Wednesday, May 14, 2008

The thermal moratorium and the market

Green co-leader Jeanette Fitzsimons blogs at Frogblog on the ETS, and the government's proposed moratorium on new thermal generation. She points out that the moratorium has no teeth - given the list of exemptions, it permits precisely what it purports to ban, to the extent that no submitter could find an example of a thermal plant that could not be squeezed through the numerous loopholes.

This poses a real challenge to the government's 90% renewables target. State-owned Genesis energy is currently planning on squeezing a 480MW gas-fired power plant through those loopholes, and this will discourage investment in renewable generation:

[Genesis have] figured out that if they build it as a peaking plant (not allowed to run more than say, 30% of the time) then whenever supply gets a little tight they can apply under the “emergency” clause to run it all the time for “security of supply”. Knowing there are 480 MW of gas station just sitting there waiting for an opportunity will discourage others from building renewables, so supply is guaranteed to get a little tight. However, if that doesn’t work there are other exemptions it can try.
The upshot is that if we don't want renewables to be Maui-ed by dirty generation, then we need a moratorium with teeth. Or alternatively, a Minister with balls - something neither party seems to be offering.

Underlying this is the problem of the market. According to free market dogma, the market will produce the most efficient allocation, but in practice it favours underinvestment. Shortages are profitable as they drive up the spot price (expect record dividends from electricity generators next year), while investment in security of supply - or "overcapacity" as they call it - drives down profits. So we go from shortage to shortage, never quite having enough, at an economic cost of a few hundred million dollars every couple of years.

Markets are useful tools. But clearly, they do not work for electricity. If we want to ensure that we have enough all the time, without the price spikes we've seen over the last decade, we need to bring the sector back under government control.