The Electricity Authority (EA) has released a consultation paper proposing changes to the way instantaneous reserve (IR) costs are allocated under the Electricity Industry Participation Code (Code), which could significantly impact renewable energy developments.

We believe the proposed changes present both challenges and opportunities. The consultation is now open for submissions.

The proposal set out by the EA (Proposal) would increase the spread of IR costs across generators, potentially impacting wind, solar, and battery storage projects.

Key takeaways

• The Proposal aims to level the playing field between different generation technologies and, in the longer term, reduce overall IR costs.
• Annual IR costs allocated to currently operating wind farms could range from $16,000 to $346,000, depending on the size of the operation.
• Solar farms could incur similar costs.

Background to the Proposal 

IR refers to fast-acting standby generating capacity - or interruptible load - that is available to operate automatically where required by Transpower, the system operator.

Transpower enters into contracts with electricity industry participants who can provide IR, which is necessary where a sudden loss of generation could otherwise result in an unacceptable fall in system frequency, for example where there is an unexpected disconnection of a generating station or transmission circuit. IR responds quickly to restore the generation load balance in the power system and maintain system frequency at an acceptable level.

Generators with large generating units (over 60MW) are required to pay for the costs of IR. These costs are allocated to generators (and Transpower, the HVDC link owner) in proportion to the risk their generating units represent (ie, in proportion to the amount of electricity each generating unit injects). Individual generating units do not incur an allocation of IR costs on their first 60MW, which incentivises multiple smaller generating units and may reduce the risk that needs to be covered by IR. 

Each turbine or solar panel is treated as an individual generating unit for the purposes of determining IR costs under the Code. As no single turbine or panel has a generating capacity of more than 60MW, no IR costs are currently allocated to wind or solar generation. The EA considers this does not provide a level playing field between different generation technologies, because certain types of generation technologies (including wind, solar, and some geothermal) consequently have a lower operating cost because they are not levied any IR costs by Transpower. 

Details of the Proposal

With the number of wind and solar farms expected to rapidly increase in New Zealand, the EA wants to incentivise new renewable generators to design their generating assets in an efficient way, reducing the cost to consumers and increasing reliability of the electricity supply.

Under the Proposal, generating units owned by the same generator and with a common point of connection to the grid, including solar and wind farms, will be treated as a single source of system frequency risk and allocated a share of IR costs. The EA considers this will incentivise these generators to design their generation investments in ways that reduce the need for Transpower to procure IR, and that will enhance system security, as well as remove a potentially inefficient incentive to invest in smaller generating units.  

The Authority considers the Proposal may also incentivise battery energy storage system (BESS) investment alongside solar and wind investment, as BESS can provide IR, earning revenue to offset the IR costs allocated to integrated solar and wind generation assets, and a BESS can reduce the risk of generation loss. Greater competition in the IR market should also drive down the overall cost of IR because Transpower procures IR based on the lowest available price for IR during the relevant electricity trading period (in a similar way to trading of electricity in the wholesale market). 

What this means for developers

The Proposal presents both challenges and opportunities for renewable energy developers:

• Cost considerations: If the Proposal is adopted, developers of wind and solar assets would need to factor IR costs into a project’s financial modelling.
• Technology integration: Adoption of the Proposal would provide an increased incentive to consider integrating BESS with wind or solar generation assets.

Next steps

Affected industry participants, current and future, are encouraged to review the consultation paper and make submissions to the EA.

Submissions are due by 23 August 2024, with one week for cross-submissions after that.

If you have questions about how the Proposal might affect you, or you would like assistance to prepare a submission, please contact one of our experts.

Special thanks to Catherine Bryant for her assistance in writing this article.