As New Zealand transitions to a low-carbon economy, the electricity sector will play an important role by allowing other sectors (notably heat and transport) to electrify and reduce carbon emissions.
The Climate Change Commission’s draft advice to the Government has carried out high-level modelling to show which investments in generation may be required. In the future, more detailed modelling of the sector will be required (for example, to feed into the national energy strategy that the Commission recommends is developed). It is important that this work:
Frontier Economics previously carried out work for the UK Government to produce a “Whole Electricity System Cost” (WESC) metric. This extends the commonly used Levelized Cost of Electricity (LCOE) measure to incorporate wider impacts on the system, and can allow demand-side technologies to be compared alongside generation.
Vector has engaged Frontier Economics to produce an illustrative WESC for different technologies in New Zealand. Unlike the work carried out in the UK (which used a complex power system model), this analysis has built up an estimate of WESC from a few simple assumptions. This approach means that the methodology can be more readily understood, but at the expense of accuracy: these results should not be read as a definitive summary of the value of different technologies, but as an illustration of how demand-side and generation technologies can be compared alongside one another.
Figure 1 summarises the results. Each column relates to a different technology (whether generation or demand side). The coloured bars show the additional costs (or, if negative, reduced costs) that the technology imposes on different parts of the power system:
All these elements are expressed, like a levelized cost, on a $/MWh basis.
The light blue line, which is the sum of these components, is the overall system impact. It represents the change in the total costs of the electricity system when a technology is added that has a lifetime output of 1 MWh (and the rest of the system adjusts accordingly). When the blue line is below $0/MWh, adding a technology such that it produces 1 MWh over its lifetime reduces total system costs. When the blue line is above $0/MWh, it indicates that adding the technology with a lifetime output of 1 MWh increases total system costs. Technologies with lower figures will add greater benefits to the system for each MWh of energy they produce.
Figure 1: WESC estimates including balancing and distribution network impacts
Source: Frontier Economics
Note: These illustrative figures should not be interpreted as “generic” estimates of the whole system impact of a class of technologies. Whole system impacts are dependent on the wider electricity system and when technologies are assumed to be built.
While illustrative, this analysis demonstrates that:
Going forward, policymakers should ensure that demand-side technologies are considered alongside generation. This may require gathering additional data on the costs and capacities of these technologies, and ensuring that all actors in the market have incentives that accord with their overall impact on the system (as shown by metrics such as the WESC).
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We want to thank Vector for providing this report and for allowing us to use it.