JOHN RIDDELL: Subsidies for renewable electricity generation increase our electricity bills

An Open Letter to the Prime Minister.

Dear Prime Minister

I am writing you this as an open letter as last year, on the 5^th of December at the Federated Farmers meeting at Mystery Creek I had the pleasure of hearing your speech. It was a good speech and while I don't agree with all your positions, that isn't the reason I am writing this.

In the Q and A afterwards, I asked you a question about the cost of the Net Zero policies on the average New Zealander. As an example, I mentioned how subsidies for renewable electricity generation increase our electricity bills. You immediately told me that they are not subsidised.

This is the reason for my letter.

It is true the government does not hand money directly to the wind and solar generators, but that is not the only way to subsidise an activity.

For the record, and so you cannot say in the future that you did not know, there are, by my count, five effective subsidies that are necessary to make investing in grid connected wind and solar generation economically viable. They are distortionary and are adding unnecessary costs to consumers.

They are (in no particular order),

1. Emissions Trading Scheme subsidy.

 Wind and solar can sell carbon credits while generators who use coal or natural gas, etc, are made to buy credits. This skews the economics massively in favour of the non-dispatchable wind and solar generation.

2. Back up power subsidy.

Wind generation typically has a capacity factor of around 30 %. Solar is usually between 10 to 25%.  The capacity factor is the amount of power produced on average. This means a wind farm with a capacity of 100MW will, on average, put out about 30MW.  In practice, sometimes it might produce 90MW, other times, nothing. When nothing is being produced a back-up power supply is needed.  This problem is often hidden by reporting generation in units of energy, megawatt hours (MWh) rather than in units of power, megawatts (MW). 

The grid is set up to balance the generation to the demand. When the sun isn't shining and the wind isn't blowing, there has to be a back-up generation, (aka firming), but the cost of the back-up is not paid for by the wind and solar generating companies. For each gigawatt (GW) of wind capacity, there has to be a GW of back-up generation.  Large batteries, pumped hydro or green hydrogen have been proposed but the cost is prohibitive. For example, Meridian has a large battery south of Whangarei which can store 200MWh and provide 2 hours of output at 100MW^[i].

They say this is for firming, but two hours of firming has little value. It is not unusual to have weeks of what the Germans call Dunkleflaute, low sunshine and wind at the same time.   This battery cost about NZ$186 million. To provide one week of back-up for each GW of installed Wind capacity we will need 168,000MWh stored. That will take 840 batteries of this size costing more than NZ$150billion. That is for one week of back-up. We probably need three or four weeks of back-up.  These batteries will need replacing in 10 years if they don't catch fire first.

Using batteries for back-up is not going to work. Meridian makes money by buying when the spot price is low and selling when it is high. This battery is good for Meridian's bottom line but not good for backing up non-dispatchable generation.

In practice, the back-up power has to come from a dispatchable supply like natural gas, coal, geothermal or nuclear. This causes an embarrassing problem.  The cost of the back-up electricity is lower than wind or solar. The solution to the problem is to use a clever accounting trick called the “Levelised Cost of Energy^[ii]” (LCOE).  It doesn't make wind and solar actually cheaper than other sources. It just makes it seem like they are a cheaper option.  LCOE answers the wrong question. It tells us the cost per kWh of different systems. What we really need to know is what is the cheapest way of delivering reliable power? You have to look closely at the assumptions of the LCOE calculations. They usually overestimate the capacity and facility lifetimes for wind and solar.

3. Transmission cost subsidy.

Whenever a wind or solar generation station is built, new transmission infrastructure, including transformers, new substations and power lines, are needed to transport the power from where it is produced to where it is demanded. This large cost of new transmission is not paid by the wind or solar companies. New hydro also needs new transmission infrastructure and this cost should be included when calculating the total cost.  However, hydro generally needs less new infrastructure.

4. Rigged market subsidy. 

The grid is forced to take power from wind or solar generators before other sources of power, based on the idea that the wind and sunshine are free.  Other generators have to cut back on their generation while power is coming from Wind or Solar. This distorts the market.   Wind and solar generators cannot compete in an open market.

Peak demand for power is typically early morning and/or late afternoon when there is little sunshine and often low wind. In the middle of the day when demand is lower, solar generators are putting power into the grid when there is less demand. 

5. Frequency stability subsidy. 

Our alternating current electricity grid has a frequency of 50 Hertz (Hz).  Even a very small variation in frequency can result in electrical failures in expensive equipment. This is a problem when too much of the power is generated by non-dispatchable sources like wind and solar.  To prevent fires and explosions, the grid has cut out switches that will trip if the frequency varies by a tiny amount. The frequency is normally stable because traditional generators using hydro, coal, natural gas, geothermal or nuclear have large metal turbines spinning at exactly 3000rpms. This provides what is called “spinning reserve”. Wind and solar don't have spinning reserve.

If too much of the generated power is coming from wind and solar, the grid might not have sufficient reserve when the frequency changes and the system can crash. There are some expensive machines called “rotating stabilisers^[iii]” that can be used to stabilise the frequency, but the cost of the stabilisation is not paid by the wind and solar companies. Because New Zealand has a lot of hydro and geothermal, frequency control is not as difficult to manage as when wind and solar make up a large portion of generating capacity. If we add a lot more wind and solar, frequency control will become an even greater problem.

In New Zealand, the three subsidies that matter at the moment are the Emission Trading Scheme, the Back Up Power and the Rigged Market subsidies. It does not matter if you call these subsidies or something else. Without these, Wind or Solar generation is completely uneconomic in New Zealand. Because of these, the price of electricity in New Zealand is higher than it otherwise would be. 

I would strongly urge you to consider the effect of these subsidies when forming energy policy for New Zealand.

Yours sincerely

John Riddell.

[i]                    https://www.meridianenergy.co.nz/news-and-events/completion-of-ruakaka-battery-energy-storage-system

[ii]                 When calculating the LCOE, the assumptions matter. Renewables can be made to look cheaper by using high capacity factors and facility lifetimes for renewables while using low CF and facility lifetimes for coal, gas and nuclear.     https://www.lazard.com/media/5tlbhyla/lazards-lcoeplus-june-2025-_vf.pdf

                Also see “Dollars, Sense, and Kilowatt-Hours” https://thebreakthrough.org/issues/energy/lcoe-lazard-misleading-nuclear  for an explanation why LCOE should not be used to compare the cost of non-dispatchable renewables with dispatchable power sources. 

                And  “Your Guide to Lazard’s LCOE Analysis:” https://www.americanexperiment.org/your-guide-to-lazards-lcoe-analysis-part-1-what-is-the-levelized-cost-of-energy/

[iii]                 https://www.statkraft.com/newsroom/explained/grid-services-innovative-solutions-to-stabilise-the-power-grid/

John Riddell is a Waikato dairy farmer whose interests range from kayak fishing for snapper to Philosophy of Science, His qualifications are a Bachelor of Agricultural Science from Massey and a Bachelor of Arts in History from Waikato. He and his wife have been farming to the north of Hamilton since 1985.