NZ ETS Settings Hold Steady Amid Shortfall Warning
The Climate Change Commission has recommended maintaining the current New Zealand Emissions Trading System (NZ ETS) settings but warns of a potential unit shortfall as early as 2028.
However, giving money is not the only way to subsidise an activity.
There are five effective subsidies that make investing in grid connected wind and solar generation viable. They are distortionary and add unnecessary costs to consumers.
They are:
1. Emissions Trading Scheme subsidy
Wind and solar can sell carbon credits while generators who use coal or natural gas, etc, are made to buy credits. This skews the economics massively in favour of the non-dispatchable wind and solar generation.
2. Back-up power subsidy
Wind generation has a capacity factor of around 30%. Solar is between 10 to 25%. The capacity factor is the amount of power produced on average. A wind farm with a capacity of 100MW will, on average, put out about 30MW. In practice, it might produce 90MW, other times, nothing. When nothing is produced a back-up supply is needed
The grid is set up to balance the generation to the demand. When the sun isn’t shining and the wind isn’t blowing, there has to be a back-up generation, (aka firming), but the cost of the back-up is not met by the wind and solar generating companies. For each gigawatt (GW) of wind capacity, there must be a GW of back-up generation. The cost of large batteries pumped hydro or green hydrogen is prohibitive.
Battery back-up will not work.
Back-up power has to come from a dispatchable supply like hydro, natural gas, or coal. Embarrassingly, the cost of the back-up electricity is lower than from wind or solar. The solution is to use an accounting trick called the “Levelised Cost of Energy” (LCOE). It doesn’t make wind and solar actually cheaper. It just makes it seem like they are. LCOE answers the wrong question. It tells us the cost per kilowatthour (kWh) of different systems. What we really need to know is what is the cheapest way of delivering reliable power?
3. Transmission cost subsidy
Whenever a wind or solar generating station is built, new transmission infrastructure is needed. This large cost is not paid by the wind or solar companies.
4. Rigged market subsidy
The grid is forced to take power from wind or solar generators before other sources of power, because apparently wind and sunshine are free. Other generators have to cut back on their generation while power is coming from wind or solar. Wind and solar generators do not compete in an open market.
5. Frequency stability subsidy
Our alternating current electricity grid has a frequency of 50 Hertz (Hz). A small variation in frequency results in electrical failures in expensive equipment. This is a problem when too much of the power is generated by non-dispatchable sources like wind and solar.
If too much of the generated power is coming from wind and solar, the grid might not have sufficient inertia so the frequency changes and the system can crash. There are some expensive machines called “rotating stabilisers” that can be used to stabilise the frequency, but the cost of the stabilisation is not paid by the wind and solar companies. Hydro, coal and geothermal provide inertia but if we add a lot more wind and solar, frequency control will become a big problem.
It does not matter if you call these subsidies or something else. Without these, wind or solar generation is completely uneconomic in New Zealand. Because of these, the price of our electricity is higher than it otherwise would be.
John Riddell is a Waikato dairy farmer
