BRYAN LEYLAND: Electricity Markets and Engineering Realities

The prime objective of any modern power system is to deliver a reliable and economic supply over the long term whereas the prime objective of any market system is to maximise profit. For electricity markets to work, their rules must reward those who best provide reliable, affordable power.

Many electricity systems are managed by markets that focus on minimising day-to-day prices, operating on the blind assumption that low prices today will guarantee a reliable supply tomorrow. This assumption is wrong. A power system is a complex, interconnected machine that forms the lifeblood of a modern economy. It must deliver stable power at lowest cost not just today, but decades into the future. Systems governed by short-term markets have repeatedly failed to do this.

The fundamental error is treating electricity as a commodity like any other. It is not. Electricity must be generated at a rate that exactly matches demand, second by second, while keeping frequency and voltage within tight limits. The system must survive major disturbances — generator failures, transmission faults, and the rapid fluctuations inherent in wind and solar output. When it cannot, catastrophic cascading collapse becomes inevitable, as Spain recently demonstrated. Any system that subjects its customers to price spikes, blackouts, and unstable supply is incompatible with a functioning modern economy.

Current plans for future power supply increasingly rely on "demand side management" — a phrase that amounts to an admission that, when generating capacity falls short, consumers will be forced to reduce consumption. This ignores hard lessons from unreliable systems elsewhere: when electricity is scarce, many businesses don't curtail operations — they shut up shop or buy diesel generators. The latter results in higher costs and higher emissions, the opposite of what was intended.

An ideal power system is built around reliability, security, stability, and long-term least-cost design for the system as a whole. These qualities can only be achieved through rigorous engineering — careful long-term planning, comprehensive analysis of worst-case conditions, and the kind of disciplined foresight that experienced power engineers bring. When a system works well, success is invisible: the lights stay on, business operates efficiently, and everyone's expectations are quietly met. Failure, by contrast, is expensive and political dynamite.

Other factors — profit, market share, political targets, public perception — are legitimate considerations, but they are secondary. When they dominate over providing a reliable and economical supply, problems follow.

Short-term electricity markets are structured to optimise generation based on prices set by generators – the organisations that also control the supply. When there is surplus capacity, prices crash to zero. When there is a shortage, prices spike. As two departing New Zealand electricity executives openly acknowledged, the way to make money in the local market is to keep the system on the edge of shortage. This creates a perverse incentive: underinvestment in capacity becomes a profit strategy. High prices and forced demand reductions become routine features rather than emergency exceptions.

Short-term markets place little value on long-term resilience, adequate reserve capacity, energy storage, or system stability. The result is chronic underinvestment in precisely the assets that keep systems secure. The growing concentration on intermittent wind and solar compounds this problem – which is exacerbated by the fact that intermittent generation gets paid at the same rate as reliable generation. While wind and solar generation is often cheap at the station gate, the full system cost — backup capacity, storage, grid reinforcement — is borne by consumers, not by the owners of intermittent plant. Multiple independent analyses confirm the pattern: the higher the share of wind and solar on a system, the higher the ultimate cost to consumers. This fact has escaped many industry leaders in New Zealand.

Wind and solar development in most countries is driven heavily by political incentives and substantial subsidies. It is telling that while developers routinely claim their energy is now the cheapest available, they never argue that subsidies are therefore no longer needed. Without those subsidies, intermittent renewables would play a modest role in large-scale power generation.

When providing a reliable and economic supply are no longer treated as prime requirements, the risks don't disappear — they are simply deferred. Language shifts to conceal the retreat: "reliability" becomes "acceptable risk"; shortages become "price signals"; engineering constraints become "obstacles to be managed." The system drifts, steadily and quietly, away from everything that underpins it.

The solution is not to abandon markets, but to redesign them around what the power system and the economy actually needs.[1] Long-term system performance — not short-term price — must guide both investment and operation. Engineers must be empowered to speak plainly about risks ahead, and their warnings must be taken seriously before failures occur rather than after.

If we want a reliable and affordable power system, we must make that a non-negotiable requirement. Markets should be the enabler of that goal, not the driver that overrides it. Ignore this reality, and high prices and shortages are not a risk — they are a certainty.

Bryan Leyland MSc, DistFEngNZ, FIMechE, FIEE(rtd) is a power systems engineer with 65 years experience in New Zealand and in many overseas countries.

[1] https://www.dropbox.com/scl/fi/r9etqqq0j1yl956tgqlkj/Leyland-Single-Buyer-Market-GWPF.pdf?rlkey=eqb0aq5oesh9hrrmd3i1x7eiw&st=3ocim0d6&dl=0