Security of Supply in the New Zealand Electricity Market
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The University of Auckland Department of Engineering Science Part IV Project Final Report Security of Supply in the New Zealand Electricity Market Author: Ben Fulton with Shasa Foster Supervisors: Dr Tony Downward Prof. Andy Philpott September 21, 2018 Contribution Declaration We have been fortunate enough to have been able to use some existing code in this project. DOASA was first developed in C++ by Andy Philpott, Ziming Guan, and Geoffrey Pritchard. It was then translated into Julia by Lea Kapelevich, and renamed as JADE. Oscar Dowson wrote much of the SDDP.jl code which implements Stochastic Dual Dy- namic Programming in Julia. The JADE model and SDDP.jl code was then extended by Shasa Foster to produce infinite horizon policies. I simulated the subsequent policies in Julia. I also wrote the VBA macros which take as inputs the results of the simulations, giving operating surpluses for each gentailer), and the macro which modifies demand to incorporate future renewable energy sources. I have written this report myself, and the work throughout this project has been carried out by myself and Shasa, with assistance from our supervisors, except where referenced otherwise. Abstract The New Zealand Government recently announced that the nation’s electricity should be entirely produced by renewable sources ‘in a normal hydrological year’ by 2035. As a result, power stations that use coal and gas are being phased out, the largest of which is Huntly Power Station. This report examines the effect of Huntly’s units being shut down, and how the potential deficit in supply could be resolved. To do this, policies of when and where to release water from New Zealand’s seven largest reservoirs and how much electricity to produce by thermal means are constructed using Stochastic Dual Dynamic Programming. These policies are then simulated using historical data which captures the weekly inflows of water into each of the reservoirs. The various policies and simulations represent various combinations of electricity-producing units at Huntly being available, as well as renewable energy sources being added into the New Zealand Electricity Market. Huntly Power Station (Huntly) has both coal and gas units and is owned by Genesis Energy, which is one of the five big electricity-generating companies in New Zealand. We investigate the role that Huntly plays in the electricity market, which companies would benefit if Huntly’s coal units are shut down, and which generation sources would be best suited to making up the deficit of electricity supply. From our analysis, it is apparent that the removal of units at Huntly increases the strain on New Zealand’s hydro network. Water becomes more valuable, and this impacts the estimated distribution of operating surpluses for the five largest market participants. If Huntly were to shut down entirely, electricity shortages would become more likely. Hence, it is clear that new generation assets will be required in order to account for the deficit in electricity supply if some or all of Huntly’s units are shut down. We postulate that geothermal and wind energy are best suited to replace Huntly’s coal units, and that the addition of all currently-consented geothermal and wind energy sources into the New Zealand Electricity Market would significantly decrease the carbon emissions associated with the generation of electricity. i Acknowledgements To my supervisors - Tony, thank you for your insights, your friendly nature and your unique sense of humour. Andy, thank you for being a fountain of wisdom, and for always being willing to have a chat. I would also like to acknowledge my project partner, Shasa, for working tirelessly, becoming a Julia expert, and coming back from Outer Mongolia in one piece (albeit on crutches). Mum, thank you for giving me an appreciation for the mighty Waikato, home of the indefatigable Huntly Power Station. To Dad, for teaching me how to pronounce Benmore in a true Scottish manner. Thank you both for your unwavering support and compassion. Finally, I would like to thank my friends and peers, for their camaraderie and sense of fun throughout the year. ii Contents 1 Introduction 1 1.1 Motivation . .1 1.2 Project Aim and Scope . .1 1.3 Report Structure . .2 2 The New Zealand Electricity Market 3 2.1 Overview of the Market . .3 2.2 Hydroelectricity in New Zealand . .3 2.3 Market Participants . .4 2.4 Huntly Power Station . .5 2.5 Demand . .5 2.6 Hydro Risk Curves . .6 3 Modelling 7 3.1 Dynamic Programming . .7 3.2 Stochastic Dynamic Programming . .8 3.3 Stochastic Dual Dynamic Programming . .8 3.4 Julia and SDDP.jl . .9 3.5 JADE and DOASA . .9 3.6 Assumptions Implicit in the JADE Model . .9 4 Implementation 11 4.1 The Marginal Value of Water . 11 4.2 Determining the Marginal Value of Water Function . 12 4.3 The Infinite Horizon Model . 13 4.4 Simulations . 14 5 The Role of Huntly Power Station 15 5.1 Financial and Physical Outcomes for Gentailers . 15 5.2 Simulations of Various Configurations of Huntly . 16 5.3 Reservoir Levels for Selected Scenarios . 17 5.4 Financial Outcomes for Scenarios 1 and 2 . 19 6 Future Renewable Energy Options 20 6.1 Adding Renewable Energy into the JADE Model . 20 6.2 Simulations with Additional Renewable Energy . 22 6.3 The Electricity Mix for Each Scenario . 22 6.4 Carbon Emissions for Each Scenario . 23 7 Future Work 24 8 Conclusion 25 iii List of Figures 2.1 2018 New Zealand Hydro Risk Curves . .6 4.1 Marginal Value of Water Graph . 11 4.2 Cuts Defining Marginal Value of Water . 12 4.3 Net Reservoir Levels in Standard Model . 13 4.4 Net Reservoir Levels in Infinite Horizon Model . 13 5.1 Historical Reservoir Levels for Scenarios 1, 2 and 3 . 18 5.2 Week 1 Reservoir Levels for Scenarios 1, 2 and 3 . 18 5.3 Distribution of Operating Surpluses by Gentailer . 19 6.1 Generation Mix for Each Scenario . 22 6.2 Distribution of Carbon Emissions . 23 List of Tables 2.1 Gentailer by Generation Assets . .4 2.2 Units at Huntly Power Station . .5 iv 1 Introduction This report discusses the security of supply of electricity in New Zealand in the next two decades. Security of supply refers to enough electricity being generated in New Zealand to satisfy demand, particularly in a dry year when there is less water available to produce electricity through hydro generation. We commence by explaining the reasons for carrying out this project and then expand on the structure of the remainder of this report. 1.1 Motivation A large proportion of energy in New Zealand is currently generated by renewable means. Hydro, geothermal and wind energy sources currently account for approximately 82% of New Zealand’s electricity needs [1]. However, one of the first announcements from the newly formed New Zealand Government in 2017 was that 100% of New Zealand’s energy should be generated by renewable sources by 2035, under normal hydrological conditions [2]. Security of supply typically becomes an issue in dry years, when rainfall is low. This announcement means that New Zealand’s ‘thermal’ stations, which typically use coal or gas as their source of energy, would only be able to be used in exceptional circumstances, that is, when electricity shortages are otherwise imminent. Huntly Power Station, hereafter referred to as Huntly, accounts for about half of New Zealand’s thermal generation capacity. Various announcements have been made regarding the future of Huntly’s six units, which would suggest that the power station’s future is unclear. This project considers security of supply of electricity if Huntly’s two remaining coal-fired units were to shut down, as well as in the case in which the power station shuts down all six of its units. The New Zealand Electricity Market is currently dominated by five companies which both generate and sell electricity. Because they act as both generators and retailers, they are commonly known as ‘gentailers,’ a term which will be used throughout the remainder of this report. This project will investigate which gentailers would benefit (and which would be worse off) if Huntly’s two existing coal-fired units were to shut down. Further motivation for this project is described in the associated Literature Review and Statement of Research Intent; please refer to [3]. 1.2 Project Aim and Scope The primary goal of this project is to generate policies and run simulations under var- ious scenarios. Using output from the corresponding simulations, we then analyse the outcomes for each of New Zealand’s five largest gentailers and look at future renewable energy options. The two key questions that this project addresses are: i) How secure is the supply of electricity in New Zealand currently, and ii) How could New Zealand ensure a secure supply of electricity in the future, given a preference for renewable energy? 1 1.3 Report Structure The remainder of the report continues as follows: Section 2 provides a brief background to the New Zealand Electricity Market. We detail the differences between New Zealand’s five largest electricity companies, and how security of supply is currently assessed. A short discussion of Huntly is also included. Section 3 explains the mathematical algorithm of Stochastic Dual Dynamic Program- ming, and the software which implements this algorithm to generate a hydro-thermal scheduling policy. We also describe some of the assumptions within our model. In Section 4, developments made to the existing software package and the new infinite horizon dynamic program are described. We then explain, at a high level, how our simulations are carried out.