Otahuhu Sub-Station Conference. Graeme Everett 23 rd July 2007

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1 Otahuhu Sub-Station Conference Graeme Everett 23 rd July 2007

2 The World of Norske Skog Europe - 100% Skogn Follum Union Saubrugs Parenco Walsum Steti Golbey Bruck Chongwon Hebei Chonju Pan Asia - 100% Shanghai Sing Buri MNI (34%) Pisa Bio-Bio Albury Tasman Australasia - 100% Boyer South America - 100% 2

3 Norske Skog Tasman is a significant part of the local and national economy Newsprint production of 317,000 tonnes/annum (half exported) $340 million sales revenue 0.6% of NZ GDP 420 employees Total employment generation = 3000 employees 1 A hub of the community in Eastern Bay of Plenty Adds value to 40% of New Zealand s residue sawmill chips 1 Dr Warren Hughes - University of Waikato - April

4 Some Key Facts about the Site We use an average of 125 MW of electricity - 3% of the national grid We use ML of water a day We process 2,000 m 3 of wood (in chip and log form) every day We make 900 T of newsprint every day 4

5 Looking forward we have some big challenges US$ 850 International price for paper 48.8gsm newsprint Global newsprint prices are declining on average 2-3% each year. When this is combined with rising input costs, then our margins are squeezed to zero.

6 Summary Transpower s proposal and options fail the GIT since they cost more than the value they will create Most New Zealanders will receive no benefit from the investment at Otahuhu The minimum investment ensures Otahuhu complies with the GRS Commission should approve the minimum investment, and nothing more 6

7 Our Major Problem with Otahuhu is We derive no benefit from the Otahuhu substation But under the TPM we will have to pay for it We thought that the GIT provided us with protection from inefficient grid investments We are concerned with the Commission s approach to Otahuhu Economic efficiency has been ignored Sets scary precedent for the rest of the grid We don t even want a duplicate sub-station at Kawerau! 7

8 Objectives of the Grid Investment Test Rule As far as practicable reflecting the interests of end use customers in ensuring a reliable transmission system having regard to the cost to end use customers Please have regard to our interests, and to those of the 2/3 of New Zealanders who derive no benefit from the upgrade to Otahuhu 8

9 Background On 12 June 2006 poor maintenance practices by Transpower were exposed on a windy day. The subsequent loss of power to parts of Auckland was deemed to be politically unacceptable Whilst it is clear that Otahuhu does not meet the GRS, the fall-out from 12 June has been to introduce some new standards Resilience to High Impact Low Probability events at any cost Diversity to Auckland, even if it s only 200 metres worth 9

10 Background (cont) Transpower s first solution was to remove overhead crossings and split the bus section with new circuit breakers - $14.1 million The Commission was initially keen to approve this solution (letter from Mervyn English to Tim George dated 13 October 06) The Commission appears to have subsequently changed its mind Subsequently the EC asked for, and received a new GUP application for Otahuhu on 11 Dec 2006 the $99 million solution Remove overhead crossings and split bus section Build new Gas Insulated Switchyard Transfer half the circuits from the old to the new Create space for capacitors that will be necessary in the years to come The Proposal incorporates the initial solution ($14.1 million) and adds much more in the hope that Otahuhu will be resilient to HILP events 10

11 Commission s Summary of Decision The Commission has approved the proposal under Rule This rule deals with Reliability Investments. The Commission says that the proposal meets the following criteria GEIP processes the GIT However all of these rules relate specifically to Reliability Investments 11

12 The Proposal is not a Reliability Investment "reliability investments" means investments by Transpower in the grid, or alternative arrangements by Transpower, the primary effect of which is, or would be, to reduce expected unserved energy; "expected unserved energy" means a forecast of the aggregate amount by which the demand for electricity exceeds the supply of electricity at each grid exit point as a result of likely planned or unplanned outages of primary transmission equipment; High Impact Low Probability events are, by definition, unlikely Investments to provide resilience against HILP events are clearly not Reliability Investments Therefore Rule 13.4 doesn t even apply to all but the minimum investment option, and the Commission does not have the discretion to approve the proposal under rule

13 Is the Proposal necessary to meet the GRS? The proposal need not be a reliability investment if it is necessary to meet the GRS 4.1 A proposed investment satisfies the grid investment test if the Board is reasonable satisfied that..it is necessary to meet the..grid reliability standards If all elements of the proposal were necessary in order to meet the GRS then the Commission could approve it under F4:4.1, provided it had a lower expected net market cost than any alternative project 13

14 What is Required to Meet the GRS? Resilience to a single credible contingency event Single transmission circuit interruption Failure of a single generating unit HVDC single pole interruption Failure of a single bus section Interruption to a single inter-connecting transformer Failure of a single reactive component 14

15 What about HILP and Diversity? We agree that Otahuhu remains at risk from a number of incredible events Tsunami Earthquake Volcanic eruption Air plane crash Sabotage etc But these are not single credible contingency events 15

16 The Minimum Investment passes the GIT My understanding is that once the bus section work is done, Otahuhu will comply with the GRS The minimum investment therefore passes the GIT under Rule 4.1 All of the extra elements of the investment must take the economic tests 16

17 Rule 14 Applies for the remainder of the Proposal To all but the minimum investment the Commission needs to apply rule 14, approval of economic investments Rule 14 is not concerned with GEIP Rule 14.4: The Board may approve proposed economic investments where Transpower has applied the grid investment test reasonably.. The proposal and Transpower s options all fail the GIT (Rule says that the expected net market benefit must be greater than than zero). Under Rule 14, the Commission must decline Transpower s proposal, and all of the options 17

18 HILP Investments must be on Economic Grounds F4, Rule allows investments beyond those necessary to meet the GRS, as long as the investment can be justified on economic grounds. The proposal, and all of the options put forward by Transpower fail this test. The benefits from avoiding a freak outage in Auckland are not worth the cost. 18

19 GIT and Time Horizons The Commission says that the GIT must ensure that any investment meets the GRS for 20 years No rule we can find supports this Alternative Projects need only meet the GRS for ONE year F4, Rule 19.5 If alternative projects need only comply with GRS for one year, why should the proposed investment be any different? Note that Alternative Projects need to be analysed for both reliability and economic investments (F4:4.1 and F4:4.2) 19

20 Real Options Either NPV or Real options analysis must be applied F4, Rule 13 Commission dismisses Real Options on the grounds that all of the options require investment prior to 2013, so no flexibility exists The Commission may not have reached this conclusion had it considered the minimum investment A Staged investment at Otahuhu is prudent because 400 kv project remains uncertain Demand growth is uncertain New generation is uncertain 20

21 Conclusions Transpower s proposal and options fail the GIT since they cost more than the value they will create Most New Zealanders will receive no benefit from the investment at Otahuhu The minimum investment ensures Otahuhu complies with the GRS Commission should approve the minimum investment, and nothing more 21

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