Chatham Islands Reduce Fossil Fuel Dependence by Integrating Wind Energy

The 600 residents of the remote Chatham Islands had relied on diesel-generated electricity for decades, but by 2008 rising energy prices were crippling the local economy.

Various attempts to get renewable energy options off the ground over the years had proved unsuccessful. In particular, hydropower had been repeatedly investigated and promoted for more than 25 years, but the options were expensive and called for significant government funding that was not feasible.

In early 2008, the utility sought advice as to whether wind power could be supplied on a commercial basis at a cheaper rate than diesel. The economic case for wind versus diesel became clear when world diesel prices soared to unprecedented levels in the first half of 2008.

Today, two 225 kW wind turbines are supplying power to the local grid. The turbines are expected to supply 47% of the islands' electricity, reducing diesel use by around 300,000 liters each year.

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Island Background

The Chatham Islands is a remote and windswept outpost of New Zealand, located 750 km east of the South Island of New Zealand. Almost all of the residents live on the main Chatham Island, which is 90 square kilometers of mostly low-lying pasture and scrub with a wild coastline surrounded by profitable fishing grounds. The island group's declining population stood at 609 in 2006.

The main Chatham Island has an electricity grid servicing approximately 80% of its residents (260 households), businesses, and other services. Total grid electricity demand in 2007 was 1,800 MWh. By 2010 (with the addition of a fish processor into the load), demand was at 2,370 MWh/yr.

The electricity system is owned and operated by a subsidiary of the Chatham Islands Enterprise Trust (the Trust), a community trust that owns and manages Chatham Islands infrastructure and is charged with fostering economic development.

The main island had relied on four diesel generators to power the electricity grid. Diesel-generated electricity typically retailed at three to five times the retail price of New Zealand main grid electricity.

Project Partners

  • Chatham Islands Electricity Trust: acted as the primary decision maker, responsible for project development, contracting, financing, and operation
  • New Zealand Ministry of Economic Development (the Ministry): provided expert electrical engineering and contractual advice to the Trust in its decision-making role and contributed to legal costs
  • Harbour Energy: a Wellington-based energy consultancy that initially provided expert advice directly to the Trust and later expanded its role to become lead negotiator on behalf of the Trust due to the complexities of the contractual negotiations
  • CBD Energy: an Australian wind-generation company that supplied the wind turbines

Motivation

The chosen technical solution was relatively economical and simple. Two 225 kW turbines, erected on the same site, began supplying power into the local grid in July 2010. In windy conditions, the wind turbines are capable of fully supplying the power needs of the community. Some diesel generation is run at all times to provide back-up. The turbines can be lowered to the ground to avoid cyclones and for maintenance. The wind power is supplied at NZ40 c/kW, which compares favorably to a variable diesel price of often around 70 c/kW. A guaranteed 47% island demand will be met by wind generation.

Project Timeline

  • July 2008: request for proposals (RFP) issued
  • August 31, 2008: RFP deadline met; four proposals received
  • November 30, 2008: preferred supplier selected (two months after initial deadline of September 30)
  • August 2010: contract signed (eight months after initial deadline of December 31, 2008)

Project Strategy

In mid-2008, the Trust, with advisory support from the Ministry, embarked on a project to select a company that could provide the up-front capital required to finance the installation of wind turbines, install the wind turbines, and operate the wind generation in an integrated way with the diesel generation.

Key considerations included:

  • Cost: The aim of the project was to lower electricity prices.
  • Reliability: Diesel generation was reliable; the technology was well established and could be supported with island expertise. Any "new" technology needed to be able to provide the same reliability of supply.
  • Island ownership and island autonomy: The Trust had an acute sense of the risks of getting tied in to a deal that a small community could not afford and becoming beholden to an external company. The Trust wanted the option of purchasing the new system from the supplier.

Other strategic factors:

  • The Trust selected a suitable site for wind generation after months of negotiations with various landowners.
  • The Trust engaged another consultant to assist it to obtain resource consents, which involved community consultation and investigation of environmental effects.

Financing

The most suitable commercial arrangement to meet the Trust's aims was a "build own operate transfer" (BOOT) contract. Under a BOOT, the supplier initially provides the capital and owns the plant. Capital and operational costs are paid off over time through the electricity price. Ownership transfers to the Trust after 20 years, with an early purchase option for the Trust.

Major Hurdles

Many of the project's challenges reflect the hurdles all energy projects in remote locations experience: time frames, process, roles and responsibilities, and community support.

Time Frames

Time frames were longer than expected, and as a result various issues arose that impacted the project.

  • Tender evaluation was more complex and lengthy than anticipated, as initially no tender was "perfect" for the Trust. The evaluation involved discussions and with the various suppliers and a call for revised bids.
  • The negotiation period took 21 months rather than the scheduled three. A range of factors caused the delays, both within and outside of the negotiating parties' control. The 2009 global recession made it more difficult for the supplier to access capital. To make the project cost-effective, the Trust had to convince a local fish processor running its own generation to join its network to boost network demand.
  • It took several months for the Trust to settle on a location and agree to a lease with the land owner, and to obtain resource consents. However, as these activities took place while the contract was being negotiated, the overall time frame was unaffected.
  • Before contract negotiations were concluded, the Trust and the supplier in good faith built the foundations, ordered the turbines, shipped them to the island, erected them, and connected them to the grid. The power started flowing a couple of weeks before the contract was signed. This was definitely a sign of commitment from both parties and saved time.

Process

One of the biggest challenges of the project was that the external conditions and economics of the case changed as the project progressed. At each stage of the project, there were also unique challenges. For example:

  • Developing an RFP
    • The Trust didn't have a standard template for developing the document.
    • It was difficult to foresee all of the contractual, engineering, and commercial details up front.
  • Evaluating bids and selecting preferred partner
    • Glitches in communications created confusion among bidders.
    • The Trust struggled to get a satisfactory technical solution at an affordable price from the initial tender round. There were rounds of detailed discussions with several tenderers before an appropriate offer was put forward.
  • Negotiating the contract
    • Some technical complexities were beyond the expertise of the Trust decision makers, who still had to make the decisions, and who had to communicate their decisions and be accountable to the wider island community.
    • Terms were renegotiated several times with the preferred supplier, partly due to the supplier's gradual realization of the harsh conditions on the island.

Roles and Responsibilities

The Trust:

  • Was cautious about entering a contract on behalf of the island people that would commit the island to paying back a capital costs over 20 years and affect power prices for the next 20 years. Wildly fluctuating diesel prices and the recession played havoc with the comparative economics of wind, creating uncertainty around the price savings that would be achieved.
  • Was worried about dealing with technology that had not been well-tested elsewhere.
  • Was driven by a desire to get the best for its community, but lacked the specialized skills required to reach a firm view on what was best.

The Ministry of Economic Development:

  • Had a duty not to expose the government to risks flowing from decisions that were clearly the Trust's; thus, although the Ministry's role of "adviser, not decision-maker" was sometimes misunderstood, it was a distinction the Ministry was keen to maintain.
  • Had no control over time lines but was funding technical advice—over a longer time frame than anticipated.
  • Had to balance a dual role: one of project adviser and the other of adviser to the government in communications between its minister and the Trust. On balance, though, being close to the action was a positive factor.

Community Support

One of the Trust's challenges was gaining and retaining community support. An initial estimate that wind would reduce electricity prices by 25% was interpreted by island residents as a promise. In late 2008, as diesel prices dropped, the relative economics became a lot closer, and island support was shaken. Island negativity about the future, as the island's population was dropping, showed up in pessimism about the project from some parts of the community. Community views were also at times swayed by persuasive personalities.

Lessons Learned

  1. Competent technical advice is essential, both in relation to engineering issues and contractual/commercial issues.

  2. The time and quantity of professional advice required to negotiate a 20-year BOOT should not be underestimated.

  3. Small and remote communities face additional difficulties and greater exposure to risk compared to larger and more experienced centers. Following are some examples:

    • Recouping the capital costs of the wind system must be carried solely by the small number of electricity customers connected to the island grid. It cannot be spread amongst a larger population as infrastructure projects in more populous areas are.

    • There were no deep pockets to absorb any unexpected costs. Neither the Trust nor the potential suppliers could afford to incur a loss. As negotiations continued into, through, and out of a recession, it was apparent that the real goal was to reach a deal that would be viable in the long term for both the island and the supplier.

  4. Having on-island operational expertise saves costs. The supplier discovered on-island skills employed to run the diesel network were capable of running the integrated wind-diesel network. As a result, the company handed day-to-day operations to island staff, enabling significant cost savings for both parties.

  5. In retrospect, the project time frames and communications would have benefited from the appointment of a project manager with appropriate skills and resources (at times East Harbour Energy partly filled this role by default).

References

The following resources provided information about this project:

Holly Hyndman, New Zealand Ministry of Economic Development

Andrew Robertson, New Zealand Ministry of Economic Development