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Wind Energy - Pete Hodgson Speech

Speech notes
NZ Wind Energy Association Annual General Meeting
Hon Pete Hodgson
Wellington, 28 February 2002

Thank you for inviting me to speak again at this gathering.

When I spoke to you in October of last year, I had just released the final version of the National Energy Efficiency and Conservation strategy. Since then we have made steady progress on energy efficiency and we are well on the way to refining the target and mechanisms for renewable energy development.

You will recall that the strategy’s initial target for renewables is an increase of between 19 and 42 percent by 2012. We expect to begin public consultation on a refined target and mechanisms in April and May of this year. A Cabinet decision in principle on the target is due in July.

The consultation on renewables will take place at the same time as consultation on the Government’s preferred policy outline for climate change.

Greater use of renewables will contribute to our climate change commitments by reducing carbon dioxide emissions. Both the National Energy Efficiency and Conservation Strategy and our greenhouse policies are likely to result in a greater use of renewables. So renewables policy and climate change policy go hand-in-hand. We intend to make sure they are integrated and consistent.

On a world scale, New Zealand is a renewable energy success story, largely due to our hydro-based electricity industry. But there is no cause for complacency.

Some 29 percent of total consumer energy in New Zealand currently comes from renewable sources. That is high by world standards, but it has not changed significantly in the past seven years. And even with expected business-as-usual growth in renewables – primarily woody biomass in the forestry industry and some renewable electricity – the share of total consumer energy from renewable sources is forecast to decline in coming years.

The Government’s long-term goal is to secure a progressive transition to renewable sources of energy. The goal we have set ourselves in the National Energy Efficiency and Conservation Strategy is a realistic step towards that. If we achieve the lower end of the target range – an additional 25 petajoules of renewable energy by 2012 – we will have increased renewable energy by 19 percent and raised the renewable energy share to at least 30 percent by 2012.

The first priority, in short, is to halt the expected decline in the proportion of energy from renewables. If we are able to secure some growth on top of that in the next ten years, so much the better.

Some commentators look at other countries’ renewable energy programmes and complain about a comparative lack of incentives for renewable energy in New Zealand.

Australia has its 2 percent programme, designed to increase its renewable electricity share from 10 percent to 12 percent by 2010 by bringing on 9,500 gigawatt-hours through its “green certificate” scheme. The UK has committed to increasing renewable electricity from 2.8 percent to 10 percent by 2010, and has more recently proposed to increase this further to 20 percent by 2020. Across the EU the aim is to increase “green” electricity from 14 percent to 22 percent by 2010.

But it is misleading to cite programmes like these as evidence that New Zealand should be doing more.

Already more than 70 percent of this country’s electricity generation comes from renewable energy. New Zealand’s natural resources have allowed us to produce plenty of cheap hydro and natural gas generated electricity. This is an economic advantage, but the continuing low price of electricity in this country means that there is a relatively high cost associated with further investment in renewable electricity.

The Australian target, for instance, if translated on a population basis to New Zealand is the equivalent of a little over 2000 gigawatt-hours, or about 7.5 petajoules – less than a third of the minimum target we have set. For New Zealand, even a small percentage increase in renewable energy supply means a substantial increase in volume.

Although some new renewable energy generation in the electricity sector is expected, it is possible that the renewable share of electricity generation may in fact decline over the period to 2012, as the bulk of new generation is likely to be gas-fired thermal, as cogeneration and combined cycle generation displace the traditional, less efficient, thermal.

As long as we maintain progress on renewables overall, however, I am not overly concerned about fluctuations in renewables’ share of any particular energy market. The developed world is beginning a long transition from fossil fuel dependency to a sustainable low-carbon energy economy – a transition the Kyoto Protocol will accelerate. Like all change, this will have its challenges. To minimise the costs and maximise the benefits for New Zealand we need some flexibility in the way we manage our energy needs.

Maintaining an overall trend towards renewable energy will bring benefits in business growth, possibly greater reliability of supply, reduced dependence on imported oil, and reduced local air pollution – with the associated health benefits and savings in health costs. It will move us towards the important long-term goal of the sustainable economy.

But in the next decade or so, with the Kyoto Protocol likely to come into force, the greatest benefit for New Zealand from growth in renewable energy will arguably be from reduced emissions of carbon dioxide. This is an area in which the Protocol, if New Zealand ratifies it as the government intends, will create new business opportunities.

There are tremendous opportunities in New Zealand, starting now, for people who can develop renewable sources of energy that can compete on price to reduce carbon dioxide emissions – the price concerned being the cost per tonne of carbon dioxide reduced.

In climate change terms renewables face competition from providers of energy efficiency technologies and services. Improving energy efficiency is often very cost effective in reducing carbon dioxide emissions and there are many gains to be made at very low or even nil net cost.

By comparison the carbon dioxide reduction from a petajoule of renewable energy can vary widely, depending on the source and the production process involved. For example the utilisation of some geothermal fields gives a relatively low net carbon dioxide reduction. The source materials and processes used to produce liquid biofuels for transport can also result in low net carbon dioxide savings.

As new renewable technologies become more accessible and affordable, however, the market opportunities are opening up. And the Kyoto Protocol means the carbon dioxide reduction market is an international one, which creates export opportunities for New Zealand.

International demand is already developing for carbon reductions. I am aware of several instances where New Zealand firms are or have been in discussions with potential overseas buyers of the carbon reductions associated with renewable energy projects in New Zealand.

These are preliminary approaches, but they give an indication of the role that various forms of project trading could play in accelerating the uptake of renewables in this country. This interest will increase so long as the cost of carbon reductions in New Zealand is less than the expected world price of carbon emissions.

To enable the growth of the renewable energy sector there are many changes ahead and still much to learn.

The resource consent process for new renewable energy projects is one key issue. These projects can have adverse local environmental effects and a community will sometimes prefer a site’s amenity value to its energy potential.

We were mindful of this while developing the National Energy Efficiency and Conservation Strategy. That is why one of the strategy’s objectives is to “ensure sustainable energy issues (eg solar access, wind farms, use of waste wood) are effectively addressed in RMA processes and documents.”

Officials, in collaboration with Local Government New Zealand and potentially Business New Zealand, are currently scoping the issues and will develop a work programme by the end of June. The work is due to be carried out in the next financial year.

Key issues in the electricity sector include transmission pricing and the development of net metering.

On transmission pricing, some of you are probably aware that Transpower are currently working through a process of establishing a fresh pricing methodology. They have been given a clear steer by the Government Policy Statement on electricity, which sets out guiding principles and specific pricing principles.

Transpower’s first round of consultation is over, submissions are in and pricing principles are being determined as I speak. A methodology in line with those principles is expected by the end of October.

You will be well aware of the potential value for the grid operator of new generation located close to load centres. The benefits include the avoided costs of additional capacity and the provision of improved levels of security of supply at lower cost.

Transmission pricing should allow investors to see these cost reductions clearly and share in the benefits. I know you will be looking for progress on that issue, and so will I.

A quick point on net metering. I know that some of you are keenly interested in seeing a model agreement developed for this.

The issue is currently bundled with other work being done by the Electricity Governance Establishment Project’s transport working group on model arrangements for distribution services. This is appropriate, I think, because the protocols being developed between market participants will define how a net metering agreement will apply. It is important that a net metering agreement is developed in coordination with the other model agreements.

I have been talking mostly about renewable energy in general, but it is time to make some specific observations on the future of wind energy.

I have said that the greatest benefit for this country from growth in renewable energy in the next several years will arguably be from reduced emissions of carbon dioxide. In determining its priorities for facilitating the growth of the renewables sector, the Government must therefore be concerned with the appropriate level and timing of investment in different types of renewables to achieve the transition to a low carbon economy.

I have already said that in the near term I would be surprised if the use of wind energy in New Zealand increased dramatically.

The latest increase to New Zealand’s electricity generation capacity is renewable, but it is hydro: the upgrade of the Manapouri tailrace adds about 2 percent to total generation. This is the result of some smart thinking and re-engineering, partly because of the cap that was placed on new generation by ECNZ.

This illustrates what I think is a very important point, namely that many opportunities for new renewables are unidentified until managers are forced to think outside their normal framework.

But the price of wind power still sits above a number of other electricity supply options, including some renewables. There may be a case for developing specific incentives in favour of some renewable energy technologies – perhaps to kick-start the market. Even so, the Government must be careful to ensure that policies for bringing on additional renewables in the short term are weighted towards cost-effective technologies.

The gap between the cost of wind generated electricity and the current cheapest non-renewable electricity source, which is gas combined cycle, is in the order of two to three cents a kilowatt-hour, or 40 to 60 percent. Later this decade it is expected to narrow to one or two cents a kilowatt hour, or 17 to 34 percent.

In those circumstances we must ask whether there are more and better alternative renewable energy opportunities available, at less cost. The cold reality for wind energy, with current technology, is that it will often be more cost effective to use alternative renewables such as biomass, geothermal or hydro.

When a key objective is to reduce greenhouse gas emissions, there is also a good case for giving priority to policy measures that will facilitate opportunities for energy efficiency gains and fuel switching to lower carbon fuels.

That said, I believe that there may be better opportunities for wind energy in the medium to long term. I am thinking of the Kyoto flexibility mechanisms and the widely expected transition to a hydrogen-based energy economy. I mentioned the Kyoto flexibility mechanisms in passing earlier. What I didn’t say is that two of the strongest nibbles we have received to date, from two different nations, involve windpower. As 2008 nears, these approaches will intensify as companies or countries discover that their marginal abatement costs exceed the international price of carbon.

As for hydrogen, if we are to have a sustainable energy future, the move to a hydrogen economy must involve the production of the hydrogen from renewable sources of energy.

In this respect, windpower may compete well. The intermittent nature of wind as a source of electricity would be less of a problem than it is for electricity generation. Transmission pricing would no longer be a barrier, because you would not be supplying the grid and the hydrogen would be stored as it was produced.

This is a government committed to making progress towards a sustainable economy, which must include renewable energy. It is also a government committed to economic growth through innovation.

The renewable energy industry is innovation-rich. It is well-placed to take advantage of the business environment the government is working to create.

I regret that this speech precedes by several weeks the release of the Government’s preferred policy outline for the Kyoto Protocol. When it does come out, I hope you will see that we have achieved two things that matter to you.

First, that the National Energy Efficiency and Conservation Strategy and the Kyoto Protocol policy outline are well integrated indeed.

Second, that the opportunities will exist, for your technology and for others, that are not immediately apparent today.


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