Economic Assessment of Puketoi Wind Farm doc

Economic Assessment of Puketoi
Wind Farm





Report to Mighty River Power


July 2011

8 Halswell St, Thorndon
P O Box 3479, Wellington
Tel: +64 4 472 1880
Fax: +64 4 472 1211

www.nzier.org.nz


NZIER’s standard terms of engagement for contract research can be found at www.nzier.org.nz.

While NZIER will use all reasonable endeavours in undertaking contract research and producing reports
to ensure the information is as accurate as practicable, the Institute, its contributors, employees, and Board
shall not be liable (whether in contract, tort (including negligence), equity or on any other basis) for any loss

or damage sustained by any person relying on such work whatever the cause of such loss or damage.


About NZIER
NZIER is a specialist consulting firm that uses applied economic research and analysis
to provide a wide range of strategic advice to clients in the public and private sectors,
throughout New Zealand and Australia, and further afield.
NZIER is also known for its long-established Quarterly Survey of Business Opinion and
Quarterly Predictions.
Our aim is to be the premier centre of applied economic research in New Zealand. We
pride ourselves on our reputation for independence and delivering quality analysis in the
right form, and at the right time, for our clients. We ensure quality through teamwork on
individual projects, critical review at internal seminars, and by peer review at various
stages through a project by a senior staff member otherwise not involved in the project.
NZIER was established in 1958.

Authorship
Prepared by: Peter Clough & Daisy Shen
Quality approved by: John Yeabsley
Date: 27/07/2011 3:16 p.m.
Version: 5
Acknowledgements:



NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM i
Executive summary
This report provides an assessment of the economic effects of the proposed Puketoi
wind farm by Mighty River Power, for the purpose of informing application for
resource consent. Given the focus of the RMA (RMA) on sustainable development,

economic efficiency of resource use in section 7 (b) and on the benefits of renewable
energy in section 7 (j), it uses a framework of cost benefit analysis for assessing
these effects.
The proposed Puketoi wind farm is likely to inject $138 million to $171 million
expenditure into the local economy directly, and create 500 jobs locally during the
construction phase, and also add $12 million to $21 million per year of direct
expenditures once in operation. Such economic impacts can be significant in
stimulating economic activity more widely, but they are not unique to a given
development, and they are not informative about efficiency of natural and physical
resources.
More relevant for RMA considerations is the stream of benefits derived from the new
wind farm once it is operational, which stem from the harnessing of a hitherto free
resource (wind) to create a valuable commodity (electricity). This has implications for
those involved in supplying electricity, the consumers of electricity, and also third
parties dealing with its effects on the wider environment.
The fact that Mighty River Power wants to invest in Puketoi wind farm indicates that
the company regards it as an efficient use of its resources. The critical question for
RMA purposes is whether Puketoi wind farm would create effects external to the
company’s consideration that are so significant as to outweigh the efficiency benefit
of its use of natural resources.
In summary, the new wind farm would alleviate electricity supply risk caused by
recurring dry years, and contribute to stated government objectives for increasing
renewable generation and reducing greenhouse gas emissions, as expressed in the
New Zealand Energy Strategy and the framework for greenhouse gas emissions
trading. Its economic effects can be expected to be:
Recovery of the wind farm operator’s long run costs from the viability of the project as
they would from any other investment, with a share of this going as enhanced benefit
for those who receive rentals for the land it occupies;
Minor benefits for power consumers, through:
• suppression of price rises, due to displacement of higher cost generation

sources;
• Defered grid investments and reduced transmission losses, any savings from
which would potentially pass through to all power consumers;

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
ii
• More than minor benefits from displacement of long distance power transmission
with associated losses;
Benefits, probably of substantial value, from the displacement of thermal generation
and avoidance of greenhouse gas emissions which comprise:
• benefits to the wind farm operator to the extent the emissions trading scheme
exposes emitters to the full cost of emissions under the Kyoto Protocol and any
successor international agreement;
• benefits to third parties (e.g. New Zealand tax payers) to the extent that emitters
are shielded from full cost of emissions by the government taking some
responsibility for meeting international obligations (as is currently the case given
the cap on emission prices under the emissions trading scheme), or should the
current government policy change in ways that shift liability for greenhouse
emissions away from the emitting sectors;
A balance of third party effects including:
• Potential disruptions to the site, mostly temporary, internalised in landowner
agreements and hence less than minor;
• Potential displacement of recreation and tourism activities, likely to be less than
minor, and possibly beneficial should the wind farm site attract sight-seers;
• Potential impacts on visual amenity, wildlife habitat etc (not assessed in this
report).
Quantified estimates are provided based on the assumed installed capacity of 159-
326 MW. The value to New Zealand of this new generation is indicated by the costs
of the next best alternative, assumed to be thermal generation.

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM iii
Contents
1. Introduction 1
2. Framework of analysis and assumptions 3
2.1 Economics, Policy and the RMA 3
2.2 Components of economic assessment 4
2.2.1 Components of cost benefit analysis of a wind farm 4
2.2.2 Components of economic impact analysis of a wind farm 5
3. The existing environment 7
3.1 Electricity supply and demand in New Zealand 7
3.1.1 Forecast growth in electricity demand 8
3.1.2 Expected increase in generation capacity 10
3.2 The role of wind in meeting electricity demand 14
3.3 National objectives and policy for electricity 16
4. Assessment of actual and potential effects 20
4.1 Puketoi Wind Farm and the local economy 20
4.2 Value of wind generation obtained from Puketoi wind farm 24
4.2.1 Wind power effects on the electricity system 27
4.2.2 Other potential effects of Puketoi wind farm 29
4.3 Assessment of costs and benefits relevant to RMA 29
4.3.1 Effects on producers 30
4.3.2 Effects on consumers 31
4.3.3 Effects on third parties (environment) 33
4.4 Assessment of the proposal against RMA’s criteria 35
5. Conclusions 38

Figures
Figure 1 Current generation across New Zealand 7

Figure 2 Electricity consumption forecasts 2009-2025 9
Figure 3 Mean monthly wholesale electricity prices 10
Figure 4 Recent trends in fossil fuel prices 12
Figure 5 Employment in national and local economies 23
Figure 6 Thermal generation and emission Costs 27
Figure 7 Summary of economic effects 36
Figure 8 Summary of national and local benefits 39



NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
1
1. Introduction
This report sets out a comprehensive economic assessment of the proposed Puketoi
wind farm development, with particular reference to matters contained in Part II and
section 104 RMA. The proposed wind farm would be located along a ridge of the
Puketoi Range to the east of Woodville and Pahiatua. The electricity it generates
would feed into the national transmission grid at the Linton Substation located
between Palmerston North and the northern Tararua Ranges. The proposed wind
farm development envelope has 53 turbines, giving an installed capacity of 159-326
megawatts (MW).
Depending on the wind resource and efficiency of operations, wind farms in New
Zealand can achieve utilisation of between 33% and 45%. Existing wind farms at
other nearby locations have achieved utilisation rates at the upper end of this range,
and due to the exceptional quality of the wind resource the same is expected for the
Puketoi wind farm. Current expectation is that it is capable of producing 706-1272
GWh per year with a utilisation rate of 44.5%.
The purpose of the wind farm proposal is to harness a hitherto free natural resource,
wind, to create a valuable commodity, electricity. This is of value to the wind farm’s
operators, but also the wider community to the extent that it contributes to generation

capacity available to meet demands across the electricity system, and avoids the
resource costs and consequences of alternative generation.
As well as creating value by capturing the wind resource, the proposed wind farm will
also inject funds into the local economy, particularly during its construction stage, and
to a lesser extent during its operation. Critical variables on these local economic
impacts are its capital cost (and its staging over the construction period), its on-going
expenditures (particularly those on services and supplies that can be procured
locally), and the direct jobs created in both the construction and operation of the wind
farm. Site occupancy rental payments to landowners is another source of economic
impact (or rather a particular form of local procurement expenditure).
As the RMA entails balancing tangible effects against less tangible ones, some
estimates of the likely magnitudes of measurable benefit are useful to the process of
reaching a decision. Mighty River Power operates on commercial principles and will
not proceed with Puketoi wind farm unless it continues to expect it be of private
benefit to the company’s returns. So the economic issues of most interest for
resource management purposes are the likely external effects, i.e. those that are
outside the consideration of the developers. In the current case these include:
• The balance of environmental effects, both local effects (like effects on landscape
amenity) and global effects (like greenhouse gas emission displacement).
• Potential savings across the energy supply system.

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
2
• Potential value of the synergies obtained from co-ordinating Puketoi wind farm
with other generation plant (e.g. hydro schemes).
• Achievement of stated objectives of government, such as those in the New
Zealand Energy Strategy.
Forecasting the likely uses of wind power in the future is a complex task, but it is
possible to provide illustrative examples of the economic consequences of Puketoi
wind farm, including cost savings, carbon emission reductions and changing patterns

of supply caused by a new wind farm, given plausible assumptions about how the
market would operate with and without it.
This report proceeds by:
• setting out a framework for considering economic effects (section 2);
• outlining the existing environment that the proposed Puketoi wind farm will affect,
with particular attention to the electricity supply and demand (section 3);
• assessing Puketoi wind farm’s contribution to national economic well-being
(section 4);
• concluding with an overall assessment of Puketoi wind farm’s economic effects
(section 5).
Sections 2 and 3 are by way of background on the general legislative, policy, and
electricity situation in New Zealand. Sections 4 and 5 are specific to the Puketoi wind
farm proposal, based on current expectations and available information.





NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
3
2. Framework of analysis and assumptions
The principal purpose of a wind farm is to harness a free natural resource (wind) and
convert it to something of value to people (electricity). There are beneficial
consequences of this for wind farm operators, but also a variety of effects on third
parties and the wider environment, all being relevant to considerations under the
RMA.
2.1 Economics, Policy and the RMA
The purpose of the RMA is to promote the sustainable management of natural and
physical resources. The RMA defines sustainable management as using resources in
a way that enables people and communities to provide for their well-being and their

health and safety, while sustaining the potential of those resources to meet
reasonably foreseeable future needs and avoiding, remedying or mitigating any
adverse effects of activities on the environment.
There is an established body of case law which highlights the several distinct threads
in the RMA which take what the Environment Court in the Marlborough Ridge case
(Marlborough Ridge Limited v Marlborough District Council [1998] NZ RMA73)
described as an “economic” approach to sustainable management. These include
Section 5(2) references to “enabling” and “economic well-being”; Section 7(b)
references to efficient use of resources; and references in Section 32 to
effectiveness, efficiency, and assessing benefits and costs. While the latter is not
strictly relevant to consideration of these applications, together they impart a
pronounced economic complexion to the RMA.
Recent changes to Section 7 RMA are particularly relevant to the application for
consents for wind farm developments such as Puketoi wind farm. The Resource
Management (Energy and Climate Change) Amendment Act 2004 specifically
amended Section 7 RMA to require decision makers to have particular regard to the
benefits associated with the use and development of renewable energy sources
(section 7(j)). Section 104E regarding discharges of greenhouse gases requires
consent authorities not to have regard to their effects on climate change, except to
the extent that development and use of renewable energy enables a reduction of
such discharges to air.
These are all consistent with development of new renewable energy generation, such
as wind farms. This legislative change is largely in response to concerns about
energy security and greenhouse gas emissions, which are also reflected in a
preference for renewable energy sources in recent pronouncements on government
policy, as detailed below.
The development of new renewable generation capacity, such as the proposed
Puketoi wind farm, would contribute to government’s objectives of restraining
greenhouse gas emissions and diversifying its mix of electricity generation away from
the current dominance of hydro, which poses risks to the reliability and security of

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
4
supply during dry years. Government policy towards renewable generation is
included in such measures as the Emissions Trading Scheme, the Energy Strategy,
and the National Policy Statement for Renewable Energy Generation under the RMA.
These are examined in section 3.3 below.
The measure of economic value of Puketoi wind farm is its contribution to economic
well-being in the community at large. This includes the benefits it provides to
producers of electricity, to consumers of electricity and to third parties, such as those
facing the consequences it creates on the wider environment. The scope of this
benefit is national, not just confined to the local or regional economy, including:
• Creation of a valuable commodity from a naturally renewable resource;
• Displacement of higher cost thermal generation and associated emissions;
• Wider consequences for the electricity supply system and the availability of
electricity to its consumers;
• Net effects on recreational and tourism opportunities and on local environmental
amenity;
• Expenditure impacts from employment and purchases in the economy (more
significant for the local/regional than the national economy).
2.2 Components of economic assessment
2.2.1 Components of cost benefit analysis of a wind farm
The focus on resource use efficiency in section 7(b) RMA is compatible with cost
benefit analysis, so it is useful to view the effects in that framework. Such analysis
focuses on economic surpluses, the separable effects on consumers, producers and
third parties (external effects), and the distinction between additional gains (benefits)
and losses (costs) from available resources. In the case of wind farms such as the
Puketoi wind farm, the principal effects could include.
• Effects on consumers:
− Benefit from lower cost power supply: some suppression of price rises can be

expected to the extent the wind farm displaces or defers the need to use higher
cost generation elsewhere;
− Benefit from avoidance of transmission losses due to closer generation to local
demand centres – also with some downward price effect for consumers during
periods when local demand exceeds supply and power would otherwise need
to be transmitted long distances;
− Benefit from reduced probability of supply disruption – a quality improvement in
electricity supply to the extent that more diversified supply reduces the dry-year
risk and improves security of supply;
• Effects on producers:
− Benefit from the value of output from the wind farm;

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
5
− Benefit from any synergies that may be realised between the wind farm and
other generation such as hydro-power schemes (additional value from joint
operation);
− Costs incurred in construction, operation and maintenance;
• Effects on third parties (environment):
− Cost of displacement of activities, if any (recreation, farming);
− Benefit of reduced greenhouse gas emissions from displacement of thermal
electricity generation based on fossil fuels, to the extent this is not internalised
into the producers’ cost of generation (as through an emissions trading
scheme);
− Other environmental effects (cost or benefit to be determined).
The breadth of components in a cost benefit analysis means that it is best conducted
from a national perspective, i.e. the costs and benefits that matter are those that
affect residents of New Zealand. Thus, the consumer benefits of Puketoi wind farm
are relevant whether they are felt in the wind farm’s vicinity or anywhere else within
New Zealand.

2.2.2 Components of economic impact analysis of a wind farm
An economic impact analysis has a narrower scope than a cost benefit analysis. The
elements of an impact analysis are:
• Direct impacts:
− Spending on construction in the wind farm development years, which may be
measured as total expenditure on the project in the local economy, the new
jobs created by the project, and the incomes retained from the project by
suppliers of labour and materials;
− Spending on wind farm operations and maintenance in subsequent years,
measured as total expenditure on the project in the local economy, the new
jobs created by the project, and the incomes retained from the project by
suppliers of labour and materials;
− Rental income generated by the project;
• Indirect impacts:
− The multiplier effect across other sectors in the local economy from new
demand created by the recipients of direct income.
One often-cited item of apparent economic impact is the increase in rates revenue
received by local bodies when new investment increases rateable value of property in
the district. Like central government taxation, rates are a transfer payment between
members of the community, and are not included in analysis of new benefits, costs or
economic impacts, as to do so would entail counting expenditures that net out at the

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
6
community level. Put another way, the real resource effects of a new development
are the increased value of output and the costs incurred, but rates and taxes are just
“claims” made to a share of the gain in net output.
Because a project that is small on a national scale can be proportionately more
significant for a local economy, such impact analysis lends itself to a more local or
regional perspective rather than a national perspective. However, not all spending is

retained within the locality of the project. Purchases of supplies from outside the
region “leak out” of the region, an effect which is explicitly allowed for in the
calculation of economic multipliers. Moreover, some of the apparent impact may be
business diversion rather than new business creation. For example, jobs created
would be an unambiguous indicator of benefit if all those newly employed were
previously unemployed, but if they draw labour from other businesses in the locality
there can be offsetting effects on the productivity in other sectors, at least
temporarily. This means that impact analyses have a tendency to overstate local net
effects by an indeterminate amount.
Because there is no comprehensive measure of how goods and services move
across jurisdictional boundaries within New Zealand, and because of the way
economic statistics are collected, economic indicators tend to be more complete and
reliable at national level than at regional level, and more reliable at regional level than
at district level. Discussion of local impacts in this report will refer primarily to impacts
on a proximate region consisting of Tararua District, Masterton District, Manawatu
District and Palmerston North City, with implications on individual districts within the
region where it is feasible to do so.


NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
7
3. The existing environment
3.1 Electricity supply and demand in New Zealand
New Zealand has a mix of hydro, thermal (predominantly gas and coal, but also
some fuel oil, wood and diesel), geothermal, wind and biogas electricity generation
capacity. Most of the current generation capacity in the South Island is hydro, which
is reliant on precipitation and spring snow-melt, providing limited storage of water to
spread generation over longer periods, and for much of the time generating in excess
of South Island demand thereby providing surplus for transmission to North Island
demand centres. The North Island has more mixed generation sources, with a cluster

of generation plant in Taranaki based on gas, hydro resources concentrated on the
Waikato River, but also some located in the Bay of Plenty, Poverty Bay and Taranaki,
geothermal plant located mostly on the Taupo Volcanic Zone and wind power
generation in the Waikato, Manawatu and Wellington regions.
In the 2009 calendar year, New Zealand’s total installed generation capacity was
9,486 MW, which generated (net) output of 42,010 GWh, 3.5% of which came from
wind generation sources.


Figure 1 Current generation across New Zealand
Year end December 2009
Installed capacity (MW) Net generation (GWh)
Hydro 5,378 56.7% 23,962 57.0%
Gas 1,747 18.4% 8,385 20.0%
Geothermal 635 6.7% 4,542 10.8%
Coal 949 10.0% 3,079 7.3%
Wind 496 5.2% 1,456 3.5%
Wood 69 0.7% 323 0.8%
Biogas 38 0.4% 195 0.5%
Waste heat 19 0.2% 59 0.1%
Oil 156 1.6% 8 0.02%
Total 9,486 100% 42,010 100%


Source: Ministry of Economic Development (2010) New Zealand Energy Data
File. From TAB_G.3b TAB_G.2a


As at November 2010, the Electricity Authority listed 106 MW of new generation
capacity as under construction, 2,143 MW as consented, 1,355 MW as consent

under appeal and 1,520 MW as applied for consent.
1
Earliest commission dates


1
Electricity Authority (2010) Generation Update – November 2010,
/>development/list-of-generation-projects/

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
8
ranged between 2011 and 2020. Of this total new capacity, 58% would be wind
powered and 11% hydro.
There is no economically viable way to store electricity in bulk, except indirectly by
storing water in hydro lakes or stockpiling other fuels. Despite recent additions to
generating capacity in the North Island, New Zealand remains a long thin country, in
which major generation and storage capacity is in the South Island, but major load
centres are concentrated in the North Island. Imbalances between supply and
demand within and between regions give rise to the need for transmission, which is
achieved with a national grid that comprises high voltage Alternating Current (AC)
transmission lines in each island, and the High Voltage Direct Current (HVDC)
transmission link between the lower South Island at Benmore sub-station, and the
Haywards sub-station just north of Wellington.
The proposed Puketoi wind farm’s 53 turbines of 3 to 6.15 MW capacity each, would
have installed capacity of 159 to 326 MW and be capable of generating 706 to 1272
GWh per year. This is equivalent to adding 1.7% to 3.4% to New Zealand’s total
installed generation capacity and 1.6% to 3.0% to current annual generation. The
706 to 1272 GWh generation is based on a utilisation rate of about 44.5%, which is at
the upper end of the range of utilisation rates achieved at other New Zealand wind
sites. The Puketoi site has an excellent wind resource, which is not surprising given

its proximity to other sites in Manawatu’s northern Tararua Range which have already
been developed for wind generation.
3.1.1 Forecast growth in electricity demand
Between 1979 and 2009, New Zealand’s net generation grew from 22,175 GWh to
42,010 GWh.
2
This almost doubling in electricity supply over 30 years is equivalent to
a compound growth rate of 2.2% per year. Five year rolling average growth rates
have declined since the 1980s, but rarely dropped below 1.5% per year until 2009.
Over the long term, electricity consumption has moved in line with economic growth.
In 2006, the Ministry of Economic Development published its electricity consumption
forecasts to 2030. Those forecasts suggested growth over the period 2005 to 2030 of
1.3% per year, on average.
3
An update of these outlook forecasts in 2010 indicated a
lower rate of electricity consumption of 0.9% per year, considerably lower than the
expected average annual economic growth of 2.3%.
4
These forecasts attribute this
change to improvements in energy efficiency and economic growth being
concentrated in less energy intensive service industries. Economic growth appears to
have become decoupled from electricity growth.
The Electricity Commission’s Statement of Opportunities (SOO) contains regional
and national projections of electricity consumption and prudent peak capacity


2
Ministry of Economic Development (2010) New Zealand Energy Data File.
3
Ministry of Economic Development (2006) New Zealand’s Energy Outlook to 2030,

/>
4
www.med.govt.nz/energyoutlook

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
9
requirements, to assist in determining future transmission capacity requirements.
5

The Electricity Commission’s latest projections suggested stronger growth in national
electricity demand than the MED’s outlook, by on average 1.8% per year over the
period 2009 to 2020 and 1.5% per year over the period 2009 to 2040. The prudent
peak capacity required to meet the peaks in demand associated with the above
average consumption growth was expected to grow at a higher rate of 1.7% per year
for New Zealand as a whole and 2.0% and 1.1% for the North Island and South
Island respectively.
The Electricity Authority has updated these forecasts on its website. These suggest
similar growth in consumption to the earlier SOO forecasts, but rather lower rates of
increasing provision of prudent peak capacity.




Figure 2 Electricity consumption forecasts 2009-2025
Consumption volumes and compound annual growth rate
Residential
Commercial &
industrial
Local lines losses
Less embedded

generation
Total
2009 13011 25888 1753 1927 38924
2050 21424 49210 3410 3510 70534
CAGR 1.14% 1.25% 1.62% 1.68% 1.51%
Market Shares
2009 33.43% 66.51% 4.50% 4.95% 100.00%
2050 30.37% 69.77% 4.83% 4.98% 100.00%
 
Required
capacity


Central North
Island
Total North
Island
Total South Island
Total New
Zealand

2009 1647 24137 14588 38725
2050 2541 49379 21154 70534

CAGR 1.09% 1.81% 0.93% 1.51%


Notes: (1) Figures in GWh
(2) Total = Residential +Commercial & industrial + local lines loses – embedded generation
(3) CAGR: compound annual growth rate

Source: NZIER; Electricity Authority; />forecast/




5
Electricity Commission (2010) Statement of Opportunities,
/>SOO

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
10
So forecast growth rates are low by historical standards, reflecting assumptions
about energy efficiency improvements, but there are varied expectations of how low
they could be. Actual growth rates could be somewhat lower or higher than these
forecasts. In particular consumer behavioural responses to changes in price and
reliability of electricity or new sources of demand (like household appliances and
automation) make future demands inherently difficult to predict.
3.1.2 Expected increase in generation capacity
New Zealand is expected to expand its generation capacity to meet this projected
demand, and other reasons reinforce this expectation of capacity expansion.
a) Dry years
Although New Zealand currently has sufficient generating capacity to meet electricity
demand in most years, its reliance on hydro sources makes it vulnerable to sharp
increases in wholesale prices in dry years when low hydro storage levels in the
autumn and winter coincide with peak demand. The effect can be seen in the prices
received in the wholesale electricity market. Figure 3 shows pronounced dry year
price spikes in 2001, 2003, 2006 and 2008 in mean monthly wholesale prices at the
Haywards node, a pattern repeated at other reference points across New Zealand.
Figure 3 Mean monthly wholesale electricity prices

$/MWh, Haywards node, Jan 2000 to March 2011, mean
$0
$50
$100
$150
$200
$250
$300
$350
Jan,00
Jul,00
Jan,01
Jul,01
Jan,02
Jul,02
Jan,03
Jul,03
Jan,04
Jul,04
Jan,05
Jul,05
Jan,06
Jul,06
Jan,07
Jul,07
Jan,08
Jul,08
Jan,09
Jul,09
Jan,10

Jul,10
Jan,11
$/MWh

Source: Electricity Authority CDS

Providing additional wind generation can diversify the national electricity generation
capacity and thereby time-shift the use of hydro to improve energy supply, especially
for dry years. This is due to both characteristics of two different types of generation.

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
11
Hydro generation is driven by the weather pattern, and the system’s water storage
level, whereas, wind has utilisation percentage - which is specific to site. In general,
though, more wind turbine capacity means more electricity produced during the year.
This is one function that Puketoi wind farm would fulfil.
b) Gas supply uncertainties
As shown in Figure 1 above, after hydro, gas is the second most important source of
electricity. New Zealand faces uncertainty over the availability of gas for electricity
generation in the medium term, due to depletion of the Maui gas field reserve, and
also whether there will be timely new discoveries sufficient to replace this source,
despite policies encouraging gas exploration.
In 2008, gas production from Maui was just over 25% of the level it was at its peak in
2001. The Pohokura gas field surpassed Maui as the largest single source of gas for
the first time in 2007. In 2008, it produced 41% of total output, Maui produced 30%
and Kapuni 12%, with the remainder coming from seven other small gas fields.
Contact Energy recently finished constructing a 200 MW open cycle gas turbine plant
at Stratford in Taranaki. This is designed to be a peaking plant, operating most
frequently at times of peak prices, and will have more modest annual fuel
requirements than a base-load gas-fired plant. There is unlikely to be much

expansion in gas-fired base-load generation in the next few years, unless gas
discoveries exceed current expectations.
6
Other sources of electricity will need to
expand as the contribution of gas declines.
Internationally strong demand for energy from fast growing developing economies
has placed upward pressure on fossil fuel prices for most of the past decade. Figure
4 illustrates this for the 20 years to 2009, and while oil and gas prices dipped from
their high points in 2009 they have since started rising again. This increases the price
of fuel oil as a source of back-stop generation, and makes a wider range of
renewable generation types more feasible.


6
Electricity Commission (2009) Gas for Electricity Generation – Availability and Price Forecasts,
/>

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
12

Figure 4 Recent trends in fossil fuel prices
Representative internationally traded commodities
0
100
200
300
400
500
600
700

800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
US$/Tonneoilequivalent
CrudeOil NaturalGas Coal

Source: BP Statistical Review of World Energy 2010; NZIER

Natural gas in New Zealand has been historically insulated from these international
trends because it has not been cost effective to export the gas;neither have there
been imprted. But as international prices rise, and technologies improve and come
down in price, it becomes increasingly likely that New Zealand’s gas will become part

of the global market (liquefied petroleum gas or liquefied natural gas).As soon as this
happens the local gas prices would move in line with international gas prices.
Increasing renewable generation will minimise our exposure to these rising costs. In
particular, renewables like wind generation are not affected by fluctuations in fuel
prices, unlike gas and coal generation, conferring a benefit in security of supply and
suppressing price variation.
c) Greenhouse gas emissions
A further reason for expanding specifically renewable generation capacity is the
government’s ratification of the Kyoto Protocol in 2002. This created an incentive for
New Zealand to reduce its greenhouse gas emissions, both to avoid the need to
purchase entitlements for emissions above New Zealand’s allowance over the period
2007 to 2012 and, to provide an opportunity for New Zealand to sell any entitlements
surplus to its needs to countries that exceed their emissions allowances.
Although a successor agreement to the Kyoto Protocol has yet to be agreed, New
Zealand is likely to be a signatory to any such agreement and to continue to face an
incentive to reduce emissions. The target that the government committed to at the

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
13
round of negotiations held in Copenhagen in December 2009 was that, subject to
conditions, New Zealand reduce its emissions to between 10% and 20% below 1990
levels by 2020. The Kyoto Protocol commitment was to reduce emissions to the 1990
level.
In July 2010 electricity generation became subject to the New Zealand Emissions
Trading Scheme, which increases the costs of fuelling generation with gas and more
particularly coal. Over the last few years, the Huntly Power Station has produced
between 3,000 GWh and 6,000 GWh of electricity per year, depending on
hydrological conditions, providing additional base-load generation during winter or
when hydro generators have chosen to store water for later use. Much of this is coal
fired generation. Gas supply uncertainties in the medium term mean that these

generators are unlikely to be converted to run on gas full time. Expansion in other
generation capacity is likely to be required as age and cost pressures make it likely
the Huntly generators will be gradually retired over the next 10 to 15 years.
7

d) Growth in demand
As discussed above, the demand for electricity continues to grow, even with
improving energy efficiency, driven in large part by New Zealand’s growing
population and economy. Even modest demand growth of 1% per year on average
over the next 10 years, assuming a 25% margin of potential output over consumption
under normal hydrological conditions,
8
would require generation capacity to expand
by approximately 525 GWh per year.
9
If demand grew at 2% per year on average,
generation capacity would need to expand by approximately 1,050 GWh per year.
e) Total expansion requirements
Combining the requirement to replace retiring power plant and accommodate
expected growth in demand suggests that over the next few years investment will be
needed in additional generation capacity, especially from renewable sources.
Observed expansion over the period 1999 to 2008 averaged sufficient capacity to
generate additional 974 GWh per year.
10
Arguably this rate could increase in future to
cover the substantial plant retirements in the medium term future. Predictions of
future generation needs generally assume no significant changes in technologies or
consumer demand responses to changes in power prices, so precise forecasts are
always open to debate.

7
The five generation scenarios in Electricity Commission (2010) Statement of Opportunities
assume that between one (the coal scenario) and three (the sustainable and high gas scenarios)
Huntly generators will be taken out of service at various dates between 2017 and 2025.
8
Electricity Technical Advisory Group and Ministry of Economic Development (2009) Improving
Electricity Market Performance, Volume 2 - Appendices: Appendix 4 states that mean annual
margins have been in the range of 18-25% of annual output in the period since 1990.
/>
9
Calculations based on current net generation of 42,000 GWh per year, 1% of which is 420 GWh
and 125% of this, in turn, is 525 GWh.
10
Electricity Technical Advisory Group and Ministry of Economic Development (2009) Improving
Electricity Market Performance, Volume 2 – Appendices.

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
14
However, the likely direction of future requirements is clear from population and
economic growth, and adding new wind generation can contribute to meeting this
need. Currently there is a substantial capacity consented but not yet built and other
capacity consented but under appeal. While it might be questioned whether this
overhang of unimplemented consents means less new generation is required, it is not
inefficient to have more capacity consented than is actually built, to give firms options
to develop (or not develop) their portfolio of power plant according to when and
where it is most efficient for them to do so.
3.2 The role of wind in meeting electricity demand
Heavy reliance on hydro-generated electricity leaves New Zealand vulnerable to the
effects of dry years, as was evident in public energy conservation campaigns in dry

spells in 2001 and 2003. The risks of dry years are alleviated by developing
alternative renewable generation plant, such as wind powered or geothermal plant.
The proposed Puketoi wind farm will be linked to the national transmission grid which
will enable it to supply power to the wholesale electricity market, so the benefits of its
additional generation are more national, than local, in scope. Over 95% of electricity
generated is dispatched via the grid, the balance being used on site by co-generation
plant or generators embedded in local distribution systems.

Since 1996 the buying and selling of wholesale electricity is done via a pooled market
in which generators offer to supply electricity and retailers bid to buy electricity at
particular locations, at prices set for half-hour intervals. The system operator,
Transpower Ltd, has responsibility for ordering despatch from the stack of generator
offers to match demand, and to do so using the sources that satisfy demand at the
lowest overall cost after taking into account: expected transmission losses; the
requirements for reserve generation; and the physical constraints on the capacity of
the transmission grid at each location. Unlike most other electricity markets in the
world, the New Zealand wholesale market
11
is designed so that the selection of
generation plant to operate takes into account the expected transmission losses to
meet demand from various sources.
There are a number of important consequences that flow from the design of the
wholesale electricity market:
• generators will take into account the economic consequences of transmission
losses when making investment decisions about where to locate a generating
plant; transmission losses are not externalities that need to be considered when
assessing the public benefits and costs of proposals under RMA, as they will have
been factored into the decisions of the applicant;

11
For a description of the various markets for electricity in New Zealand see NZIER’s document
prepared for the Electricity Commission:
/>markets.pdf

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
15
• in the despatch process potential transmission losses and grid constraints are
taken into account in determining which generators will operate so as to satisfy
demand at minimum overall cost;
• generators facing competitors are incentivised to offer power at their short run
marginal cost (SRMC), the efficient price, so as to maximise their likelihood of
selection for despatch and enable selection of lowest cost generation for each
despatch stack; and
• the price paid for all supply in each dispatch stack is set by the plant at the
margin, i.e. the one last selected with highest cost power. So all other plant in the
stack with lower SRMC earn a “producer surplus” that contributes to profit and to
providing a return on the investment in the plant. The ‘marginal’ plant is paid what
it offered but every other plant that generates is paid more than the price at which
it offered.
Once built, wind farms have SRMCs close to zero, as their fuel (wind) is free and has
to be used when it is available, or otherwise lost, as there is no way of storing wind
energy. Hydro-electric schemes also have SRMCs close to zero when there is no
need or capacity to store water for a later period.
The rules of the wholesale market require that generators not alter their offers to
generate into the market in the time period within two hours of the start of the half
hour to which they relate. If, for reasons beyond their control, a generator does have
to alter its offers within this two hour window then it is required to establish the
change was due to circumstances which are acceptable according to the market
rules.

The imposition of a rule not allowing changes in offers from two hours prior to trading
on wind powered generators would be onerous or unworkable given their intermittent
output. To cater for wind, the market rules allow offers for wind generators to be
varied within the two hour window and even during the half-hour trading period
provided the variations in volumes of electricity offered have been derived in a
specified manner. The quid pro quo for this concession is that the market rules
require wind generators to offer all their output at $0.01/MWh. The intention behind
this restriction is to preclude wind generators using their greater flexibility to game the
market by using late alterations of volume offered to increase their likelihood of being
dispatched for some output at high prices.
As a result of the design of the wholesale electricity market, wind farms are likely to
be used to generate whenever they have sufficient wind and transmission capacity to
do so. When they do run, they will generally displace higher short run marginal cost
thermal plants. Wind farms may also initially displace power from hydro-electricity
schemes, but generally only when the value of the water in their dams is high
because of dry conditions or the hydro plant faces transmission constraints that the
wind farm does not. Whenever a hydro-station offers at a price above its SRMC then
a wind farm will displace it.

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
16
When conditions are dry is precisely when it is desirable to conserve stored water
where this is possible. Without wind farms, the usual replacement for hydro in dry
conditions would be thermal capacity with higher short run marginal costs.
Under the grid investment test (GIT)
12
, transmission constraints only continue if
removal of them will not generate greater public benefits than the costs of removing
them; if it would be an economically inefficient use of resources to remove them.
The addition of the low-priced wind generation may displace a hydro plant offering at

a high price because it has the capacity to store water and is setting its offers to
reflect its view of the high opportunity cost of stored water (driven by the costs of
fossil fuels). Analysis of market data shows that the ‘marginal’ plant in the sense of
being the plant with the highest offer price dispatched is often a hydro plant, offering
at a price at or above that of thermal generation.
13
In such situations, however, the
eventual effect is still very likely to be that the wind generation displaces fossil fuel-
fired generation. In the first instance, wind displaces hydro but water storage also
increases and eventually this stored water is used to displace fossil fuel-fired
generation.
The addition of wind generation will not generally knock a hydro plant which is
gaming the market out of the dispatch stack either. The owners of such plant will
reshape their offers to take into account that the introduction of the wind plant means
an additional quantity of electricity will be offered to the market at $0.01/MWh rather
than continue to offer as before and not be dispatched.
With constraints faced by New Zealand’s two main generation sources, hydro and
gas, wind power offers potential to provide additional generation capacity and
diversify New Zealand’s energy sources. It has the additional attraction of using a
free renewable energy source with zero carbon emissions in operation. Whether it is
economically efficient to do so depends on wind generation displacing or deferring
more costly sources of generation. Decisions on building new generation capacity
depends on the long run marginal cost (LRMC) of different generation, which
includes provision for the capital cost of the facilities used.
3.3 National objectives and policy for electricity
A preference for renewable energy sources, such as wind, has been expressed in
recent government policy.


12

Refer to 4.2.1 section for more information
13
Toby Stevenson & Simon Hope (2007) “Costs to consumers of a narrow based emissions trading
scheme in the NZ electricity market”; LECG, Wellington

NZIER-ECONOMIC ASSESSMENT OF PUKETOI WIND FARM
17
a) Emissions trading scheme
In September 2007, the previous government released its Framework for a New
Zealand Emissions Trading Scheme.
14
This document set out the government’s in-
principle decision to introduce an emissions trading scheme for greenhouse gas
emissions, with implementation phased by sector over 2008 to 2012. The purpose of
emissions trading is to put a price on emissions generated by activities such as fossil
fuel-fired electricity generation, making these activities more costly than lower
emitting alternatives, such as electricity generation from renewable sources like
hydro.
b) National policy statements
Government has also recently been issuing National Policy Statements related to
energy and infrastructure to assist local government in fulfilling its functions under the
RMA. The purpose of national policy statements (NPS) is to set objectives and
policies for matters of national significance that are relevant to achieving the purpose
of the RMA. An NPS requires every local authority to amend its planning documents
“to give effect to a provision in a national policy statement”.
15
Decision makers need
to have regard to an NPS when considering resource consent applications under s
104(1)(b) RMA. The objective and policies of a NPS are intended to guide applicants
and decision makers in making applications for resource consent, making decisions

on the notification and determination of resource consent applications, drafting policy
statements and plans that relate to renewable electricity generation activities, and
exercising other powers under the RMA.
There are two NPS of relevance to an economic assessment of the benefits of the
Puketoi wind farm – the National Policy Statement on Electricity Transmission
16
and
the National Policy Statement for Renewable Electricity Generation.
17
The
Transmission NPS was issued in March 2008 to reinforce government’s commitment
to renewable generation. This NPS notes that “on-going investment in the
transmission network and significant upgrades are expected to be required to meet
the demand for electricity and to meet the government’s objective for a renewable
energy future, therefore strategic planning to provide for transmission infrastructure is
required”.
The objective of the Renewable Generation NPS is “To recognise the national
significance of renewable electricity generation activities by providing for the
development, operation, maintenance and upgrading of new and existing renewable
electricity generation activities, such that the proportion of New Zealand’s electricity


14
New Zealand Government (2007) The Framework for a New Zealand Emissions Trading
Scheme, />sep07/html
15
RMA 1991, section 55(2)(a).
16
National Policy Statement on Electricity Transmission,
www.mfe.govt.nz/rma/central/transmission/index.html

17
National Policy Statement for Renewable Electricity Generation,
www.mfe.govt.nz/rma/central/nps/generation.html