20 Mar 2016

Huntly coal, gas plants could live on

3:20 pm on 20 March 2016

The odds are growing that two fossil fuel power plants at Huntly will have their life expectancy extended.

Genesis Energy's Huntly Power Station.

Genesis Energy's Huntly Power Station. Photo: Genesis Energy

The 500-megawatt units were scheduled for closure in 2018 in an announcement made last year.

But they are now looking more likely to stay open for a year or two longer and possibly until 2025.

When Genesis Energy originally announced the closure, it said the units' fixed costs were too high and their usage too low to be economically worthwhile.

This decision was praised by environmentalists because the plants burnt coal as well as gas to generate electricity.

But several big power companies argued closing them down could leave New Zealand short of electricity in 2019 and began asking Genesis to consider reversing the closure decision.

Their worries about energy security were echoed in a report by Transpower.

Genesis Energy chief executive Albert Brantley responded by opening the door a little, saying he could keep the plants operating if he could see an economic justification for doing so which gave a reasonable return for shareholders.

"We are engaged in discussions with various parties right now and we will continue to look for solutions," Mr Brantley said in January.

Those talks have been under way for several months, and Mr Brantley said he wanted them settled by the time he retires at the end of April.

No-one was saying anything in public about how well the talks were going, but RNZ news understands they were leaning towards an extension of the plants' life expectancy, possibly until the middle of next decade.

It would be financed by various power companies agreeing to fund some of the fixed costs of the Huntly units.

This would be achieved with so-called swaps - in which companies buy each other's electricity supply for long periods, set in advance.

The price of the swaps would be tilted slightly in favour of Genesis to offset its costs.

Everyone agreed that whatever deal was achieved, it would have to be done by the end of the year at the latest, and mid-year was mentioned as the most likely deadline.

The fly in the ointment was the aluminium smelter in Southland, which used a seventh of New Zealand's power but could shut down as soon as 2018.

If that happened, so much electricity would be unleashed on the market that Huntly would not be viable and the closure plans would go ahead.

If the smelter stayed open, then Huntly's power would be needed.

The logic of this plan is that Huntly's costs are sunk costs. But closing it down and building a new plant would incur new costs that could not be paid for if the smelter shuts.

It is this that makes retention of Huntly so likely, since all major electricity companies were privatised or partly privatised and so did not have the fiduciary right to pay more for their electricity than they need to.

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