Ministers about to decide which way to flick the switch on Lake Onslow

The Government is expected to announce in the next few weeks whether it will spend $70 million on a detailed business case for a multibillion-dollar pumped hydro scheme at Lake Onslow, or park the project.

If the scheme goes ahead, an artificially-expanded lake high in the hills of Central Otago would in effect provide a massive battery with a charge equivalent to the total amount of power the entire country uses in six weeks, that could be drawn down when needed.

Proponents of the scheme argue Lake Onslow would mean generators would no longer need to rely on burning gas and coal when hydro lakes ran low in “dry years” and would let them increase their use of cheap, intermittent sources of “green” generation such as wind and solar power.

But doubters have baulked at the possible cost of the project which they believe would inevitably balloon out after construction began.

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The Ministry of Business, Innovation and Employment has so far spent about $30 million investigating the potential of Lake Onslow and alternatives, much of which has gone on engineering studies.

It reported in July that the pumped hydro scheme appeared technically feasible and could help smooth out volatile wholesale electricity prices, which have soared over the past few years.

But a big unknown is the likely cost of the scheme. An early guess suggested Lake Onslow could cost $4 billion to build, but that was before geotechnical assessments of the site last year.

The results of those assessments may be key to whether the Cabinet decides to press ahead with a detailed business case.

Those in favour

Waikato University professor Earl Bardsley – who was first to identify the potential of the natural rock basin at Lake Onslow – says he can’t see the “green transition” to a fully renewable electricity system being possible without the pumped hydro scheme.

Mooted alternatives such as producing and storing “green hydrogen” to burn for power, stockpiling biofuels, or relying on new technologies and incentives to reduce consumer or industrial power demand during times of short supply, were unlikely to solve the dry year problem on their own, he says.

“If you rely on load reduction, you might have to turn an industry off for an awfully long time.”

Keith Turner is a former chief executive of the country’s largest power firm, Meridian Energy, who now chairs the state-owned national grid operator Transpower.

He advocated strongly for the Lake Onslow scheme prior to his appointment to Transpower, describing it in 2020 as “a nation-building” project.

He made clear at a Transpower function in June that he didn’t view his new role as being compatible with advocacy, but said providing dry year cover in a post fossil-fuelled future was an issue the country had to solve, “whether it’s Onslow or whether it’s something else”.

“I haven’t seen in a response to the advocacy for Onslow a practical, long-term sustainable ‘New Zealand Inc’ solution to deal with that problem,” he went on to say.

Parliamentary commissioner for the environment and former National Party environment minister Simon Upton has also sung the merits of the pumped hydro scheme, which he said would “put a floor under wholesale electricity prices” and likely bring forward investment in solar and wind generation.

In a letter to Woods in December giving her the hurry-along to develop an energy strategy, Upton said the “system-wide benefits” of Lake Onslow could not be ignored.

While it was “crucial to find out whether the project was physically deliverable”, he said the interests of generators opposing the scheme were “not necessarily aligned with the wider national interest” and Onslow would limit their ability to charge a premium for the power they produced.

Luke Blincoe, chief executive of power retailer Electric Kiwi, said Onslow would have the spin-off of reducing the market power of the large generators, by acting as the power user and power generator that brought supply and demand into balance.

“The scale of the project suggests it’s best done on the Government balance sheet, but the strongest reason is that it risks being hijacked like our current generation assets if any of the incumbents are involved,” he said.

“The reason the incumbents are so ‘anti’ the concept is because they will lose the ability to set prices based on market power as they do today.”

Those against

Contact Energy chief executive Mike Fuge says he believes “Lake Onslow has the potential to be as successful as ‘user-pays’ in the health system introduced in the 1990s”.

“Let’s not as a nation get conned into a massive infrastructure project. Let it compete against demand response. Let it compete against 4 million people shifting their load to later in the night.”

Fuge said it was important that the professionals involved in examining the scheme were honest about the costs and their approach to the technical solution.

“As someone who’s built hydro, in seismically-challenged areas like New Zealand or in Chile, it’s really important that you are honest, upfront, about the risks that you’re taking on.”

Meridian development manager Guy Waipara said there was a problem that needed to be solved as the country moved to an electricity system that was more reliant on intermittent renewable generation, but believed there would be cheaper and less risky options than Onslow.

“I would always lean towards breaking a reasonably chunky problem up into smaller pieces. There are lots of things that would knock 10% to 15% off the size of the problem.”

Waipara said he would start by looking at “every hydro reservoir in the country and asking ‘can you apply more storage to each at almost no to low cost?’”.

Replacing some gas and coal generation with biomass, such as waste wood, could also make a contribution, and there was a massive opportunity to reduce electricity demand in times of short supply, he said.

The latter could involve stronger incentives for the Tiwai Point aluminium smelter or a yet-to-be-built “green hydrogen” plant to reduce production when hydro lakes were low.

Businesses such as Fonterra that currently used coal boilers in their factories could switch to electricity but keep their boilers as a back-up with biomass on hand for periods of short supply, he also suggested.

“There is no doubt something like Onslow would work, but the things that would worry me would be how long will it take, how much will it cost, and is there a better solution than the ‘big silver bullet’?”

National Party energy spokesperson Stuart Smith is in no doubt a taxpayer-funded investment in Lake Onslow is unjustified and believes it is a given it would experience a cost blow-out.

“If somebody [else] wants to build Onslow, then I think that we’d welcome that, but I don’t believe the Government should build Onslow,” he said.

Smith confirmed his view was that the current structure of the electricity market was right; generators had sufficient incentives to build enough new generation, and if a new solution was needed to address the “dry year” issue, then that could be left to the market to deliver.