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A Fresh Look At New Zealand's Gas Sector

Hon Pete Hodgson Speech Notes

[Address to the Annual General Meeting of the New Zealand Gas Association]

Thank you for inviting me to speak today.

I'd like to take this opportunity to discuss the review of the gas sector I announced recently. I'll talk about the Government’s expectations for the energy sector, including gas, the process involved in the review and key issues to be considered in this review.

I'll also mention a few points about the important issue of climate change and the draft National Energy Efficiency and Conservation Strategy released earlier today.

As a Government we've developed a clear view about what we want from New Zealand's energy industry.

Our energy policy objective is to ensure that energy is delivered in an efficient, fair, reliable and sustainable manner to existing and potential users. We set this out in the Power Package of electricity industry reforms released on 3 October last year.

This objective applies to gas just as much as it does to electricity.

In the Energy Policy Framework statement released with the Power Package, I indicated a need to maintain a close watch on the gas sector to ensure that prices are efficient and that gas is not used wastefully.

I noted also that policies on gas were subject to further development to enhance competition, increase pressure on prices and ensure that gas is used efficiently.

Having reviewed the electricity industry and taken steps to see that it meets our objective, we've now turned to look at the gas sector.

The gas industry hasn't been subject to any serious Government scrutiny in recent times. It's time to address that.

Labour's pre-election energy policy noted that the gas market may not have developed enough to ensure the most efficient use of this non-renewable resource. We need to find out whether, or to what extent, that is the case.

You could perhaps characterise this as an exploratory review, rather than one that sets out to address burning issues. I don't see it as an exercise that requires an investigation on the scale of a Ministerial Inquiry.

To get things started we will have a detailed discussion paper prepared. A competitive tender process is underway to select an independent consultancy to do this.

We have decided to use a consultancy company to ensure we get international quality advice on the technically complex issues in the gas sector. The consultant will approach key industry participants to obtain information and hear their views.

My aim is that the paper from the consultants will be completed by the end of June 2001. We'll then be asking for submissions on it from the public and interested parties.

Following this consultation, I expect to put up some policy options for consideration by the Government late in 2001.

The review will focus on natural gas and does not include transport gas. That matter is taken up in the draft National Energy Efficiency and Conservation strategy.

Nor will the gas review consider issues relating to the management and royalty regime for exploration. There is an established process in that area for any updating that may be necessary.

The key issues for the review include the overall efficiency of the gas sector and the current regulatory environment. It will also cover issues relating to take-or-pay contracts for gas.

To gauge the overall efficiency of the sector, the consultancy will be asked to assess and comment on the efficiency of each of the different parts of the gas market.

The gas sector differs from electricity in that there are no restrictions on the degree of vertical integration. Gas is also an energy source of choice, rather than necessity, for at least its domestic consumers.

So we are asking the consultants to comment on whether, and if so to what extent, competition from electricity and other fuels place a restraint on the price of gas for domestic, industrial and commercial users.

I am sure you are aware that the Government approved amendments to the Gas Information Disclosure Regulations last year. Since this review will re-examine the role of information disclosure in the regulatory regime for the gas sector, I've decided to defer further work on finalising the amendments until the review is complete.

Another key issue the discussion paper will examine is whether ODVs should be mandatory for gas companies, or whether an alternative valuation methodology is appropriate. You will be familiar with the questions ODVs have raised in the electricity sector, and indeed in other sectors where ODV is used.

The appropriateness of the current regulatory regime for gas is included in this review. If the reviewers recommend any amendments to the regulatory regime they will be expected to detail the costs and benefits of any changes.

The impact of any regulatory changes on different sectors of the industry must be considered, as well as safety issues and the implications for efficient use of gas. I expect some comment in the discussion paper on the opportunities for self regulation compared to government regulation.

There will also be some examination of the implications for the regulatory regime of common ownership of gas, electricity, and even telecommunications networks.

Take-or-pay contracts are common in the gas industry but can also be controversial. I am seeking independent advice from the consultants, which will be included in the discussion paper, on the advantages and disadvantages of these types of contracts.

There are many questions surrounding the price path for gas as the Maui contracts expire, and the opportunity is being taken to explore some of these. I am also interested in views on whether the take-or-pay contracts result in inefficient use of gas for electricity generation when hydro water is freely available.

The work being undertaken in this review on the Maui take-or-pay contracts should not be seen as indicative of any change in Government policy. But it is important that the Government gets quality advice on the questions raised, given the importance of the Maui field to the energy sector and indeed our economy overall.

These are complex issues and this review will demand some hard thinking from all involved. But there are some even larger and more demanding questions facing the gas industry, and they concern the global issue of climate change.

I’ve been talking about a review designed to check the efficiency of New Zealand’s gas market, but we already know that our use of energy in all its readily available forms is not nearly as efficient as it should be.

International comparisons show we have champagne energy tastes on a beer budget. And we are predicted to use 13% more energy in 2012 than we do now.

Our energy use accounts for over 80% of our carbon dioxide emissions. By 2012, our energy demand is set to push up carbon dioxide emissions to 45% over 1990 levels. We have international obligations to reduce greenhouse gas emissions, but we are on a track of steadily increasing use of carbon dioxide-emitting fossil fuels.

Earlier this month the Intergovernmental Panel on Climate Change issued a report showing the scope for action to address climate change. The striking finding in that report was that energy efficiency technologies and practices in buildings, transport and manufacturing make up more than half of the potential global emissions reductions internationally.

Many of the measures the report mentions are directly relevant to New Zealand.

The Draft National Energy Efficiency and Conservation Strategy launched earlier today agrees that the energy efficiency potential is large. That’s why it proposes a 20% improvement in energy efficiency by 2012.

If that target can be achieved, it is estimated that we could reduce by as much as 50% the excess of New Zealand’s greenhouse gas emissions over our Kyoto Protocol target.

A lack of energy efficiency information, a widespread lack of understanding of the issue and a past shortage of leadership in this area have all contributed to our poor energy efficiency record. Entrenched consumer attitudes, institutional arrangements, and past pricing policies have compounded these problems.

The problems are serious - so too must be the solutions.

Energy efficiency, energy conservation and renewable energy must grow as mainstream energy management solutions. If we seize New Zealand’s large energy efficiency potential we stand to gain economically, by reducing waste. And we take a large step towards meeting our international obligations on climate change.

As with the Government’s Energy Policy Framework and Electricity Reform Package, a key focus of the strategy is to continue progress towards the use of renewable energy.

Abundant hydro, geothermal and biomass resources already give New Zealand one of the highest rates of use of renewable energy in the developed world. Generous, but as yet largely untapped, flows of renewable resources, such as wind and direct solar radiation, present huge opportunities.

The costs of renewable energy are reducing as technologies develop and scale economies are achieved. For example, internationally the cost of electricity from wind has halved over the last decade.

A larger renewable energy base provides permanent solutions to energy sector CO2 emissions by reducing dependence on fossil fuels.

Some energy supply measures would focus on increasing the use of renewable energy sources. Proposed measures in the strategy include introducing a mechanism to halt the decline in the proportion of generation derived from renewables. This is supported by amendments to electricity legislation currently before the Select Committee.

As New Zealand and the world move progressively away from fossil fuels, the use of gas may well, paradoxically, rise. As gas replaces petrol, coal or oil, as efficient gas generation of electricity replaces inefficient gas generation, and as gas is increasingly used directly instead of being converted to electricity, we will see find that increasing gas use coincides for a time with reducing carbon dioxide emissions.

We are now looking for feedback on the draft strategy. I invited my audience earlier today to comment specifically on the possible mechanisms to support renewable generation that the Draft Strategy proposes, and on how much electricity generation should come from renewable sources.

I extend the same invitation to you – and indeed an invitation to comment on anything else in the draft strategy that can be improved.

You will also be aware that the Government is developing proposals for the implementation of a tradeable emissions permit regime as a key measure to meet our Kyoto Protocol obligations. I know that your sector has already been involved in discussions with officials on points of obligation and other key issues. Thank you for engaging on these issues. They are hard. It is important that we explore together how best to achieve that objective at least cost and disruption to our economy.

Thanks again for the opportunity to talk to you. I encourage you to actively participate in the gas review and the consultation on the strategy, and I look forward to your response.


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