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New Zealand’s hydro-dominated electricity system is vulnerable to dry years and related price volatility in the spot market. This has had a significant effect on large industrial power consumers, causing production losses, putting jobs at risk, and deterring investment. The government has now decided that the situation needs fixing and has adopted a target of a 1-in-60 year level of reliability (i.e., sufficient capacity should exist to meet load in all but the driest conditions, expected once every 60 years on average). The mechanism they propose to achieve this is a “dry-year reserve scheme.”

The objective of the dry-year reserve scheme is to provide incentives that result in efficient construction of enough thermal reserve capacity to meet dry-year needs and to finance that capacity in a manner that does not result in extreme prices—and therefore unacceptable economic impacts—in dry years.

In this article, NERA Special Consultant Hamish Fraser and Senior Vice President Eugene Meehan evaluate the Government’s proposal and recommend further improvements that could be made.

This article was published in the September issue of Asian Power, published by the Charlton Media Group.