4 October 2001

Speech by Jeanette Fitzsimons to Wind Energy Association

Since your last AGM some very important events have shaped the climate in which renewable energy will develop. The Kyoto Protocol talks at The Hague collapsed, and President Bush gave the Treaty an apparently terminal kick while it was down. Then the world decided at Bonn that it could proceed even without the world's largest polluter and the New Zealand Government has repeated its determination to sign next year.

The Tax Review has reported in extremely lukewarm terms on proposals for a carbon tax, despite being presented with solid and convincing argument. We will have to wait for the election policies of the various parties to see whether that idea will be progressed.

New electricity legislation has been passed mandating an industry self-regulation model backed up with Government powers to regulate. The Act holds the industry accountable to a Government Policy Statement which clearly specifies goals like efficient use of resources, minimising hydro spill and greenhouse gases, and facilitating distributed generation and the use of renewables.

However the Industry Establishment Board has translated these into a set of guiding principles which are mainly commercial in nature and water down the requirements of the GPS to words like 'take into account the desirability' of renewables.

All the news coming out of that body tells us that sustainability measures have been put on the back burner to deal with when the market structure and commercial relationships are in place - if in fact they are ever dealt with at all.

The chickens will come home to roost when the Auditor General and the Parliamentary Commissioner for the Environment report to Parliament on each annual report of the Electricity Industry Governance Board - auditing them against the Government Policy Statement. Two successive audits by both officers of Parliament which show they have failed to meet the requirements of the GPS trigger a ministerial statement of intention to regulate.

These provisions, which the Greens worked hard to get into the Act, is all we have to keep the industry accountable on sustainability issues.

Over the last few months, and continuing as we speak, the electricity industry has managed a dry year with maximum damage to the economy and some individual businesses, schools and hospitals, but windfall profits to others, notably the overseas owned Contact whose gas stations have done very nicely. Government handled the crisis initially by saying the market would fix it but it soon transpired the only tool available was the spot price.

Eventually there was an attempt at planning for a better outcome - a very unfashionable process these days. By then energy conservation was the only thing that could bring the lakes up and the prices down and it did - until it was abandoned too soon, leaving us with continued risk into next year.

The message this muddle and bad management risks sending New Zealand is first, that renewable energy is risky so we need more fossil energy, and second that energy conservation is something you turn on and off, it means going without, and should only be considered in times of national emergency.

These messages could well be the most damaging things to come out of the winter.

What should we learn from those events?

First that we do need to diversify and that other renewables have a big part to play and we should get on with it. Wind, sun and biomass are quite unconnected with hydro flows in a particular season and offer good additional security.

Second, that there are two ways of dealing with a dry winter. We could build a lot more power stations and run them only occasionally when the lakes are low. All power prices would rise to cover the stand-by costs.

Or, we could develop an energy conservation plan with several levels which kick in progressively as the lakes fall. The first level would be just a reminder to turn off things that were not being used. The second could include reducing street lighting where it is safe, reducing night lighting of buildings, changing air conditioning temperatures by a degree or so.

It would be a very rare winter indeed that would demand any level of real inconvenience provided the plan was called into action early enough and we would all reap the benefits of not wasting capital and capacity. The key would be a plan where everyone knew what to do first, and second, and third in their own circumstances.

Energy conservation, the behavioural things, is notably lacking from the Strategy compared with Energy Efficiency, the technical fixes, which dominate. They play different and complementary roles in a sustainable energy future.

During this same very busy year we have seen plans for new thermal power stations that would increase our thermal generation capacity by 50 per cent, and two of them have already been approved. Fossil fuels are no longer used mainly for peak power demand, but are increasingly base loaded. The operation of the wholesale market ensures that the gas stations run when they want to run, even if it means renewables don't, and there is plenty of anecdotal evidence of unnecessary hydro spill as a result. It's not clear how you will get your new wind stations scheduled if gas bids in at minus zero as they have done.

The new stations at Otahuhu and Huntly will further squeeze renewables out of the market because once these giants are built, ways will be found to run them. This big increase in thermal capacity has been regarded by Government as being as much out of its control as climate change or dry winters. It was very disappointing that a government much more committed to renewables and to addressing climate change than the last, did not see fit to follow Simon Upton's example and call in those stations under the RMA to address their national and international effects.

It is also naive to say, as the Strategy does, that energy efficiency and renewables will reduce the need for these stations and their emissions. The experience of decades of big power projects in NZ is that if they are there and their owners have market power, they will run.

The other big event was the Strategy. There is now official Government commitment to increasing renewables both in absolute terms and as a proportion of New Zealand's energy mix. And I'll return to that. It is of course much too soon to judge its effects but we can certainly comment on the targets and measures it sets.

During the last year and its climate changing events there has been no increase of any note in New Zealand's capacity to produce renewable energy. In fact, there has been no such increase over the last decade although annual production figures fluctuate a lot, and the proportion of our primary energy coming from renewables has been decreasing for years, standing now at only 29 per cent.

But we now have a statutory government commitment, so it is time to consider what renewables need in terms of policy, in order to flourish. I want to look at the three most immediately ready and cost-effective technologies in order to ground this in some sort of reality. These seem to me to be direct solar heat for low temperature purposes, particularly in water heating; woody biomass for high temperature heat and co-generation; and wind for electricity. Each of these of course includes a range of technologies.

As you and I have been saying for years, the first and most important measure to level the playing field is a price on carbon. This is being dealt with under climate change policy and after many years of inaction it is still looking to be little and late.

The next is adequate knowledge of the resource and its location. We have this for solar radiation and for wind speed, and frequencies down to quite a local level though of course site-specific work will always have to be done. We do, I think, need more work on biomass wastes - how much there is where, because location affects costs crucially. The proposal in the Strategy to assist with regional resource inventories could be helpful there in bringing together what the timber industries already know within their own operations but I hope it won't spend time on reinventing wheels where the work has already been done.

Research back up so the technologies can continue to evolve is also crucial and has been sadly lacking in New Zealand ever since the demise of the Energy Research and Development Committee. It is good to see an intention in the Strategy to reorient public good science funding away from fossil and towards sustainable energy. We still don't know what that means in terms of money or projects.

Market access is a key need and that covers a lot. With Transpower's charges almost wholly fixed at each node there is virtually no financial benefit to be gained by the wind industry from its embedded nature in local networks.

Bidding into the market in advance is particularly difficult for wind which needs to be able to take advantage of sudden increases in the resource and bidding in every two hours is particularly onerous for small generating companies.

The rules of the Electricity Wholesale market have the power to make or break wind energy but there is no one in there with the mandate to argue for the industry. We can expect Trustpower to be batting for wind-friendly rules but they are a small player compared with the others.

For solar water heating a key issue is scale of production. At present the Strategy estimates around 1,000 units a year are being installed - way short of even the 19,000 or so new homes built in the last year, let alone all the existing homes and workplaces that could benefit. Strategies are needed to give the industry the confidence to reduce prices by scaling up production. I have some ideas on how to do that.

So what does the Strategy give us to increase the role of renewables?

The ideological commitment to letting the market make all the decisions has been broken and there is a new commitment to set a direction for the nation. This is clear both in the statement of goals and in the setting of targets, even though that is expressed as a wide band at present and we don't know how great the commitment will be in the number that is finally chosen.

But there the change seems to stop. The measures listed to help achieve the target seem rooted in the old way of thinking - more studies, some public information, a bit of unspecified "encouragement". Let me read you the nearest things to action plans I can find in the Strategy as it relates to renewables.

"Investigate support mechanisms for the solar water heating industry" - report in two years' time.

"Investigate opportunities for transport biofuels" - start in three years' time.

"Facilitate use of biomass as a viable source of energy in the forestry sector and elsewhere" - success is to be measured by a significant increase in the use of biomass energy but the only action specified is to begin an investigation by mid - 2003.

There is the announcement of a work programme to investigate aspects of the wholesale electricity market which particularly affect renewables such as wind: EECA intends to look into demand side management, network pricing, net metering, and measuring whole system efficiency, beginning by mid-2003. This is an extremely important statement as it is the first evidence that EECA may succeed in breaking out of its corral and have an influence on wider energy policy decisions. So far it has not had any influence on proposals for more thermal capacity or market rules. The old style supply side continues on course while EECA has been ring fenced to issues of trying to affect demand.

They plan to liaise with the Electricity Governance Board and other industry players. But it is not clear to me why the Board would even engage with EECA as it is not bound to do so. The market rules will be largely in place by mid-2003 and unless there is clear government backing for EECA and the threat of regulation I cannot see the current market players taking much notice of these efforts to persuade it to create a level playing field for renewables and efficiency.

What would I have liked to see instead?

Of course, I would have liked to see a price for carbon well before now and the Greens put in a strong case for that at the Tax Enquiry. A carbon price is better than green pricing of renewables because it is the polluter that pays rather than the aware and public-spirited consumer. We are staggered at the lack of understanding of what is a well-established and supported trend overseas of shifting some tax from incomes and enterprise to waste and pollution.

I would have liked to see a target for energy efficiency expressed in relation to our total energy use rather than related to some notional hypothetical business as usual rate of energy efficiency uptake.

If there were to be a strong price signal for carbon or an absolute cap on total carbon emissions we might not need another instrument such as mandatory tradeable renewables requirements. But if all we get is a trading regime which includes carbon sinks and allows trading of real emissions against unreal sequestration it will not be enough. In that case we also need to mandate a growth path for renewable electricity with penalties for non-compliance that are sufficiently large that they are not seen as the easy way out.

A better penalty for not acquiring the necessary renewables certificates would be a cap on the fossil energy a firm could sell until the renewables requirements had been made good.

I accept that more work needs to be done on the target for renewables and as long as we get a clear target in the next year I think that's acceptable.

But I would like to see much stronger action measures.

Work on the design of the wholesale electricity market should begin now while the rules are being developed and EECA should be directly involved in those discussions.

The Strategy expects the costs of renewables to drop as a result of the "experience curve" which it defines partly as increased scale of production. That will apply to some technologies more than others. I can't see it making much difference to the cost of imported turbines for example. But it is crucial to the solar water heating industry and the Strategy does not propose any of the obvious and well-developed mechanisms to capture these benefits.

I'm going to explore solar water heating a bit because it has the potential to make a real difference in a quantitative way to our total renewables inventory in quite a short time. It could provide the easy runs on the board which EECA so desperately needs if the Strategy is to retain credibility.

Solar water heating pays for itself now on a lifetime costing basis but people don't necessarily stay in their homes that long and don't necessarily recoup the capital value when they leave.

There are at least three ways to deal with this and it is very disappointing that the Strategy does not allude to any of them as all have been well known and much discussed for a couple of decades.

A leasing arrangement or lease to buy where the capital and interest costs are covered by the lease payments and by the power savings over say ten years and then the plant is owned would immediately address that up front cost hurdle. EECA could set up a revolving fund gauged to the scale up of the industry.

Financing arrangements and energy efficiency mortgages where the money for cost-effective measures like this are added to the mortgage and paid from energy savings is another.

I would also like to see Government take a market leadership role and let a tender for the progressive installation of solar water heating on all government buildings where it can be shown to be cost effective. This would provide the market certainty to develop a local industry and bring the price down through competitive economies of scale. The private sector would soon follow.

While the old rhetoric of leaving everything to the market has been abandoned there is still no recognition at all of the role government could play, at cost savings to the taxpayer, in leading the market and creating economies of scale.

The Strategy is a start in changing minds but there is as yet no start on the mechanisms necessary to produce change on the ground. We must hope that it will turn soon from a talk fast into an action plan.

And when we think of targets, lets remember that the real measure of sustainability is not how much renewable energy we produce, but how much fossil energy we don't produce.

ENDS

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