4. Assessment of actual and potential effects
4.3 Assessment of costs and benefits relevant to RMA
As noted above, the principal benefit of Puketoi wind farm comes from harnessing a free natural resource (wind) and converting it to something of value (electricity).
There are beneficial consequences of this for the wind farm operators and landowners who share in the revenue stream from operation, for consumers of
electricity and for the wider environment (e.g. from greenhouse gas emissions avoidance). There are also costs for the wind farm operators and for third parties in the wider environment. Both benefits and costs are compared against an implicit counter-factual of what is likely to occur if Puketoi wind farm does not get built.
4.3.1 Effects on producers
a) Benefit from the value of output from the wind farm
That Mighty River Power is proceeding with this proposal indicates the company regards it as worthwhile and an efficient use of its resources. The previous comparison of the LRMC of wind generation with the SRMC of existing gas and coal fired generation is consistent with this being the case. With the introduction of emission trading for generation and stationary energy from mid 2010, the SRMCs of thermal generation are expected to rise substantially above the cost of wind generation. Looking forward, unless there is a reversal of current policies towards greenhouse gas emissions or substantial change in the supply and demand for gas, new wind generation like Puketoi wind farm will be competitive with even existing thermal generation.
If Puketoi wind farm displaces thermal generation plant, it not only provides power at lower cost than the plant it displaces but also avoids the greenhouse gas emissions of thermal plant. As indicated earlier, an extra 679 to 1224 GWh of wind generation (the output of a 159 to 326 MW plant after average transmission losses) would avoid around 278,461 to 501,702 tonnes of CO2-e from a gas fired plant or 550,129 to 991,168 tonnes of CO2 from a coal fired plant.
The economic value of such emissions under New Zealand’s Kyoto Protocol commitments could be in the region of $NZ21 to $NZ30 per tonne of CO2 equivalent.
At these prices, the avoided emission cost would be in the order of $6-$8 million to
$11to $15 million per year if displacing gas generation or $12 to $17 million to $21to
$30 million if displacing coal-fired generation. It is possible the CO2 price could rise higher if emissions trading is adopted by more countries. At $50/tonne the potential emissions avoided by Puketoi wind farm would be valued between $14 million and
$50 million per year depending on whether gas or coal generation is displaced.
Savings due to reduced emissions resulting from the operation of Puketoi wind farm will be internalised to Mighty River Power by the emissions trading scheme as it raises the cost of thermal electricity generation. Section 7(j), however, requires those exercising powers and functions under RMA have particular regard to “the benefits to be derived from the use and development of renewable energy.” So even though the effect is internalised and not requiring intervention, it is noteworthy that Puketoi wind farm aligns with government policy towards renewables and emissions reductions, and could avoid combined thermal generation and emissions costs in the range of
$46 to $113 million per year.
b) Rental payments to landowners
Rental payments to the owners of land under the wind farm are a claim on the value of its output. This is part of the producer surplus, or economic rent, derived from Puketoi wind farm, comprising the difference between output value and the costs of procuring that output. It can be viewed as increasing the value obtained from the specific sites, and hence increasing the efficiency with which they are used.
However, it is just a claim on a share of the value created by generation output, and not additional to it.
As indicated earlier, local government rates are a transfer payment which extracts part of the economic rent accruing to Puketoi wind farm’s operators and landowners and are not an additional benefit of the wind farm. They do not have a bearing on the value obtained from resource use, and hence have no relevance for consideration of resource use efficiency.
c) Synergies between the wind farm and hydro-power schemes
In principle, co-ordinated operation of Puketoi wind farm with back-up from the nearby hydro schemes may increase the efficiency of utilisation of the wind and hydro resources. It is difficult to quantify how much this adds to efficiency, but it could contribute to high utilisation of the Puketoi wind farm. Mighty River Power has opportunities to seek wind/hydro synergies through the Waikato hydro generation facilities it operates as these plants provide power to the same grid and are offered into the same wholesale electricity market, despite the significant distance between its Waikato plants and Puketoi wind farm.
d) Costs incurred for construction, operation and maintenance
Expenditures on construction, operation and maintenance are resource costs that are internalised within Mighty River Power’s decision processes. So the company’s decision to proceed with the Puketoi wind farm indicates the resources will be used at least as efficiently here as in the next best alternative use.
4.3.2 Effects on consumers
a) Benefit from lower priced power supply
In principle, Puketoi wind farm should result in reduced power prices and increase in consumer surplus because every time it is selected to despatch its power it will be displacing other generation with higher cost. In practice, because of the way the wholesale electricity market operates there are reasons why consumers may not see much difference.
Most electricity consumers, including residential, commercial and small industrial, receive electricity on supply contracts which act as fixed price contracts. Day to day fluctuations in the price of electricity are not passed onto consumers but rather are absorbed by retailers, who only adjust their tariffs when a marked and sustained shift in power costs occurs.
The predominant impact of injecting more wind power into the stack of stations despatched will be to enhance the producer surplus of generators and retailers, which are generally vertically integrated companies. As producer surplus is a part of economic welfare, and as Mighty River Power is a state owned enterprise owned by New Zealand taxpayers, this enhanced producer surplus still represents a gain for national well-being consistent with section 5 RMA.
Another potential source of benefit for consumer prices comes from Puketoi wind farm deferring the date at which new capacity with higher long run marginal cost will need to be commissioned. Technologies and economic conditions change over time so this effect is only a deferral, but it will nevertheless in the short to medium term dampen any rise in price from inclusion of higher cost generation in the mix of available capacity.
b) Benefit from avoidance of transmission losses
In principle, new generation in the southern part of the North Island should reduce transmission losses at periods when power must be transmitted from afar to demand centres in Manawatu. The average loss of power in transmission across the whole of New Zealand is 3.8%, but in supplying any particular location this varies with such factors as the distance transmitted, the condition of the transmission facilities (e.g.
line sag) and environmental conditions (weather). This is also difficult to determine in practice as it is impossible to tell which plant supplies which consumer in an electricity system without undertaking very complex analysis.38
The Central region in which Puketoi wind farm would be located generates more power than it uses, so Puketoi wind farm is likely to reinforce the region’s position as net exporter of power for much of the time. This means the transmission benefit is likely to be small for electricity flows into the Manawatu, but more significant for flows out of the region when they displace power that would otherwise need to be despatched from sources even further from the demand (such as the South Island).
However, losses on transmission of power are already factored into prices and despatch decisions in the wholesale electricity market, and are already incorporated in Mighty River Power’s decisions on new plant location, so they are not an external effect requiring separate consideration under the RMA.
c) Benefit from reduced probability of supply disruption
Local economic activity (including residential, commercial and industrial consumers) can benefit from reduced probability of supply disruption caused by failures in the transmission system. Such failures produce spikes in the price of power as more costly alternative supplies are sought from back-up generators. There is also some denial of service and lost load where such alternatives are not available. The value of lost load can be considerable for some activities and averages $20,000 per MWh in the Electricity Authority’s GIT.
38 Kirschoff’s Law – that flow is inversely proportional to the impedence on the system – applied to an alternating current on a constrained grid complicates the tracking of actual electricity flows.
The value of this benefit depends on how often there are transmission constraints in this area; how high the prices go during them; how often supply interruptions are caused by transmission failures (as opposed to distribution network failures) and how significant they are, given that major users are likely to have standby generators.
Transpower's Annual Planning Report 201139 identifies new generation could bring forward the need for some transmission upgrades in the region. However, the reduction in probability, and hence the expected value of likely benefit, are likely to be small.
There is a regulatory process in place between Transpower and the Electricity Authority to manage the planning of transmission upgrades in light of new demands and generation requirements. So the adequacy of transmission to accommodate new generation without exacerbating grid constraints is not an externality requiring consideration under the RMA.
4.3.3 Effects on third parties (environment)
a) Displacement of activities (farming, recreation, tourism);
Puketoi wind farm will occupy some proportion of the area of the properties on which it is located. Apart from the possibility of disruption during construction, the footprint on the ground of turbines and associated facilities is usually small, so this is unlikely to have an appreciable effect on farm production from the properties in the long term.
Moreover, any payment for agreements to use the land on which the wind farm stands will have internalised the cost of displaced land use by the original owners.
There is no external effect to be considered under the RMA.
Displacement of recreational use is a potential cost. Other assessment reports are considering effects on recreation, but as the site does not encompass any areas of public reserve (other than two areas of DOC marginal strip alongside the Makuri Stream), the Puketoi wind farm’s economic impact on recreation is unlikely to be significant.
It is conceivable that the wind farm could become a tourism attraction in its own right, although more for passing tourists already in the region rather than attracting people into the region. Puketoi wind farm is not the first wind farm in the region, and as such is unlikely to unleash a large surge of additional interest in wind farm sight seeing.
The economic impact on tourism is unlikely to be significant.
b) Reduced greenhouse gas emissions
To the extent that Puketoi wind farm displaces output from thermal generation plant, it will reduce emissions of greenhouse gases in New Zealand and the associated liabilities to be met by New Zealand entities under the Kyoto Protocol. In 4.3.1(a) above we note that due to the operations of the wholesale electricity market, savings due to reduced emissions will be internalised to Mighty River Power by the emissions
39 Transpower (2011) Annual Planning Report 2011, page 201
trading scheme (ETS) once it applies fully to thermal electricity generators. If this is the case, greenhouse gas reductions are a benefit to power producers, not to third parties. At present the cost of emissions is partly shielded from emitters by a price cap of $25/tonne, above which government and its taxpayers bear the cost of emissions, so the effect of emission changes is shared by producers and third parties.
Section 7(j) requires those exercising powers and functions under the RMA to have particular regard to “the benefits to be derived from the use and development of renewable energy.” The economic value of this benefit is determined by the cost of emissions liabilities, which at present will be internalised by wind farm operators, but looking ahead there is some possibility that they may be third party effects if current government policies change. In assessing economic effects of Puketoi wind farm, these benefits can only be counted once, and there is no additional third party effect if the effects are internalised.
c) Other environmental effects
There are potential costs from other environmental effects, principally visual intrusion.
The economic value of environmental and recreational impacts can be assessed through techniques of non-market valuation. These infer an economic value either from observed behaviour towards analogous products (e.g. valuing visits to a recreation site by analysis of travel costs of visitors who use it) or by modified market research techniques involving hypothetical questioning of a sample of respondents.
These techniques can be complicated and costly to apply, and there is wide variability in results according to the specifics of the sites and resources to which they are applied.
Because the economic value of sites for recreation or amenity varies according to their particular characteristics, such as the quality of the site or the proximity to substitute sites, it is difficult to ascribe a meaningful “average value” to any particular site that has not been subject to a detailed study. But such studies may not add much insight if technical assessment of recreational or environmental impacts assess them to be insignificant.
Local economic impacts are relevant to the well-being of communities. The Puketoi wind farm would inject up to $138 to $171 million to be spent in the region during the construction phase, and about $12 to $21 million per year once in operation.