Making sense of barriers to distributed generation

With over of a third of New Zealand’s operating and under construction wind farms connected as distributed generation (DG) and many of our members considering DG projects, NZWEA has a strong interest in enabling these types of development.

We are well aware that some of our members have faced difficulty in pursuing their DG projects. With this in mind we were interested to read EECA’s recent report ‘Analysis of Barriers to Distributed Generation’.

The report set out to ‘provide a wide ranging and comprehensive analysis of barriers to the greater uptake of distributed generation in NZ’s electricity system’. It is intended to inform government action to encourage the growth of the DG industry.

Unfortunately some of the conclusions in the report were a little underwhelming, perhaps because the report lacks a clear definition of DG and it seems to confuse the barriers faced by proponents of projects of various scales. Having said that, the report did identify some interesting issues that might warrant some further consideration.

What are the benefits of DG?
The report set out to identify the benefits of DG, as the authors saw understanding the benefits as fundamental to understanding and addressing any barriers.

The report reviewed literature from several overseas markets, including Canada, the USA, Norway and Australia and the UK. In these markets it appears that the main benefit expected from increased DG relates to reducing greenhouse gas emissions and the related cost of carbon. With this in mind it appears strange that the report does not make reference to the Emissions Trading Scheme (ETS), NZ’s ‘all gases, all sectors’ approach to putting a price on carbon.

The electricity sector entered the ETS on 1 July. Having the ETS in place would appear to narrow the scope to provide DG with any specific compensation for its impact on emissions. And presumably any rise in electricity prices resulting from the ETS will assist with the viability of new DG projects – as  EECA’s DG feasibility fund identified economic viability as a major issue for developers.

If the ETS is the process through which DG receives recognition for its contribution to reducing emissions, this leaves the network benefits (i.e. reducing peak demands, deferring grid investment, etc.) as potentially the next most significant group of benefits that are not being realised. These are however perhaps the hardest benefits to demonstrate, and may ultimately be highly project and network specific.

The 2008 DG regulations were meant to ensure that DG developers were compensated for any reduction in transmission charges that their projects provided (through reducing the amount of electricity required to be injected from the transmission system). The report seems to suggest that the regulations may be ineffective without giving any further explanation. If these regulations are not achieving the intended outcome, perhaps this in itself warrants some investigation?

Having identified that these network benefits exist, perhaps a useful next step would be to identify where these benefits would be the greatest. For example, in a recent paper discussing scarcity pricing LECG discuss how this mechanism should provide an opportunity for local generation to develop where prices become high behind transmission constraints. Projects that are able to generate at times of peak demand may also be able to gain greater returns.

Lines companies and gentailers: sources of frustration for DG investors or DG investors themselves?
The report identifies that two sources of frustration for potential DG investors are lines companies and electricity retailers – without recognising that these companies are also potential investors in DG.

Lines companies do not appear to have been consulted in the report about the perceived connection issues raised by independent DG developers. It could be worth exploring if these frustrations result from developers not understanding all the issues associated with operating a lines network. Lines companies are also potential DG developers in their own right, and may have their own views on issues associated with DG development.

The report also suggests that DG developers consider that the prices that they receive from retailers, who are also essentially competitors, are either too low or of insufficient duration to make their projects bankable. Yet no retailers appear to have been approached to discuss this issue. Given this, it is hard to determine if the problem is with the retailers or with the projects themselves - with the possibility that projects do not make use of a sufficiently strong resource or developers are expecting an unrealistic price as a result of not understanding the risks associated with retail.

For a wind farm that cannot offer ‘firm’ output, the price that it receives for its generation will be lower than average market prices as the retailer must manage the variable output with other, potentially more expensive generation. Some of the uncertainty created by the current market reforms (such as the real and virtual asset swaps, potential scarcity pricing and consumer rebate schemes and other factors such as possible changes to the transmission pricing methodology) may also be making retailers risk-averse in the short term. This situation should settle as the reforms are worked through. And the establishment of the liquid hedge market should provide greater transparency of prevailing short-term electricity prices, which DG developers can use as a reference for their projects.

Challenges independents face in obtaining power purchase agreements at a suitable price and term warrant investigation, as do issues with their access to finance. But another option to consider is if there are tools that might allow independent generators to manage their risks. Are there products available, and at an appropriate price, that might allow them to offer ‘firm’ output to retailers? Is there an opportunity for DG and demand response to work together, or a way to aggregate DG projects independent of the existing retailers?

Understanding why ‘financial viability’ is a barrier
The report identifies that financial viability is typically the major barrier for DG projects. The fact that a project is uneconomic is certainly a barrier to its being developed. But what makes it uneconomic? Is it necessarily a result of a policy, regulatory or market failure that the government should be addressing? Perhaps there are other, lower cost options that are being developed first? It is also important to note that economic viability is a struggle for all projects at present.

A large portion of applicants to EECA’s DG fund indicated the reason they sought the funding was to understand the viability of their project. Following completion of the feasibility studies, financial viability was identified as the main challenge to progressing projects. This suggests that some education may be required to improve viability, be that technical such as site identification and maximising yield, or commercial such as project management and cost control.

It is likely that EECA will continue to investigate further enabling DG, with the report proposing that the next step should be cost benefit analysis of DG. The Electricity Commission is also looking at regulating the purchase of DG, but this appears to be focused on micro scale generation.

NZWEA will continue to engage with EECA on this work, and is also considering what we can do to enable greater uptake of DG. As always, we are interested to hear your thoughts on this issue. Please contact Fraser (email fraser@nzwea.org.nz or 04 499 5048).

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Electricity industry bill passes Parliament

The Electricity Industry Bill has now passed through Parliament. It implements the recommendations of the 2009 Ministerial Review of the electricity sector. As we’ve discussed in previous newsletters, the Bill paves the way for the Electricity Commission to be replaced by a new Electricity Authority with approval of grid upgrades to be undertaken by the Commerce Commission. Responsibilities for energy efficiency are now consolidated in EECA.

With the real and virtual asset swaps confirmed generators will be able to move forward with retail and new generation plans, knowing what their generation portfolios are. Also, there has been a marked increased in the volume of trade on the ASX’s electricity hedge market, which should lead in time to more transparency in the price of electricity. However, there is still uncertainty in areas where the bill requires the new Electricity Authority to take action, including scarcity pricing, consumer compensation in dry years, transmission pricing and locational price risk management.

NZWEA will continue to keep an eye on work flowing out of the Ministerial review.

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Project round up

With construction proceeding at four wind farms, two Environment Court hearings and a Board of Inquiry hearing beginning, Hayes becoming ever more convoluted and progress being made at several sites under investigation, we felt it was time for a round up of the status of wind farm projects across the country.

Under construction
Starting in the north, Meridian is well underway with transporting turbine components to its 64MW Te Uku Wind Farm near Raglan. One enthusiastic local is documenting the transportation of components on her blog. It is well worth a look if you want to see some good photos. Between now and December, 84 blades, 84 tower sections and 28 nacelles will be transported to site. First power is expected before Christmas.

At Te Rere Hau in the Manawatu, 65 (32.5MW) of the planned 97 wind turbines are operating. Civil works for the remaining 32 (16MW) turbines are well underway, and the turbines are expected to be erected from November onwards. Approximately two turbines will be commissioned every second week, with all expected to be operating by mid 2011. Even though NZ Windfarms has consent for an additional 56 turbines in the original Te Rere Hau site and in the extension area, it appears to have no plans to erect turbines on these sites.

Energy 3 reports that the four wind turbines for its 1MW Lulworth wind farm in Marlborough have arrived in NZ. Two of the second-hand Micon 530 machines have already been stripped and reconditioned in Christchurch. At the site, the roads have been prepared and the foundations are in the process of being poured. The turbines will be installed in December.

At TrustPower’s 36MW Mahinerangi, work at the site has begun. As we mentioned in the last newsletter, turbines will arrive in NZ in December, and TrustPower expects the wind farm to be commissioned by May.

Consented projects
TrustPower has held consent for the 240MW Kaiwera Downs wind farm in Southland since early 2009. In its recent annual report it reiterated that the project is unlikely to be viable unless the HVDC cost allocation method is changed. The comments also applied to any expansion of Mahinerangi wind farm beyond the 36 MW currently under construction (Mahinerangi is consented for up to 200MW). The allocations of HVDC costs are part of the ongoing review of the transmission pricing. The next step in this review will come in December, when an issues paper is released. Given this, it is likely to be some time before TrustPower makes any decision to progress either project.

Meridian still seems to be considering its options for Central Wind. Consent was confirmed for the project in January 2010, following an appeal to the Environment Court. Meridian’s Adam Muldoon recently commented to Energy News that a timeframe for the project won’t be announced until "the planets line up" – which implies a range of factors including turbine prices and exchange rates need to be favourable.

Taharoa C and Power Coast are progressing the 54MW Taharoa project, in the Waitomo District. Consent for the project was originally granted in 2006. Appeals related to migratory shorebirds were resolved in April 2009. Under the original consent, turbine components were to be barged to site from New Plymouth. Taharoa C and Power Coast have recently had the consent condition altered to allow components to be transported by road from the Port of Tauranga.

Pioneer Generation received consent for its 7.65MW Mt Stuart wind farm, near Milton in Otago, in May this year. It is now working through consent requirements before committing to the project.

The consent for the 12.5MW Long Gully wind farm, in Wellington, is now clear following the withdrawal of two appeals. However the future of the project is not clear as Mighty River Power, who originally intended to own and operate the wind farm, have decided that they will not proceed to construction. Windflow and Mighty River Power are currently exploring alternatives that would allow another party to build the wind farm, such as a power offtake arrangement. Windflow says it is committed to building the project and is hopeful that an agreement acceptable to both parties can be reached.

Projects seeking consent
Mighty River Power and others are still waiting for the Board of Inquiry to release its draft report and decision about the proposed 288MW Turitea wind farm in the Manawatu, south of the existing wind farms. The hearing originally began in July 2009, and then was adjourned in October to allow MRP time to revise the proposal in light of submitters concerns. The final two weeks of hearings were held in March 2010. Once the draft decision is released, parties will have 20 working days to provide comments to the board.

The path to consent for Meridian’s 630MW Project Hayes seems become more torturous by the day. The future of the project was due to be considered at an Environment Court conference in November. But now opponents of the project have sought leave from the High Court to take the project to the Court of Appeal. It will be interesting to see the High Court’s take on comments by opponents that they have sought leave to appeal mainly to keep their options open.

Earlier this month Meridian had sought clarification about the directions in the High Court decision, putting forward that the directions should explicitly say the consideration of alternate sites should use the Central Otago district plan’s landscape categories. A point of debate at the Environment Court hearing was the landscape value of the site and how it was identified in the district plan. Meridian's request seems to be aimed at ensuring it does not have to undertake a district-wide landscape assessment. The High Court now needs to arrange a hearing to consider Meridian’s request for clarification before the matter is reconsidered by the Environment Court (originally set down for 15 November). And if the High Court grants opponents leave to appeal, they may either take the case to the Court of Appeal or continue with the Environment Court rehearing.

The Board of Inquiry’s hearing for Contact Energy’s 540 MW Hauauru Ma Raki resumed last week. Parties’ evidence and daily transcripts of the hearing are available on the Environmental Protection Agency’s website. The hearing seems to be moving forward significantly faster than the original hearing.

Further south, the Environment Court hearing for Contact’s 177MW Waitahora project, in the northern Wairarapa, begins on today. The hearing is being held in Hastings and is set to run for all of this week and then for four days in the week of 18 October. The Tararua District Council declined consent for the project in April 2009 because of the project’s potential to affect underground water flows and landscape impacts. At the time the decision was released we commented that the decision did not appear to be the result of robust decision-making as the commissioners seemed to relied on their own judgement rather than the evidence and data presented at the hearing.

The Environment Court hearing for Meridian’s 71MW Mill Creek, near Wellington, begins on 12 October, following a site visit on 11 October. Meridian is now proposing to have the new Wind Turbine Noise Standard (NZS6808:2010) used as the basis for noise conditions at the wind farm. It will be interesting to see how the Court treats the new edition of the Standard, and if applied how it works in practice alongside the convoluted noise related conditions for the nearby West Wind wind farm.

It is still unclear when Mainpower’s 69MW Mt Cass will head to an Environment Court hearing. The original application was declined by the Hurunui Council because of the proposed project’s effects on local ecology. Mainpower has altered the project to avoid significant areas of limestone and plant communities, and subsequently made a supplementary application that proposes new sites for wind turbines west of the original site. The combined applications are now being considered by the Environment Court. If parties, which include Forest and Bird, the Department of Conservation and the local Conservation Board, do not reach an agreement through mediation then a hearing is likely in March or April 2011.

Meanwhile, it’s likely to be another month before Meridian submits a resource consent application for the proposed Hurunui wind farm in North Canterbury. And Meridian does not appear to be progressing its Windy Peak project in the Wairarapa, which stirred up much opposition from nearby Martinborough residents. As the residents raised concerns about landscape effects, Meridian said that it would wait for the results of Greater Wellington Regional Council’s public consultation about landscapes in the region.

TrustPower is investigating a wind farm at the site of Allco’s Waverley project, in Taranaki. TrustPower says it has landowner agreements in place, but has not indicated details for its project. Allco had applied for consent for a 135MW project, but the application was withdrawn when it went into receivership in 2008.

Genesis Energy held open days in September for its proposed Castle Hill wind farm in the Wairarapa. The company is still conducting a range of environmental and engineering assessments, and does not intended to apply for consent until sometime next year. Genesis has released a range of information about the project on its website. As we reported in last week’s newsletter, Genesis has also purchased the Slopedown project, in Southland, from Wind Prospect and is conducting site assessments there as well.

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