Request for Market Performance Review.

Transcription

1 1 st August 2013 Attn: Bruce Smith General Manager Market Performance Electricity Authority Level 7 ASB Bank Tower 2 Hunter Street PO Box Wellington From: Christopher Brown Site Energy Coordinator Carter Holt Harvey Pulp and Paper Ltd Kinleith Mill State Highway 1 Private Bag 6 Tokoroa Request for Market Performance Review. The purpose of this letter is to request that the Electricity Authority (Authority) undertakes a Market Performance Review into specific conditions and events in and around the central North Island that Carter Holt Harvey (CHH) considers are undermining the efficiency and credibility of the electricity market. CHH considers the events raise important issues regarding how decisions on the reconfiguration of transmission assets are made particularly the unilateral nature of such decisions, and the apparent disregard to their impact on market participants. CHH would be happy to provide further information to the Authority if required. Background: The Kinleith Pulp and Paper mill has operated at the same site, making products, since Over the years there have been several major mill upgrades, the last of which occurred in with the rebuild of the Paper Machine and the installation of the cogeneration plant. Apart from some moderate power reliability issues (primarily tap changers), until 2010 there were relatively few localised issues with power supply and price spikes. CHH Kinleith s electricity consumption is fully covered by a combination of its own on-site generation and financial hedge contracts for the residual load not covered by the on-site generation. For trading period (TP) 41 on 20 th June 2013, the prices at market nodes where CHH Kinleith s hedges are referenced were significantly lower than at the Kinleith GXPs. CHH was therefore exposed to the price difference between the two nodes. (The reason why CHH does not have hedges at the Kinleith GXPs is explained later in this letter.) Since early 2010 the Kinleith Mill has been subject to significant disruption and reduction in security and reliability of supply when changes to the national grid have caused the Tarukenga/Kinleith/Arapuni 110 kv network to become highly constrained. These changes have given rise to a significant number of grid reconfigurations (e.g. bus splits) at the Kinleith bus (CB 348). Prior to this, splits at the Kinleith bus would only be required infrequently during short periods of maintenance work on the transmission network in the South Waikato/Bay of Plenty (BOP) area. In 2011 a 24 hour / 7 day a week bus split was put in at Arapuni (CB48), which CHH understands was to better manage transmission security issues in Central and Upper North Island, due to unusual transmission power flows at that time. The grid owner subsequently informed CHH that the Arapuni bus split was to be a temporary measure, required to manage grid security, until a number of small transmission upgrades could be carried out. In addition to the significant disruption and security and reliability of supply issues since 2010, CHH has also been subjected to some unusual price situations as power flows have changed. The main drivers of the pricing effects appear to be reconfigurations made to the transmission network made in response to increased transfer of power north to Auckland and increased geothermal generation in the Taupo/BOP region. CHH has implemented a work programme with Transpower and Powerco to improve the reliability of supply to the Kinleith Mill. However, this is primarily focused on the performance of the Kinleith substation, not the wider grid security, reliability and pricing issues. CHH has concerns regarding the increasing security issues that affect the Kinleith area and the risk of high spring washer price (HSWP) situations occurring with more frequency and intensity, due at least in part to grid reconfigurations such as the use of the Arapuni bus split. CHH has corresponding concerns about the process by which the grid owner is making grid reconfiguration decisions. Page 1

2 HSWP situation 20th June 2013 For TP 41 on Thursday 20 th June 2013 a HSWP situation in the BOP region resulted in CHH being exposed to costs in the order of $120,000 in respect of its Kinleith Mill. CHH understands that the high spring washer prices situation methodology set out in Part 13 of the Code was applied correctly in respect of TP 41. CHH also understands that the methodology may have been applied to some trading periods earlier on 20 th June 2013, which resulted in the potential HSWP situations being relieved. At the time of these spring washer prices, storm activity across the North Island had led to a number of issues for the system operator to manage. Importantly, the grid owner had closed the Arapuni bus (CB48) due to a transformer issue at Arapuni. Between 16:00-17:30 some spring washer price separation occurred (which had a relatively minor impact on final prices). At 19:12 the HVDC link tripped causing an under frequency event in the North Island. The Kinleith Turbine Generator also tripped at this time due to suspected high vibration (CHH is currently working through the trip implications with the system operator). The Kinleith generation was brought back online by 19:55. The price at Kinleith for TP41 (20:00) spiked at approximately $4,000/MWh on the 5 minute spot price, however interim and final prices for the Kinleith nodes were $6,500/MWh. The prices at surrounding nodes, where CHH holds hedges, were considerably lower; the cost to CHH of this price differential was $120,000. Specific issues: Process for deciding transmission reconfigurations CHH understands that the grid owner undertook a net benefit test to assess the implications of moving the securityimposed bus splits from the Kinleith bus (CB348, used from early 2010) in mid-2011 to the Arapuni bus at CB48 (some bus modifications were required). CHH understands that the conclusion of this assessment was that the proposed modification would increase the dispatch of lower cost generation from Arapuni. Following this assessment the decision was made by the grid owner to modify and permanently split the Arapuni bus other than for security and maintenance reasons. Since that time there has been a considerable amount of transmission network maintenance requiring grid reconfiguration and/or minimum generation/reduced load to be managed by CHH at Kinleith. In addition, there is an increased risk to supply security at Kinleith each time a reconfiguration is carried out and the number of reconfigurations has been extremely high. For example, a switching error occurred in January 2012 which islanded the Kinleith Mill, the Tokoroa town and the Fonterra Lichfield dairy factory, as well as Arapuni GXP This led to severe production loss for the Kinleith Mill and CHH understands this switching error also caused damage to Mighty River Power s generators. In May 2013, due to issues with a transformer at Arapuni, CHH understands that the grid owner undertook a net benefit test on another grid reconfiguration, and made the decision to close the Arapuni bus split. The split was reopened on 25 th June 2013, after the transformer was repaired and further grid reconfigurations were needed to allow planned maintenance on other parts of the grid in the area. Neither Powerco nor CHH were consulted on the net benefit test undertaken by the grid owner in May. As far as CHH can tell the assessment was focused solely on enabling more generation to be dispatched from Arapuni, and did not take into account the local supply security risks and potential cost impacts on other market participants and consumers. When the Arapuni bus or the Kinleith bus is split, constraints that cause HSWP situations 1 are prevented from developing in the Arapuni/Kinleith/Tarukenga network. The other side of this coin is that while one of these buses is split, Kinleith is effectively a consumer on a spur of the grid, which has security and reliability implications. Prior to the permanent Arapuni bus split, these HSWP situations were relatively rare (not unknown previously). However, since 2010 the grid in the Kinleith area has become much more constrained and power flows have shifted significantly. Consequently, CHH is concerned that the probability and severity of HSWP situations has increased, to an unknown extent, and present an unbounded risk to consumers in the Kinleith area. CHH s key concerns in respect of the process for deciding transmission reconfigurations are: 1) the robustness of the grid owner s cost-benefit analyses for the grid reconfigurations that have been undertaken in the central North Island, and going forward; and 1 e.g. high prices at Kinleith nodes and very low and/or negative prices in the BOP nodes (circular path of low prices at Rotorua, Kawerau increasing in price around Wairakei, Whakamaru, rapidly escalating at Arapuni/Kinleith). Page 2

3 2) the extent to which Transpower has liaised with affected parties during the process for deciding whether the central North Island grid reconfigurations should go ahead. Sub-optimal hedge market The $120,000 incurred by CHH as a result of the 20 th June 2013 HSWP situation is an unbudgeted cost to the Kinleith Mill, and is a symptom of the financial risk to CHH that will exist for as long as obtaining hedges at Kinleith nodes is materially more expensive than at surrounding market nodes. CHH s estimate of the approximate additional cost to CHH of hedges at Kinleith (at ~$5/MWh margin) compared with those hedges that CHH obtains from nearby nodes (ARI, WRK, WKM, KAW), is approximately $1.5M per annum. It seems probable that the reason for the materially higher priced hedges at Kinleith is because the counterparties to the hedges take into account the market price risk in the Kinleith area due to the uncertainty of the transmission network configurations and the impact of possible transmission constraints. The obvious alternatives to hedge contracts are for the Kinleith Mill to become self-sufficient in generation and/or to undertake demand-side response through load shedding. Due to the nature of Kraft Pulp and Paper Mills (high base load, long cycle chemical processes), the Kinleith Mill s particular operations have only a limited ability to shed load (3-5 MW, of 72 MW) before core plant shuts and we lose at least half the product output of the mill. The load shedding operation takes anything from 1hr 24 hrs to restore production. Consequently, the ability to use demand response to react to relatively short duration price spikes is limited. It is also important to note that even with both production lines stopped, the mill uses 7-15 MW of baseload power and so would still have some degree of exposure to market price spikes (as a cogeneration plant the on-site generation requires significant baseload of steam production). The alternative, whereby CHH s Kinleith Mill becomes self-sufficient in generation, is currently the only means to effectively manage locational price risk and transmission network reconfiguration decisions. However, CHH considers this to be an economically inefficient outcome. That CHH is being strongly incentivised to adopt this approach suggests to us that there are strong indications of market failure. HSWP situations may occur reasonably infrequently, but their impact can be considerable. It is important for New Zealand consumers and the New Zealand economy that the design and operation of the market does not lead to economically inefficient outcomes as a result of HSWP situations. Importantly, the issues identified in this letter arise from issues external to CHH because the Kinleith Mill configuration has not changed significantly in the last 15 years. CHH is experiencing an increasingly constrained grid, associated security and pricing issues, and a sub-optimal market for hedging the resulting financial risks. All the while CHH is being expected to pay significant increases in transmission charges due to grid upgrades, which are providing benefits to other regions. Higher costs to CHH have wider implications for the NZ economy as CHH competes internationally in a commodity market and, as such, higher electricity supply costs presents itself as a competitive disadvantage. CHH s key concerns in respect of the hedge market are: 1) whether the reasons for the material price differential between the Kinleith nodes and nearby nodes are reflective of shortcomings in the design and/or operation of the electricity hedge market; and 2) whether the proposed intra-island financial transmission rights would remove the financial risk faced by CHH as a result of grid reconfigurations in the central North Island. Request for Market Performance Review: To investigate and, if possible, address the issues raised in this letter, CHH requests that the Electricity Authority initiates a Market Performance Review that, amongst other things would consider: 1) The underlying physical causes of the high spring washer price situations on 20 th June 2013, including the appropriateness of industry participants actions e.g. the system operator, the grid owner, generators. 2) Evaluate how the recent and potential future management of the transmission system in the Kinleith area is leading to economically inefficient outcomes and adversely impacting the electricity market s reputation. Page 3

4 3) Whether the net benefit test and network reconfiguration processes, as presently practiced by the grid owner, are sufficient to meet the market objectives and ensure that participants are fully engaged in network reconfiguration decisions that materially impact on the service delivered to them and price risks. 4) Whether continuing to relieve a constraint until a high spring washer effect on prices is eliminated or thoroughly diluted is more consistent with the Code, any regulations, the Act, or any other law. For example, if the net benefit from doing this is higher than the counterfactual. 5) Whether proposed Code amendments i.e. in addition to the intra-island financial transmission rights, and/or additional market facilitation measures should be progressed to enable industry participants to better manage risk through financial market instruments. Page 4

5 Interim Price ($/MWh) 8,500 8, ,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, HLY2201 ARI1101 KIN0111 KIN0112 KIN0113 KIN0331 LFD1101 TRK2201 TGA0111 KAW0111 WKM2201 WRK0331 HAY1101 5min Spot Trading Period Page 5