Wednesday, October 21, 2009

What now for Huntly?

There is some media attention on the recent financial performance of Genesis Energy and the write down of the Huntly Power Station in particular. There are a few issues that arise from this.

First, don't get carried away with accounting jiggery pokery. The Huntly write down is not a real cost. All the write down means is that one inaccurate estimate of Huntly's value has been replaced by another inaccurate estimate of Huntly's value; and the estimates are different.

Second, and far more importantly is the debate about the ongoing role of Huntly in the future. Genesis have a problem. They know, as do most reasonable people in the industry, that Huntly is a major contributor to security of energy supply in New Zealand. The problem is that there isn't a current mechanism by which the costs of keeping Huntly running will, necessarily, be recovered over time. This doesn't mean that Huntly isn't economic, it just means that the owner of Huntly may have to swallow signficant costs for those rare times that the station can earn large amounts of money (such as when hydro systems are experiencing severe droughts). For an owner of such an asset it is attractive to try to socialise at least some of the costs to keep the power station running. So, to an extent, it looks like Genesis may be playing a political game in its latest annual report and media release.

Nevertheless, it is worth considering whether there is a common good role for plant such as Huntly; and, therefore, whether there should be another mechanism for earning revenue. Somewhat ironically Huntly may have a major role to play in enabling renewables.

Renewable energy in significant quantities, in the foreseeable future, is likely to come from geothermal and wind. Geothermal has a limited beneficial contribution to the security of energy supply. When it is first commissioned geothermal almost certainly allows for more surplus of hydro-electricity but, on average, will be substantially matched to demand growth. This means that generally we will still have exposure to dry year risk as geothermal power stations will not be able to produce more (as they generally operate at maximum output) during these times.

Wind makes things worse (from an energy security basis) because it can only operate when the wind blows which may not always be when it is needed. Many proponents of wind suggest that wind and hydro are complimentary. Generally this is probably true but not at the extremes. Unfortunately you cannot guarantee that the wind will blow when you are in the middle of a drought. Indeed this was a problem during the drought of 2008. If New Zealand aspires to significant quantities of wind energy (with the associated economic and environmental benefits) then we will also need a large source of entirely discretionary generation on standby. This is an almost perfect description of the old Huntly power station - a large source of entirely discretionary generation on standby.

I'm not sure if Genesis are playing a political game or not but, regardless of the merits of such an approach, the ongoing role of Huntly needs to be elevated in the energy policy debate. And, ironically, it should be the greens that champion the old girl.