706-1272 GWh per year with a utilisation rate of 44.5%. The purpose of the wind farm proposal is to harness a hitherto free natural resource, wind, to create a valuable commodity, electricity. This is of value to the wind farm’s operators, but also the wider community to the extent that it contributes to generation capacity available to meet demands across the electricity system, and avoids the resource costs and consequences of alternative generation. As well as creating value by capturing the wind resource, the proposed wind farm will also inject funds into the local economy, particularly during its construction stage, and to a lesser extent during its operation. Critical variables on these local economic impacts are its capital cost (and its staging over the construction period), its on-going expenditures (particularly those on services and supplies that can be procured locally), and the direct jobs created in both the construction and operation of the wind farm. Site occupancy rental payments to landowners is another source of economic impact (or rather a particular form of local procurement expenditure). As the RMA entails balancing tangible effects against less tangible ones, some estimates of the likely magnitudes of measurable benefit are useful to the process of reaching a decision. Mighty River Power operates on commercial principles and will not proceed with Puketoi wind farm unless it continues to expect it be of private benefit to the company’s returns. So the economic issues of most interest for resource management purposes are the likely external effects, i.e. those that are outside the consideration of the developers. In the current case these include: • The balance of environmental effects, both local effects (like effects on landscape amenity) and global effects (like greenhouse gas emission displacement). • Potential savings across the energy supply system. NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 2 • Potential value of the synergies obtained from co-ordinating Puketoi wind farm with other generation plant (e.g. hydro schemes). • Achievement of stated objectives of government, such as those in the New Zealand Energy Strategy. Forecasting the likely uses of wind power in the future is a complex task, but it is possible to provide illustrative examples of the economic consequences of Puketoi wind farm, including cost savings, carbon emission reductions and changing patterns of supply caused by a new wind farm, given plausible assumptions about how the market would operate with and without it. This report proceeds by: • setting out a framework for considering economic effects (section 2); • outlining the existing environment that the proposed Puketoi wind farm will affect, with particular attention to the electricity supply and demand (section 3); • assessing Puketoi wind farm’s contribution to national economic well-being (section 4); • concluding with an overall assessment of Puketoi wind farm’s economic effects (section 5). Sections 2 and 3 are by way of background on the general legislative, policy, and electricity situation in New Zealand. Sections 4 and 5 are specific to the Puketoi wind farm proposal, based on current expectations and available information. [...]... informative of the resource use efficiency implied by section 7 (b) RMA This, and the difficulties of NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 23 constructing multipliers from a dated base model, mean it would not be a major part of an economic assessment of the Puketoi wind farm 4.2 Value of wind generation obtained from Puketoi wind farm Because of its connection to the national grid, the economic. .. greenhouse gas emissions NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 19 4 Assessment of actual and potential effects 4.1 Puketoi Wind Farm and the local economy The proposed Puketoi wind farm would be located in the Tararua District in the southern Manawatu region Its impact on the local economy will depend on the nature of the expenditures on the project and the characteristics of the economy receiving... residents of New Zealand Thus, the consumer benefits of Puketoi wind farm are relevant whether they are felt in the wind farm s vicinity or anywhere else within New Zealand 2.2.2 Components of economic impact analysis of a wind farm An economic impact analysis has a narrower scope than a cost benefit analysis The elements of an impact analysis are: • Direct impacts: − Spending on construction in the wind farm. .. ASSESSMENT OF PUKETOI WIND FARM 25 These estimates take the SRMC of gas and coal as indicative of the value of harnessing wind, which is appropriate for comparison of existing plant However, in comparing a prospective wind farm with existing thermal plant, it is necessary to take account of the capital cost of the wind farm and compare its long run marginal cost (LRMC) against the SRMC of the existing... generation of 42,000 GWh per year, 1% of which is 420 GWh and 125% of this, in turn, is 525 GWh 10 Electricity Technical Advisory Group and Ministry of Economic Development (2009) Improving Electricity Market Performance, Volume 2 – Appendices NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 13 However, the likely direction of future requirements is clear from population and economic growth, and adding new wind. .. detailed below The development of new renewable generation capacity, such as the proposed Puketoi wind farm, would contribute to government’s objectives of restraining greenhouse gas emissions and diversifying its mix of electricity generation away from the current dominance of hydro, which poses risks to the reliability and security of NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 3 supply during dry years... reduced probability of supply disruption – a quality improvement in electricity supply to the extent that more diversified supply reduces the dry-year risk and improves security of supply; • Effects on producers: − Benefit from the value of output from the wind farm; NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 4 − Benefit from any synergies that may be realised between the wind farm and other generation... national economic benefit Under current plans, Puketoi wind farm would have an installed capacity of 159 to 326 MW, capable of generating 706 to 1272 GWh at 44.5% utilisation Each GWh despatched from Puketoi wind farm will equate to less than 1 GWh consumption because of transmission losses between Puketoi and the markets served On average, transmission losses across the network are 3.8%28 of power... in the supply and demand for gas, new wind generation like Puketoi wind farm will be competitive with even existing thermal generation 33 Electricity Commission, Statement of Opportunity 2008 (this edition provides stand alone generation cost) NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 26 Figure 6 Thermal generation and emission Costs Generation output net of transmission loss Generation Cost Carbon... Authority (2010) Generation Update – November 2010, http://www.ea.govt.nz/document/11979/download/industry/modelling/long-term-generationdevelopment/list -of- generation-projects/ NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM 7 ranged between 2011 and 2020 Of this total new capacity, 58% would be wind powered and 11% hydro There is no economically viable way to store electricity in bulk, except indirectly . NZIER -ECONOMIC ASSESSMENT OF PUKETOI WIND FARM i Executive summary This report provides an assessment of the economic effects of the proposed Puketoi wind. Components of economic assessment 4 2.2.1 Components of cost benefit analysis of a wind farm 4 2.2.2 Components of economic impact analysis of a wind farm