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Pete Hodgson, Address to Electricity Industry

Pete Hodgson, Minister Of Energy
Address to Electricity Industry Reform conference

Good morning.

We meet in interesting times.

This is a usefully timed conference, because this is a good opportunity for the electricity industry to examine its future.

Over the next two days you will be talking and thinking about the implications of the report of the Ministerial Inquiry into the Electricity Industry. I welcome that. While the Government considers its response the industry is doing the same. Neither side has a monopoly on wisdom in this area. As most of you will know by now, my approach to these issues is to look for industry solutions where possible and regulatory solutions where necessary. That was our mantra pre election, our mantra pre Inquiry and our mantra post Inquiry. The trick is now to divine what is possible, and what is necessary.

I know that the industry is putting considerable effort into formulating its response.
Many of the major players in the industry met last week to discuss the report. Other meetings and discussions are happening all the time. I am finding as much time as I can to hear your views on the Inquiry recommendations. I am not undertaking a round of submissions, because the Inquiry has done that, but I'm trying to run a pretty open process. We're working towards Cabinet decisions in early August.

The Inquiry process has generated what I think is a useful, creative tension between Government and industry. Compared to the bulldozer process of electricity reform under the previous Government, I think we've entered a more balanced and mature phase of policy development. There will always and should always be a healthy level of tension between business and the makers of public policy, because our objectives are not – and should not be – identical. Accordingly I need to maintain a bit of an edge in my relationship with the electricity sector. I need to maintain that creative tension. I need to satisfy myself that the interests of consumers are met. I need to ensure that the national interest or the common good is satisfied. But I need also to acknowledge that the industry has made remarkable progress on a wide range of fronts, despite the Government rather than because of it.

I think the Inquiry report is a very well-considered and high-quality piece of work. David Caygill's panel was given a huge task but they've dealt to it well. I think I was very lucky to secure the services of David, Susan Wakefield and Stephen Kelly, and Professor Littlechild as their expert adviser. I want to thank them for producing a concise and coherent report that will be of lasting value in helping the Government to get the electricity sector back on track.

The panel has recommended a comprehensive and principle-driven approach to improving the efficiency and fairness of the electricity market. I expect most of you will be familiar with the Inquiry report by now, so I won't go through it. David Caygill is about to tell you about it when I've finished, in any case.

I am particularly pleased to see a focus in the report on the needs of consumers – either directly or indirectly. An example of a direct consumer interest was a recommendation for majority representation of independent members on the proposed new single market governance board. I said when I set up the Inquiry that I hoped it would help us get to the point where New Zealanders can believe they are paying a fair price for electricity. There is a widespread perception that consumers – particularly domestic consumers – can have no such confidence. So a closer focus on consumer needs is important.

I am also pleased with the Inquiry's efforts to look at the behaviour of consumers and the incentives they face. The panel has put forward a suite of measures to improve demand-side participation and energy efficiency.

This matters because one of the Government’s objectives for electricity is that it be delivered in an environmentally sustainable manner. As the panel notes, the market alone is unable to achieve this. And industry compliance with the Resource Management Act is not enough. That Act provides well for one-off locational decisions, but does not necessarily manage all environmental threats and consequences.

The prime example in the case of energy policy is climate change. New Zealand’s commitment to ratify the Kyoto Protocol in 2002 means the Government has to focus on what is required to meet this challenge. The implications for the electricity sector are likely to be significant.

I am co-ordinating the ministerial committee on climate change. I spent last week in Warsaw for my sins and watched the world grapple with the issue that won’t go away. I saw a bewildering array of multi-dimensional position-taking. I saw countries ladling negotiation chips on the table and the response of other countries to that. I saw soap-boxing, sophistication and sophistry. I heard honest debate and dishonest debate and bega0n to learn the difference. I saw many genuine attempts to progress the debate from many wise people and yes I did see some common sense and some integrity. At home we have begun working on an action plan for ratification and all options are on the table.

In March I released an example of the kind of work we're looking at. I had the Ministry of Economic Development model the likely effects of banning coal-fired electricity generation. By 2020, that told us, such a ban would have reduced New Zealand's carbon dioxide emissions by 13 percent but raised electricity prices by 26 percent. A ban on new coal-fired generation only, plus a carbon pricing mechanism – which means tradeable emissions permits or a carbon tax – would spread costs more evenly. Electricity prices would not go up so much, but there would still be a significant increase in the price of coal.

The lesson is simply that there is no free lunch. There are no cheap and easy ways to cut greenhouse gas emissions. So there's a challenge for the industry that extends beyond the immediate impact of whatever the Government decides to do in respect of the Ministerial Inquiry report.

The panel does however make some significant recommendations on energy efficiency, sustainability and the environment. It proposes limiting fixed charges to no more than about 25 per cent of the typical household’s electricity bill, amending transmission charges so that co-generation is not disadvantaged and giving consideration to the terms and conditions under which distributed generation connects to the network.

Other recommendations from the inquiry could also contribute to improved energy efficiency and reduced environmental impacts. The development of a real-time market, for example, could enhance opportunities for demand side management.

These and other proposals promise some innovative ways forward for the electricity industry. Perhaps this is a good time to say that the future is technology. The inquiry recognises that. Their report allows for embedded generation or distributed generation. It was written with an eye to the future, which is where my attention is focussed also.

While addressing the issues raised by the Inquiry I am also starting to look at developing a National Energy Efficiency and Conservation Strategy. While the Inquiry's ideas are very useful, New Zealand unfortunately has a long way to go before it can be considered energy efficient.

Some of you will have noticed the recent work of Dr Lee Schipper, who led an International Energy Agency research team in a four-year study of energy intensity in New Zealand and other developed countries.

His study, commissioned by the Energy Efficiency and Conservation Authority, confirmed what I and others have been saying for years. New Zealand has the energy use habits of a highly developed country, but the GDP per capita of a lower-ranking country. In Dr Schipper’s words New Zealand has champagne energy tastes on a beer budget.

What’s more, we can expect to face growing energy demand and upward pressure on energy prices as the economy grows and pushes up energy-related greenhouse gas emissions.

Clearly this research reinforces the need for New Zealanders to take energy efficiency seriously, which is why I'm shifting the policy focus in Government from energy production to more efficient energy consumption.

We have lost the plot in recent years when it comes to energy efficiency and the value of renewable energy sources. That’s very worrying for a country trading on a clean, green reputation.

As part of the Budget the Government has boosted EECA's budget by $3 million for the upcoming financial year. This is a substantial improvement on what was planned by the previous Government, which had been arranging a $2.5m cut.

Jeanette Fitzsimons' new Energy Efficiency and Conservation Act has finally been passed after a prolonged and difficult two-year passage. The Energy Efficiency and Conservation Authority now has statutory recognition. It is, as of Saturday last, a Crown Entity.

One of EECA’s first tasks will be to take a lead in developing a National Energy Efficiency and Conservation Strategy, as provided for in the Act. It is critical that the Strategy incorporates the collective wisdom of business, environmental and professional groups and I urge you to take part in this process.

More efficiency measures need to be implemented and more renewable energy generation needs to be built if we are to call our energy system sustainable. New Zealanders demand guaranteed availability of energy, as citizens of every modern nation do. More efficient use of energy offers one way towards meeting future demand without resorting to more large power stations or steeply rising prices.

But there are open questions still about how will we meet that demand in full as well as meeting New Zealand’s international obligations regarding greenhouse gas emissions - especially as those obligations inevitably tighten. And how will we make sure energy is priced in line with its cost, while ensuring it is affordable for all?

The Government strongly supports the progressive upgrading of electricity generation efficiency. We also plan to look closely at issues associated with the decentralisation of generation as technology advances are made. We see a bright future for some renewable technologies and some efficient non-renewable technologies. Inefficient thermal plant will inevitably be phased out.

On the distribution side, it is worth noting briefly that the Government has recently introduced a number of technical amendments to the Electricity (Information Disclosure) Regulations. These regulations provide information to the public and government on the pricing and performance of electricity line businesses. This promotes close questioning of the companies, backed up by the threat of further regulation if abuses of market power continue. The changes we've made are designed simply to improve the quality and transparency of the disclosures.

The Inquiry recommended that the Commerce Commission be responsible for the content and design of the disclosure regulations. Irrespective of what decision is made on this, I am concerned to ensure that lines operate in a sound regulatory framework.

Many people, especially in the news media, are trying to read the tea leaves and figure out what my response and the Government’s response to the report of the Electricity Inquiry will be. Particular attention has focussed on the price regulatory framework for distribution and transmission.

The organisers of this conference and some of you here today might have been expecting me to spell that out this morning. But I think most of you will understand it is too soon for that. I decided to release the report the morning after it was formally delivered to me, but the Government's response must be developed through the normal channels of Cabinet committees and the Cabinet itself. We must also give officials time to analyse the options and the practicalities of decisions.

All reports of this ilk stop short of detailed implementation issues. Yet good implementation is the key and the devil is often in the detail. We will need to take our time.

I am a pretty open person. I openly welcome the report. I openly state that the Government will carefully consider each and every recommendation and announce decisions. I am listening to your views. But between now and early August I'm afraid there will be no hints, no nods and no winks.

Legislation is likely to deliver some of the changes recommended by the panel and I expect to introduce this in October. It will, of course, be referred to a Select Committee, which will give everyone the chance for comments and submissions.

In the meantime the mature, measured, creative tension that I had hoped we would all be able to create has been created. Both industry and Government are engaged. Both are making progress. Differences will emerge, along with consensus.

I want to thank industry for their engagement and for their progress and I want also to say that we have a distance to go yet.

Thanks for your attention.

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