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Are we ‘Thinking Big’ Again?

CS web 17
Craig Stent | Posted on Jul 27, 2020

One Think Big Project leaves – another to begin?

  • Electrification of industrial and process heat makes sense
  • Pumped storage would be a massive project, but could help achieve the Government’s 100% renewable objective
  • Substantial challenges remain in terms of cost, engineering, and resource consenting
  • Scoping study results unlikely to be published quickly with sector uncertainty to remain in the short term

With the Rio ingots barely having had time to cool, the Government made two potentially important announcements over the weekend.

Firstly, and perhaps of more near-term importance, the Government announced that it is going to spend $70m enabling the electrification of industrial and process heat in the lower South Island, with transmission upgrades and direct assistance in the conversion of coal boilers to electricity.  Outside of this statement, the details provided have been few, however we would view this announcement as a positive in really kick-starting the conversion and decarbonisation process.  With New Zealand’s Aluminium Smelter (NZAS) typically consuming around 5000 GWh of electricity,  converting coal-run milk drying facilities to electricity would help offset this loss of demand and, with facility locations also being in the lower South Island, provide an efficient match outside of any transmission upgrades.  The key limits for uptake will be the overall economics of conversion and appetite from the likes of Fonterra and others to make these investments. 

The second announcement by the Government, is funding a $30m scoping study to investigate pumped hydro, for what would be a massive scheme, at Lake Onslow in the lower South Island.  The project could potentially be the world’s largest pumped hydro storage, with capacity to store 5000gwh, which would be more than double New Zealand’s existing hydro storage. 

 Proposed Dam

Source:  Earl Bardsley; Note on the pumped storage potential of the Onslow-Manorburn depression

The basic concept would be to fill the lakes when demand is low, and then use the water to generate in times of dry year risk.  It would likely have 1200 MW of generation capacity (which is larger than the current Waikato hydro system) and would take six months of continuous running to drain.

A project of this scale could satisfy the Government’s objective of 100% renewable electricity generation, however would likely come at a significant cost to achieve this target, with a number being reported of about $4bn, and being described as the largest New Zealand infrastructure project since the 1980’s. 

Location of the project will provide challenges.  It will likely be an engineer’s dream, a project this size, however challenges for resource consenting and Central Otago’s schist rock are not necessarily the easiest for tunnel construction. 

Transmission upgrades will still be required, as they are with the NZAS departure, with the key network links needing capacity upgrades to get the electricity from the lower South Island, to where the demand and population growth currently is, in the upper North Island. 

Whilst this project could ensure New Zealand becomes 100% renewable in our electricity generation, it would likely come at a significant cost to taxpayers, with commercial interests unlikely to make it economic without government assistance.  It will also have major engineering and resource challenges to navigate. However, maybe this is bold thinking by the Government in setting up the country for the future.

What does it mean for the sector?

There is still a lot of unknowns with these new initiatives and any outcomes of the scoping studies are likely to be long dated.  In the short term the uncertainties in the sector will remain on the timing of the NZAS exit and what it means for company earnings and dividends, but in the medium term the electrification of industrial heat load can be seen as a positive not only for the sector but also for New Zealand’s contribution to decarbonization. 

It remains, however, that transport and agriculture are the largest emitters in New Zealand.  Perhaps we could see greater initiatives in this space that make more economic sense if, as a country, we want to make a meaningful contribution to reducing our CO2 exposures. 


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