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Energy Agency Reviews NZ Energy Policy

International Energy Agency Reviews NZ Energy Policy

A review of New Zealand's energy policies by the International Energy Agency highlights the challenges posed by climate change, says Energy Minister Pete Hodgson.

Mr Hodgson and IEA executive director Robert Priddle released the IEA New Zealand 2001 Review today. The IEA, an autonomous body within the Organisation for Economic Cooperation and Development (OECD), reviews the energy policies of member countries about every four years.

“The IEA is positive about many developments in New Zealand energy policy but its report highlights the size and complexity of the climate change issue," Mr Hodgson said. "It quite rightly emphasises the importance of developing a comprehensive and cost-effective policy response to global warming."

“The report comments on our current policies and programmes and makes recommendations. I am pleased to note that many of the recommendations are already part of the Government’s policy, or are under active policy development."

IEA recommendations that have been or are being implemented include:

- Update energy sector outlook scenarios.

- Greenhouse gas emissions:

- develop a cost-effective package of policies and measures, based on all technically feasible options, for achieving our emissions target;

- develop measures such as emissions trading and credits for sinks;

- ensure methane emissions from agriculture and carbon dioxide emissions from transport, as well as energy sector emissions, are addressed.

- Give priority in the National Energy Efficiency and Conservation Strategy to improving efficiency of energy use in transport, domestic space heating, water heating and electrical appliances.

- Put in place new legislation ensuring the full benefits of electricity market reform are achieved, through competition wherever possible, and with appropriate incentives for industry self-governance, but with regulation by the Commerce Commission of the natural monopoly line businesses.

- Review the possible benefits of regulatory reform in the gas market.

The IEA report was prepared following a visit to New Zealand late last year by a team of energy experts from Finland, Australia and Canada and the IEA’s headquarters in Paris. New Zealand was last reviewed in 1997.

IEA REPORT: NEW ZEALAND 2001 REVIEW OF ENERGY POLICIES

Embargoed until 12.20pm, Wednesday, 11 July 2001

SUMMARY OF CONCLUSIONS

- New Zealand faces challenges in several major areas of energy policy. Energy policy has been innovative and strongly market-oriented: New Zealand has shown leadership.

- Energy-environment policies have made rapid progress. A timetable for ratification of the Kyoto Protocol has been set and there is now an urgent need to agree on a cost-effective package of policies and measures; but crucial decisions may not be possible before the ratification deadline because of the need for international agreement on emissions trading and credits for sinks.

- Energy efficiency is a priority for policy development as an early response to the Kyoto commitment.

- Electricity liberalisation policy has been successful in reducing wholesale prices and in improving efficiency in the sector. Further reforms are designed to strengthen industry self-governance and to bring the benefits of market reform to the retail market. Regulation remains an issue. Care will be required to avoid distortions that may arise from simultaneously seeking to achieve economic, environmental and social goals in the sector.

- Gas discoveries are particularly needed to replace depleting supplies from the Maui field. Convergence of the gas and electricity markets may call for market reforms in the gas sector consistent with those in the electricity sector. At present, gas prices are limited by competition with electricity. The small size of the gas sector is not thought to justify possibly costly regulation.

- Coal may grow in importance for power generation. It is a competitive export industry; government participation in the industry is no longer justified.

- Renewables already play a major role in meeting energy demand. Hydro and geothermal are the basis of electricity production. Further encouragement of renewables should be compatible with energy market reforms.

- Energy research and development efforts could be enhanced by a more focused organisation of government research and development generally.

SUMMARY OF RECOMMENDATIONS

The Government of New Zealand should:

General Energy Policy

- Ensure effective mechanisms are in place to closely co-ordinate the work of the Ministry of Economic Development, the Ministry for the Environment, and the Energy Efficiency and Conservation Authority, to balance economic, environmental and social goals. Achieving this balance will be challenging because of the determined thrust the government has made into several areas simultaneously: regulatory reform, energy efficiency and ratification of the Kyoto Protocol. Measures might include:

- Using an energy scenario agreed by all areas of government involved in energy policy and programme design as a reference point in presenting policy options to the government;

- Preparing an annual energy report to encourage departments to work towards a proper balance of economic and environmental policies.

- Update outlook assumptions in light of recent encouraging gas discoveries and establish a new baseline scenario based on more positive assumptions on gas production.

- Review policies on security of energy supply generally, noting in particular the impact of depleting oil and gas reserves, and the management of supply security in the energy network industries.

Environment

- Agree on a cost-effective package of policies and measures based on the full range of technically feasible options to achieve New Zealand's target for greenhouse gas emissions; the package should be agreed with stakeholders and announced before ratifying the Kyoto Protocol.

- Quantify the contribution to be made by each group of policies and measures (such as for energy efficiency, domestic emissions trading, a carbon charge, negotiated greenhouse agreements, international emissions trading including credits for sinks, and investment in renewables energy).

- Ensure that methane emissions from agriculture and carbon dioxide emissions from transport addressed, as well as emissions from the energy sector.

- Evaluate and announce the impact on the energy sector of the proposed package of climate policies and measures, in particular the impact on international competitiveness; clearly identify policies and measures which require international agreement, such as emissions trading and credits for sinks.

- Contribute to the international development of a policy on allocating and trading credits for sinks; develop a domestic policy on these issues that addresses the treatment of windfall gains.

End-use Efficiency

- Support data collection on energy end-use by funding and regulation.

- As far as possible, quantify the greenhouse gas emissions benefits and associated costs of the components of the National Energy Efficiency and Conservation Strategy.

- Take particular note of the requirements of the Energy Efficiency and Conservation Act 2000 to establish only targets that are measurable, reasonable and practicable; take into consideration the findings of the IEA's study on energy efficiency in New Zealand; ensure adequate means to enforce compliance with the strategy.

- Ensure that the National Energy Efficiency and Conservation Strategy is based on cost-effectiveness and is integrated into existing and proposed policies on competitive energy markets.

- Give priority in the National Energy Efficiency and Conservation Strategy to improving efficiency of energy use in transport, domestic space heating, water heating and electrical appliances. Energy use in manufacturing should be addressed only after data deficiencies are corrected and the underlying causes of relatively low energy efficiency are better understood.

- Determine the nominal (test) fuel economy of cars purchased new, and of cars purchased used, to see how the two groups compare; develop policies to encourage purchase of more efficient cars from either group.

Electricity

- Specify in legislation that the overarching goal of electricity market reform is the creating of the conditions for full and free competition wherever possible.

- Ensure clarity and co-ordination in the respective roles of the Electricity Governance Board and the Commerce Commission with respect to:

- Industry self-governance, including regular consultation between the Minister of Energy and the chairman and members of the Electricity Governance Board to monitor the performance of self-governance;

- Promoting competition in the market;

- Regulating natural monopoly areas (transmission and distribution);

- Achieving energy efficiency and environmental goals at least cost;

- Ensuring accountability and transparency through regular public reporting, including by the Commerce Commission on its interpretation of its statutory duties and intended activities in the electricity sector.

- Ensure that the Commerce Commission has the authority and capacity for evaluating performance and regulating prices of transmission and distribution to support the intention of intervention should self-regulation fail.

- Consider the need for establishing an energy group within the Commerce Commission in view of the specialised and on-going task the Commission is likely to face.

- Monitor performance of the transmission and distribution companies; establish incentives for continuing improvement in transmission and distribution prices and services to electricity consumers.

- Ensure that consumer representatives participate in the development of final proposals for self-governance of the electricity sector; ensure that domestic, commercial and industrial consumer interests are fully represented on the Electricity Governance Board.

- Define social goals contained in the Power Package and consider options for achieving these goals with a view to removing any distorting impact on the electricity market of the policy on rural tariffs and arbitrary limits on fixed charges; promote the evolution of cost-reflective pricing for all consumers.

- Consider privatising remaining government interests in the electricity sector to improve credibility and transparency in the market, as well as efficient operation.

- Monitor measures to allow switching between suppliers in the retail market; ensure genuine customer choice.

Renewables

- Consider how small-scale renewable sources of energy can efficiently participate in the competitive electricity market.

- Encourage small-scale renewable energy generators to address problems of reliability and to improve overall operational efficiency through innovations in industry organisation and management.

Oil and Gas

- Review policy and invite industry submission on the regime necessary to encourage exploration in the Great South Basin an in other remote areas, and on further improving administration of petroleum exploration generally.

- Investigate the benefits of regulatory reform in the gas market and publish a paper on possible options for reform; in particular, review the implications of the close relationship between the gas and electricity sectors.

Coal

- Review the rationale for government shareholding in the coal industry; reconsider the postponement of the privatisation of the Coal Corporation of New Zealand Ltd (Solid Energy) in view of recent improvements in international coal prices, but also the generally flat outlook for growth in coal prices expected in the long term.

Research and Development

- Review the structure of government research and development in light of government priorities for the energy sector; enhance co-ordination of existing energy research and development in supporting the government's National Energy Efficiency and Conservation Strategy and climate change policy programme.

- Continue to assess the government's overall research and development priorities in light of policy goals with a view to reallocating available funds to increase for energy research and development.

- Further develop effective mechanisms for monitoring and assessing the performance of government-funded energy research and development to improve energy efficiency and to meet the Kyoto target.

- Further improve the conditions for commercial application of the results of energy research and development activities; consider, at the outset, alliances of industry/government/universities to develop the knowledge base and technologies of strategic importance.

INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme.

It carries out a comprehensive programme of energy co-operation among twenty-five* of the OECD's thirty Member countries. The basic aims of the IEA are:

- To maintain and improve systems for coping with oil supply disruptions;

- To promote rational energy policies in a global context through co-operative relations with non-member countries, industry and international organisations;

- To operate a permanent information system on the international oil market;

- To improve the world's energy supply and demand structure by developing alternative energy sources and increasing the efficiency of energy use;

- To assist in the integration of environmental and energy policies.

The initial focus of the IEA was on arranging emergency procedures for dealing with disruptions in international oil supplies. Since the 1970s oil markets have become considerably more sophisticated and flexible, and there has become less need for oil security measures. However, IEA actions almost certainly helped oil-consuming countries in dealing with the Gulf crisis in 1991.

In recent years the IEA has widened its focus from just oil market security to becoming an agency for debating issues, and collecting and disseminating information, in relation to energy market reform and climate change. The IEA links in with the UN Framework Convention on Climate Change (UNFCCC) secretariat in dealing with climate change issues, and New Zealand has valued the IEA work in this area.

ROBERT PRIDDLE: EXECUTIVE DIRECTOR IEA: BIOGRAPHY

Robert Priddle has been the Executive Director of the International Energy Agency in Paris since December 1994. He came to the Agency from the UK Department of Trade and Industry, where he had been Head of Corporate and Consumer Affairs.

Mr Priddle served as Chairman of the Governing Board of the International Energy Agency in 1991-1992. He was also a director of the UK Petroleum Science and Technology Institute in Edinburgh from 1989 to 1992.

As Deputy Secretary of the UK Department of Energy and Director General of Energy Resources from 1989 to 1992, Mr Priddle had policy and management responsibility for the United Kingdom energy sector and international energy relations; oil and gas, coal, electricity, nuclear energy, new energy technology and energy conservation.

In his earlier career, Mr Priddle was responsible for UK government policy in relation to a number of industrial sectors - including telecommunications and aerospace. From 1974 to 1985 he worked in the Department of Energy, where he was responsible for policy in relation to exploitation of the oil and gas resources of the UK continental Shelf, the creation of the State oil company, BNOC, and confronting the year long miners’ strike in 1984-85.


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