The clock is ticking on electricity sector flexibility: how long have we got?

Meeting the carbon budgets proposed by the Climate Change Commission requires a fit-for-purpose electricity system and market able to cope with the heavy lifting resulting from rapid electrification and uptake of renewable, distributed energy resources (DER).

The electricity sector will not make a least cost transition to a low emission future without a plan of action. But the broad discussion on how the electricity sector plans to evolve to support least cost electrification and decarbonisation of the economy has not really started

People, the economy and the environment will be worse off [link to article 3] unless a clear plan is quickly developed to guide the upgrade to the regulatory settings needed to have an electricity system and market able to cope with the heavy lifting.

So how much time is there before we start imposing avoidable costs on people and the economy? 

Good thinking is happening, but there is no coordinated activity 

Although we don’t yet know the nature and pace of change, the challenges and the possible responses are being explored. 

Wellington Electricity is doing useful thinking about the practical effects of electric vehicles. Some of its insights are discussed in its EV Connect Customer Benefits and Secure Networks through Industry Collaboration document

WEL Networks is also exploring impacts and opportunities from changing energy needs through Raglan Local Energy. Aurora Energy is partnering with solarZero to harness the flexibility of DER as a lower cost alternative to building new network infrastructure to meet current and future needs of the Upper Clutha and Wanaka communities.

And perhaps the Māori and Public Housing Renewable Energy Fund will provide insight into “new ways of generating energy and integrating it with existing electricity networks, while supporting the Government’s commitment to renewable energy generation and its climate change goals”.

Despite these individual efforts, the absence of a clear plan to coordinate the transition puts Aotearoa New Zealand at risk of making the same mistakes as Australia and other jurisdictions and needing to play regulatory catchup to evolve policy and market settings to reflect fundamental changes to the technology and consumer landscape. 

No plan means people pay more. And slower reductions to carbon emissions. Is that really what we want? Are the costs affordable?

A basic process map suggests there is not much time to spare

Achieving the proposed carbon budgets will require fundamental shifts to economic activity, particularly due to electrification of transport and process heat using renewable sources. 

The Climate Change Commission does not give much detail about the nature and timing of the practical effects of the shift, especially for the transmission and distribution networks which will bear the increased load. This obscures the urgency of the deadline.  

A basic process map suggests there is not much time to spare to develop, test and refine new market settings, particularly to avoid locking in the extra costs of traditional network reinforcement relative to a flexibility-first approach.  

The energy strategy the Climate Change Commission wants in place by June 2023 is about providing a plan for achieving 60% renewables by 2035. That target will be even more challenging if some quite fundamental decisions required before June 2023 do not provide decent foundations for the hoped for accelerated electrification. 

Three of the most critical decisions required in the coming 2-3 years are highlighted here.

The Commerce Commission wants to start the 2023 input methodology (IM) review this year. This makes sense given the 2023 IM review is perhaps a pass or fail test for ensuring electricity networks can meet the electrification challenge. It will not be easy. The 2016 review required nearly two years and a cut and paste exercise is not sufficient given the current settings for electricity and gas networks are increasingly inadequate for dealing with the changing environment.

The 2025 to 2030 price-quality path decision by the Commerce Commission due around late 2024 will also play a fundamental role in whether electricity networks can meet the electrification challenge. The 2025-2030 price-quality path will determine the nature and level of investment by distributors from 2025. The Climate Change Commission sees this as a critical period for investment in networks to cope with accelerating electrification from 2030. The reset process will probably need to start by early 2023 given the previous one took nearly two years from early 2018 to November 2019.

Finally, a flexibility market will need to be up and running by April 2025 to coincide with the start of the 2025-2030 price-quality path. Employing flexible DER to support network and whole-of-system stability and resilience is the least regrets approach for least cost electrification and decarbonisation and a stable and robust electricity system. The UK flexibility market has taken over 4 years to get to where it is. It’s hard to see how a market with sufficient liquidity and low emissions characteristics to give networks operators confidence in using flexibility to maintain reliability can emerge fully formed by 1 April 2025.  

Starting right now is the least regrets and least cost approach

There is a long list of things to work on. A useful reference point is the 104 page Australian Energy Security Board Post-2025 Market Design Directions Paper

Aotearoa New Zealand needs its own plan and list of things to do. But, at the top of this list must be upgrading network regulation to provide the right incentives for networks to be ready to meet the surge in electrification and to implement the ENA Network Transformation Roadmap, with particular focus on developing functioning flexibility markets that can help maximise the value of DER.

Exhaustive and complicated modelling isn’t necessary to show the critical path is set in 2023 (just 2 years from now!) when the Commerce Commission revisits the rules for how distributors and Transpower manage and invest in their networks. 

This decision will have far-reaching effects on the cost of ensuring electricity networks have the capacity and capability to reliably deliver power to charge all the electric vehicles, to electrify space heating for homes and keeping buildings warm, to electrify industrial processes and to connect and deliver increased amounts of distributed and renewable generation.

Simply put, we have until 2023 to identify the regulatory settings needed to put the electricity sector on the path to least regrets and least cost electrification. The clock is ticking and we don’t have much time left.

This is the fourth of a series of collaborative articles put together by Aotearoa New Zealand electricity industry innovators, Cortexo and Our Energy, supported by Craig Evans of CTQ Advisors.

Our aim is to ask the questions not being asked. And share our view of the answers to these hard questions.

Get in touch with your hard questions and answers. We want to build the community of people, businesses and organisations wanting greater urgency in how the electricity sector responds to the climate emergency. The status quo simply does not cut it. And given current priorities, it’s very difficult to be confident the electricity sector will deliver the openness, flexibility, equity and drastically lower emissions at anywhere near the speed that is required to meet our carbon budgets in a cost-effective way.

In the fifth article of our series, we ask: What is it going to take and what needs to be done!?  

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