4. Assessment of actual and potential effects
4.2 Value of wind generation obtained from Puketoi wind farm
Because of its connection to the national grid, the economic benefits of Puketoi wind farm will not be confined to its local region. There will be times when it benefits the local consumers of electricity by providing an additional source of supply in the region and diversifying against the risk of hydro shortage or other constraint, but it is not dependent on the region’s electricity demand. Most of the effects on the electricity system need to be viewed in terms of 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 despatched, which may be taken as a conservative assumption of losses from despatching power from Puketoi wind farm. With those losses Puketoi wind farm would deliver less electricity, and displace less thermal generation and emissions. The annual output of Puketoi wind farm after transmission losses would be 679 to 1224 GWh, assuming that it displaces thermal plant located in the North Island closer to demand.
While the output will have a market value reflected in the revenues earned by Mighty River Power from Puketoi wind farm’s operation, it is difficult to forecast what that might be. An alternative indication of the economic value of this output is to consider the cost of generation by the next best alternative means displaced by the wind farm, including the external costs of that alternative generation. In the short term, the next best alternative means of generating extra output is likely to be an existing thermal plant. As the short run marginal cost of wind generation is close to zero, the short run marginal cost of thermal generation avoided gives an indication of the value of savings to New Zealand at large.
In its 2010 Statement of Opportunities, the Electricity Commission assumed the short run marginal cost of thermal generation to be $52/MWh for Huntly coal plant, and
$56/MWh for gas combined cycle plant, the latter based on gas at $7/GJ and no carbon charge. Electricity generation came under New Zealand’s Emissions Trading Scheme from July 2010, partially shielded from the full costs of emissions by a cap on carbon cost. Once in the scheme emission costs should be reflected in wholesale electricity market prices, so emissions savings will not be an additional benefit expected from the Project’s new generation. However, for this illustrative analysis the marginal cost values exclude the emissions cost, so the estimates of greenhouse gas emissions avoided are an additional benefit to that of displacement of higher cost generation.
28 Ministry of Economic Development, Energy data file 2010, TAB G.4
With respective SRMC for coal and gas generation of $52 and $56 per MWh, generating an extra 679 to 1224 GWh would cost around $35-$64 million from a coal fired plant, and $38 to $69 million from a gas fired plant.29
Allowing for the different quantities emitted in combustion of different fuels and the different transformation efficiencies in turning fuel into electricity, the latest data indicate that generating a GWh of electricity from the average New Zealand gas-fired plant emits 410 tonnes of carbon dioxide equivalent (CO2-e) and generating a GWh from the Huntly coal-fired plant emits 810 tonnes.30 Once constructed, wind farms produce no emissions in generation.31 So 679 to 1224 GWh from Puketoi wind farm would therefore avoid 550,129 to 991,168 tonnes of CO2–e per year if this electricity would otherwise be obtained from a coal-fired plant or 278,461 to 501,702 tonnes per year if otherwise obtained from a gas-fired plant.
The economic value of such emissions under New Zealand’s Kyoto Protocol commitments in future is unclear, but currently the Treasury values New Zealand’s liability for Kyoto emissions at around $NZ21 per tonne of CO2 equivalent, and Certified Emission Reductions have been traded internationally at around $NZ33 per tonne.32 Under the emissions trading scheme the cost of emission credits to industry is capped at $25, but any rise in the price of credits above this would be borne as a cost to New Zealand taxpayers as government would pay the amount above what industry pays for any credits acquired on the international market.
If the carbon emission cost were $21/tonne, Puketoi wind farm would avoid emissions worth $6-$11 million if displacing a gas fired generation or $12 to $21 million if displacing coal. At the carbon prices assumed by the Electricity Commission in its Statement of Opportunities of $30/tonne or $50/tonne, the value of emissions avoided would be $8 to $15 million and $14 to $25 million from displacing gas and
$17 to $30 million to $28 to $50 million from displacing coal-fired generation. These are estimates per year and combined with the generation cost savings suggest that Puketoi wind farm could avoid thermal generation costs of between $46 to $84 million and $63 to $113 million per year, depending on fuel used and cost of carbon credits.
29 This calculation is based simply on replacing 1 GWh of wind with 1 GWh of thermal generation.
The costs of thermal generation may be slightly less if thermal plant are closer to the load demands they serve, and hence have lower transmission losses than Puketoi wind farm, but this is already factored into Puketoi wind farm’s additional output.
30 Calculated from Ministry of Economic Development (2010) Energy Greenhouse Gas Emissions, Table 2.4 and Ministry of Economic Development (2010) New Zealand Energy Data File, Table G.2a. Rounded to the nearest 10 tonnes.
31 Construction of new power plant imply additional emissions from fuel use, cement manufacture etc, which under the emissions trading scheme will be internalised in the project’s input costs to some degree. To the extent that they are not internalised, new emissions create a liability for the New Zealand government under the Kyoto Protocol. We have no information on which to estimate the size of that liability, but note that all construction activities have the same effect.
32 The figure of $21 is close to that currently used by Treasury. It is based on a formula using prices for carbon certificates observed on international markets and has progressively increased since this liability calculation was first published in 2005 (aside from exchange rate variation).
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 alternatives.
This is illustrated in Figure 6, which uses the Electricity Commission’s figures33 to compare the short run marginal costs of gas and coal-fired generation with the long run cost of a high performing wind site. This table shows that at $7GJ for gas without any carbon charge, the wind generation’s LRMC is higher than the gas or coal generation’s SRMC at 90% load factor. But once a carbon charge of say, $30 (per tonne) is added, even with the gas price of $7GJ, the total cost of wind generation is below the gas generation SRMC. For coal fired generation, wind generation is competitive (ie its LRMC is lower) even without having emission charges added. Note that the (SRMC) cost of coal and gas fired plant depend strongly on the assumed load factor, as well as the price of gas and the size of an emission charge. Recent increases in the price of gas, which reached $9/GJ in some supply contracts in 2010, would also push the comparison in favour of wind generation.
Any prospective wind farm investor will look forward to see whether the conditions will allow a return over time, as the plant will last many years. The general view (as captured in the Electricity Commission’s SOO 2008) is that gas and coal prices are unlikely to fall. Moreover, as discussed earlier in this report, New Zealand is committed to carbon charging. Thus, looking forward, unless there is a reversal of current policies towards greenhouse gas emissions or substantial change in the supply and demand for gas, new wind generation like Puketoi wind farm will be competitive with even existing thermal generation.
33 Electricity Commission, Statement of Opportunity 2008 (this edition provides stand alone generation cost)
Figure 6 Thermal generation and emission Costs
Generation output net of transmission loss
Generation
Cost Carbon Cost Total cost/yr
Output SRMC
($/MWh) Cost/yr CO2 CO2/yr Cost of CO2
emission/yr Assumed
load factor
GWh/yr gas at
$7/GJ t/GWh tonnes carbon at
$30/t
carbon at
$50/t
carbon at
$30/t
carbon at
$50/t Gas CC 90% 1224 56 69m 410 501,702 15m 25m 84m 94m Coal 90% 1224 52 64m 810 991,168 30m 50m 93m 113m Gas CC 90% 679 56 38m 410 278,461 8m 14m 46m 52m Coal 90% 679 52 35m 810 550,129 17m 28m 52m 63m Output LRMC
($/MWh) Cost/yr CO2 CO2/yr Cost of CO2
emission/yr GWh/yr Gas at
t/GWh tonnes carbon at
$30/t
carbon at
$50/t
carbon at
$30/t
carbon at
$50/t
$7/GJ
Wind 44.50% 1224 85 104m - - - - 104m 104m
Gas CC 90% 1224 75 92m 410 501,702 15m 25m 107m 117m Coal 90% 1224 85 104m 810 991,168 30m 50m 134m 154m
Wind 44.50% 679 85 58m - - - - 58m 58m
Gas CC 90% 679 75 51m 410 278,461 8m 14m 59m 65m Coal 90% 679 85 58m 810 550,129 17m 28m 74m 85m
Source: NZIER
4.2.1 Wind power effects on the electricity system
Wind generation is a technology in which fuel constraints reduce the achievable load factor well below 100%. With current technology, wind turbines only generate power when the wind speed is within a band and only generate maximum output in a smaller range within the band.Thus, the total installed wind generating capacity is not able to be all used all the time. The load factors – ratios of actual output in MW to the total rated output in MW - of wind generators in favourable sites in New Zealand are in the 33% to 45% range.
These load factors are high by international standards, and the potential for wind generation in New Zealand appears reasonably large if only technical and operational issues are considered. Whether Puketoi wind farm can achieve high utilisation is a technical matter but it can be expected to exhibit greater efficiency and higher
output/MW installed than existing wind plant which include older machines with smaller blades.34
There are limits to the share of wind generation that can be accommodated by an electricity system before the variability of the resource affects the reliability of the system. Because of its variability, wind generation needs to be operated with other sources of generation in reserve if it is to provide a substantial portion of the generation capacity. Experience in Denmark and other countries with longer histories of wind utilisation than New Zealand suggests up to 20% of total supply could come from wind generation before variability imposes serious instability on the electricity supply system and grid integration.35 Where there are good connections with back-up generation to balance wind variability, wind energy penetration can reach higher proportions, over 60% recorded in Jutland (Western Denmark).36 A 2005 study which took into account only technical and operational considerations, and not economic ones, suggested the potential for wind generation to be about 35% of New Zealand’s installed capacity and about 20% of actual generation.37
If reliance is to be placed on substantial wind generation, quick responding (and cheap) “reserves” are needed to provide back-up against the short-term variability of wind. Hydro is very good at providing this kind of reserve compared with other generation types that require longer start up times (e.g. gas, coal or oil fired). New Zealand is well placed to utilise wind because of its high reliance on hydro generation and expanding network of geothermal generation. With wind power currently accounting for 5.2% of installed capacity and approximately 3.5% of electrical energy generated in New Zealand, there is substantial scope for more wind power within the electricity system.
Installation of new generation capacity at the southern end of the North Island increases loading on the transmission network in that region. This may necessitate bringing forward the date of network upgrades which may appear to create an effect external to the wind farm’s developers. But regulatory mechanisms other than RMA are in place to account for such effects, and it would be counter-productive and inefficient for consents to be altered to manage these effects.
Transpower’s Annual Planning Report 2011 notes there are several prospective wind farms in the Puketoi ranges area with substantial combined capacity, which may necessitate a new transmission line to connect them all to the national grid at Bunnythorpe. Even if the proposed Puketoi wind farm were to necessitate works on the transmission grid, this is not an economic effect relevant to the RMA. Under
34 East Harbour Management Services (2005) op. cit.
35 Ministry of Economic Development, Sustainable Energy; Creating a Sustainable Energy System, October 2004, http://www.med.govt.nz/templates/MultipageDocumentTOC____10124.aspx.
36 EnergyLink Ltd & MWH Ltd (2005) Wind Energy Integration in New Zealand; Report to Ministry of Economic Development, Wellington
37 Energy Link MWH NZ (2005) Wind Energy Integration in New Zealand, May 2005, p6 http://www.med.govt.nz/ers/electric/wind-energy/index.html
current rules a wind farm developer will bear the costs of connecting to the grid, so these assets are internal to its investment decision and do not create external effects that need to be addressed by the RMA. But if any shared grid assets need to be expanded, the costs will be spread among all customers under Transpower’s transmission pricing methodology. Thus, there is an apparent divergence between private cost to the developer and the public cost across the network which could be regarded as an external effect. The value of this external effect is not the full cost of these network upgrades, but the present value cost of the new wind farm’s contribution to bringing forward the date when they are required.
Under EA rules, any investment in the grid needs to pass the Grid Investment Test (GIT) if Transpower is to be able to recover the costs of its investment from its customers. The GIT requires an investment to achieve a net market benefit when compared to all alternatives. Hence, these effects are internalised as a developer will not invest unless it expects there to be sufficient grid capacity to export its power, or for capacity upgrades to pass the GIT. The apparent external effect on the grid is not relevant for the RMA, as it is taken into account in the GIT process. The GIT process optimises the selection of the next investment out of all possible investments across the grid, so the cost spread among consumers is the lowest possible from known options at that time. Although there is a possibility of regulatory failure, the environment decision maker should assume that there will not be or else one regulator will be cutting across the role of another.
4.2.2 Other potential effects of Puketoi wind farm
Other potential environmental effects raised in connection with wind farms include disruption of recreation, visual intrusion, land cover and ecological disturbance (particularly regarding birds). Most of these depend on the particular characteristics of the surrounding area and they are not equally apparent at all wind farms. There can also be positive effects, such as the development of new tourist attractions or the diversion of revenues to improving ecological conditions in the vicinity. These effects are considered in other consultants’ reports in the AEE.
The economic value of all these adverse effects depends on what the community is prepared to pay to avoid them. An economic value is implicit in all decisions on consents, which for efficiency purposes should be consistent with the value of similar effects elsewhere. If Puketoi wind farm is built to operate within specified limits for these effects, the economic value can be regarded as internalised within the design and operational costs of the wind farm and there is no unaccounted-for external effect.