What role will hydro play in New Zealand's future power generation mix? Neil Ford takes a look at the options available to the country

The hydro industry has long formed the backbone of New Zealand’s successful power sector. It has provided a relatively constant 60% of total electricity production since the 1930s and enabled the country to enjoy some of the lowest power tariffs in the world. While the government’s determination to minimise the proportion of thermal power plants in the generation mix could be seen as a sign of confidence in the hydro sector, the lack of surplus generating capacity is posing a series of specific challenges for the nation’s hydro companies.

From the 1980s onwards, the determination of successive governments to inject an element of diversification into the generation mix resulted in an increasing role for gas and coal fired plants. As Table 1 demonstrates, oil fired generation has been virtually eliminated and the development of the Maui gas field off the coast of Taranaki has provided convenient feedstock for thermal power plants. The Maui field is now becoming depleted and the current government hopes that wind power can provide a large proportion of new capacity, but it is feared that wind farms could be less effective in supporting the hydro sector.

The possibility of electricity shortages has been mooted time and again over the past few years and so the direction of government energy policy is of more interest to the general public in New Zealand than in most other countries. The big fear is that an unusually severe drought would trigger power rationing and the vulnerability of the power sector to dry years is becoming increasingly apparent with the decline of the Maui reserves.

The government’s power sector strategy remains unclear but what is certain is that there is no single solution. No one form of power generation will step into the breach left by Maui. New gas fields could make some contribution, while renewables – led by wind power – will definitely play an increasing role. The impact on the hydro sector is less clear. The government has revealed that its policy will be guided by three main concerns: the impact on power tariffs, security of supply and the environmental impact.

From the point of view of pollution and greenhouse gas emissions, hydro is viewed positively with regard to its environmental impact. New Zealand has historically enjoyed some of the lowest electricity tariffs in the Organisation of Economic Cooperation and Development (OECD) and the hydro sector has traditionally provided the bedrock of generating capacity, so it has a track record in providing low tariffs. Given the level and timing of rainfall in New Zealand, hydro schemes have also demonstrated that they can help ensure secure electricity supplies. Yet while the sector as a whole is viewed favourably by government and there is no question of decommissioning existing, profitable hydro schemes, there appears to be a limit to the amount of additional hydroelectric generating capacity that can be brought on stream.

One of the biggest problems with New Zealand’s existing hydro schemes is the lack of water storage capacity. While some hydro projects in the US and Tasmania, for instance, can store several years worth of water inflows, New Zealand’s hydro schemes do not benefit from such large reservoir capacity and most have just several months worth of storage. They are therefore more vulnerable to annual or even seasonal fluctuations in precipitation and snow melt. The variation in electricity production during the course of a year in the 1990s was around 20%.

A substantial proportion of non-hydro capacity in the generation mix is already required to cover reduced power production during periods of low rainfall. Moreover, rainfall has become increasingly erratic over the past decade, raising fears that climate change is already having a long term effect on rainfall patterns in the Southern Hemisphere. Dry winters in 1992, 2001 and 2003 all led to a reduction in hydroelectric production of about 20%. If water resources are to become more scarce and therefore valuable, enthusiasm for new hydro ventures could be dented.

Some sources indicate that New Zealand still has a large number of undeveloped sites for hydro but the role of public opinion will be decisive. Opposition to large new hydro ventures is likely to be strong, as some sites lie in protected areas, but small hydro projects would receive far more support.

In addition, the fact that the most attractive potential hydro sites have already been developed indicates that the sites that remain will be less commercially desirable. The government has concluded that higher construction costs would make hydro a more expensive option than it has been in the past. Many existing schemes were developed with public money and are no longer affected by the costs of construction. However, new projects developed by the private sector would have to bear the cost of repaying development costs and the costs of environmental mitigation, which would also be higher than in the past.

Still room for expansion

According to Contact Energy, the best opportunity for expansion of the hydro sector lies with developing small scale projects. There are many potential sites for development and Contact research indicates that many smaller hydro schemes would be more economically viable than the larger options. A report by the company concluded: ‘There are still some small to medium scale developments with ‘acceptable’ environmental impacts that are probably still worth pursuing as part of meeting New Zealand’s future energy needs.’

In a speech to the ESR and IEE in July, the chief executive of Meridian Energy, Keith Turner, commented: ‘There are still undeveloped large scale hydro possibilities, between 5000 and 8000GWh of undeveloped hydro potential. We need to preserve our rivers but there is still some potential for hydro. There are competing uses for water and the RMA [Resource Management Act] is not suited to handling the allocation trade offs, with much debate regarding the role of irrigation versus power.’

The hydro sector benefits from the support of most of the country’s main power companies and as Table 2 demonstrates, ownership of the nation’s hydro generation stock is already very diverse. While Meridian, TrustPower and Mighty River Power control 28 plants between them, there are a number of other important players in the market. In the form of the 432MW Clyde and 320MW Roxburgh facilities, Contact Energy operates two of the largest five plants in the country, while Genesis Power has controlled two large hydro schemes for over 20 years.

Some new hydroelectric capacity is being brought on stream. In August, Contact Energy submitted plans for a small hydro scheme at Lake Hawea in Otago, with generating capacity of 10-17MW, two years after its plans for the site were rejected because of community concern. TrustPower hopes to develop a new 46MW hydro scheme at a cost of $117M by diverting water from the existing Arnold dam reservoir for power generation. There is also some potential for sea based generation schemes in the future. Neptune Power’s plans to test 1MW floating sub sea turbines in the Cook Strait from 2008 are currently being assessed.

New Zealand’s determination to focus on hydro and renewables has also prompted a number of technical innovations. For instance, local company Green Zephyr is developing a prototype combined wind and hydro project, which would allow wind power to be used to pump water up to a reservoir for use in hydroelectric generation. Elsewhere, the government’s Projects to Reduce Emissions Programme has funded a number of small hydro schemes. TrustPower is developing a 6MW, US$6M project in Canterbury that will use water for power generation before it is piped on for irrigation with the help of carbon credits from the programme.

A report by consultants Sinclair Knight Merz for the Energy Efficiency and Conservation Authority (EECA), which was published in September, argued that technical changes or the expansion of existing small and medium sized hydro schemes in the Waikato region could yield another 100MW of generating capacity. A further 40MW could be installed at the Huka Falls, although this could conflict with the site’s attraction as a tourist destination.

Assessing the competitors

Potential small and medium sized hydro schemes face opposition from several other forms of power generation. Wind power accounted for just 151GWh of the country’s electricity production in September 2005 out of total national production of 10,958GWh but the government is optimistic that wind farms can play an increasingly important role over the decade to come.

In the long term, technological advances in the storage of electricity could make even greater reliance on wind power a realistic option. In the short term, however, a number of obstacles must be overcome: public opposition because of the impact on the visual environment; the cost of transporting electricity from remote areas to the main centres of consumption; generally higher generation costs and the need for back up capacity.

Other types of renewable energy all offer some potential for additional capacity but all are more expensive than established forms of power generation at present and, with the notable exception of geothermal energy, most present problems in terms of energy security. Moreover, despite its potential role in helping to curb greenhouse gas emissions, the government remains steadfastly opposed to developing nuclear reactors and so nuclear power does not seem to be an option at present.

Thermal power plants could certainly provide a stable source of generation to balance the country’s existing hydro schemes. Table 1 shows how important gas fired plants have become but this growth has mainly been driven by the Maui field, which originally held 3,452Bft3 of natural gas but which now contains less than 500Bft3 and the government predicts that meaningful supplies from the structure could run out by 2010. In addition, the Pohokura structure is now unlikely to yield as much gas as was originally hoped, although the Kupe field is being developed

However, a large proportion of New Zealand’s offshore acreage is yet to be explored for hydrocarbon resources. It is widely accepted that the prospect of new, substantial discoveries is high, particularly in the Taranaki Basin but the uncertainty means that relying on new domestic gas finds would be the most risky option, while bringing any discoveries on stream would take many years. At the same time, the development of the Methanex methanol plant has significantly increased demand for natural gas in the country.

Thermal plants have been favoured in the past because they can be developed closer to centres of consumption, thereby reducing the requirement for improvements to the national transmission grid but apart from gas, the other options for thermal plant feedstock all have major drawbacks. New Zealand has signed the Kyoto Protocol and the government is reluctant to sanction the development of new coal fired plants, partly because the proportion of coal feedstock consumed has already risen thanks to its use at the country’s biggest power plant, Genesis Power’s 960MW Huntly facility.

The import of liquefied natural gas (LNG) has been mooted but the local market would be limited, at least in the medium term, and the fact that New Zealand lies many thousands of kilometres away from the nearest LNG producers – in north-west Australia and Indonesia – could make that an expensive option. However, a recent report by Contact Energy revealed that LNG would be a better option than coal if emissions trading rates rise above $5 to $15 per tonne of carbon dioxide.

Hydro schemes still play a bigger role in electricity generation in New Zealand than in any other country in the Asia-Pacific region. In addition, as a result of major drawbacks with all other elements in the generation mix, the hydro sector is likely to remain the basis of the country’s power sector for a long time to come. Yet it seems unlikely that many more large scale schemes will be developed, so it is up to New Zealand’s hydroelectric operators to make the most of the facilities that they already possess and work to ensure that future small hydro schemes fit in with the government’s overall vision for the sector.


Table 1
Table 2