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Hodgson: Energy in New Zealand: current and future

Energy in New Zealand: current and future

Pete Hodgson Speech: [Address to Auckland Museum Institute / Royal Society seminar, "Energy in Aotearoa New Zealand: The current situation and future potential", Auckland Museum]

I've been invited to talk about trends in energy demand in New Zealand, expectations for the future, and what the Government is doing to ensure we will have the energy we need.

I'll take it for granted that the chief area of interest is electricity – rather than, say, oil – because the dry year problems of 2001 and 2003 and the recent cancellation of the Project Aqua hydro scheme have focused attention on the electricity system. I'll also be talking about gas, mainly because it is a critical fuel for electricity generation.

I'm pleased to be addressing questions about energy demand, because too often the focus is on supply.

It is widely assumed that energy demand must grow in lockstep with the economy, and that our energy supplies must therefore expand steadily and continually. In fact, if we look at patterns of growth and energy consumption in developed economies, we see that the link can be broken. By making more efficient use of energy, economies can grow at the same time as they reduce overall energy consumption.

[Slide 2: US total consumer energy and GDP]

Here's what's happened in the United States. This might surprise many of you. The USA is an energy-hungry country and its citizens consume more energy per person than New Zealanders. But the United States has successfully broken the link between economic growth and growth in energy consumption. The American economy has grown significantly more than energy demand over the last few decades.

[Slide 3: NZ total consumer energy and GDP]

If we look at New Zealand's record, we can see that growth and energy demand are still quite closely tied together. We have not made much progress, in other words, in improving our overall energy intensity – that is, the amount of production we achieve for every unit of energy we consume.

[Slide 4: OECD primary energy intensities]

This shows how New Zealand's energy intensity compares with some other developed countries. A downward line means a country is improving its energy intensity — increasing the amount it produces with each unit of energy it consumes.

The striking feature here is that New Zealand has been going in the opposite direction to the rest. We have actually been increasing our energy intensity in recent decades. The sharp dip marks the recession of the early nineties and since then the line has actually been fairly flat, with just the beginning of a slight downward trend.

[Slide 5: OECD electricity intensities]

Here's what it looks like for electricity alone, over the last couple of decades. There's a slight improvement visible, but not over the long term: we are still using more electricity per unit of production than we were in the 70s and most of the 80s. The economies that have decoupled economic growth and energy demand growth are not starving themselves of energy and stunting their growth as a result. In fact they show that more continual improvement in energy efficiency is an economic strength. It is an investment that pays off in higher productivity.

New Zealand is only just beginning to pay serious attention to energy efficiency.

When this Government updated the Building Code in 2000 to raise the energy efficiency standards, it was the first time this had been done since 1977.

When we introduced the National Energy Efficiency and Conservation Strategy in September 2001, it was the first such strategy in New Zealand's history.

The minimum energy performance standards for electrical goods and machinery that we began to introduce in 2002 are also the first we've had.

So when we look at the very slight downward trend in our economy's energy intensity over the last decade, we have to remember it is a delicate thing. We could easily turn it around if we are panicked by the challenges ahead of us and become fixated on supply-side solutions. We must avoid that — because we simply can't sustain growth that is accompanied by relentless demand for new sources of energy.

We have plenty of energy resources – I'll talk more about that later – but relentless demand puts relentless upward pressure on prices. The only way we can ease that pressure is to have an efficient level of investment in technologies and practices that moderate demand.

Every time we succeed in doing more with less, we delay by another fraction the need for expensive new energy infrastructure. As well as easing the pressure on prices, that increases our energy security.

In the electricity sector, New Zealand has a history of abundance. Hydro has given us some of the cheapest electricity in the developed world. As a result we have wooed and developed industries that use copious amounts of electricity.

Similarly for 30 years the Maui gas field has given us plenty of cheap gas, which we have consumed in large volumes for petrochemical and electricity production.

When energy is cheap and abundant, there is little incentive to use it efficiently.

Can we hang on to a place in the developed world as an economy fuelled by continually increasing consumption of cheap energy? Our competitors for this kind of development are developing nations, who are prepared to discount their resources to attract offshore capital.

Or must we deal with a future in which energy is more highly valued and we have to make more of our other competitive advantages – like innovation, skills, creativity, global connections?

I think energy prices answer these questions for us.

The cheap energy has gone. The best hydro sites are developed. Maui gas is running out. We are beginning a transition to a future in which our energy options are more expensive.

But we can prosper through this change if we let it drive an improvement in the way we use energy. Other developed nations, as we have seen, have already been down this road – and they are richer for it, not poorer. I want you to keep this in mind when I move on to talk about supply-side issues.

I often see energy efficiency and other demand-side measures dismissed by commentators as "all well and good, but no substitute for megawatts" … nice, but not important … a footnote to the real business of oxidising carbon and liberating electrons.

In fact our efficiency at turning petajoules into products is a fundamental measure of the strength of our economy and the sustainability of its growth.

We will, of course, need new energy supplies for the future, even as we improve the way we use them. So let me talk a little about future supplies of electricity and gas, in particular.

First I need to remind you how decisions are made about new sources of electricity supply.

We have not had a centrally planned electricity system since the wholesale electricity market was created in the 1990s. In this system, the government does not get to draw up a plan laying out what new generation should be built, where and when.

Decisions about investment in new plant are made by the electricity companies themselves, based on their assessments of what is economically viable. A crucial factor in these decisions is the wholesale price of power. As demand increases and existing generation capacity comes under increasing pressure, the wholesale price rises. Generators invest in new capacity when they are sure they can sell the power it will produce at a price that will recoup the investment.

That is perhaps the simplest possible explanation of a complex market, and there is, of course, endless debate about its strengths and weaknesses.

For the moment I just want to remind you of the government's position in this market, because I have been asked to talk about planning for future electricity needs.

Essentially the government is now one of a number of important players in shaping the future of the electricity system, rather than – as in the past – the only important player.

This was a deliberate change wrought by those who designed the market system. The changes they made were mostly irreversible, and mostly a mess. But, remembering past failures of central planning – such as the power shortages in the 50s and 70s, huge crisis-driven price hikes in the 1970s, and the crisis of 1992 – the designers of the new system sought to spread responsibility more widely.

The government is responsible for providing policies that facilitate both supply security and sustainability. Through the Electricity Commission, it is also responsible for maintaining a functional governance and regulatory environment for the industry to operate in. And the industry is responsible for responding effectively and strategically to both market and policy signals.

One of the key things for the government must do, therefore, to help ensure New Zealand has adequate electricity supplies for the future is to make sure the market is working as well as it possibly can. That means it must be delivering the industry the information it needs to make good decisions about investment in new capacity.

This government has not been happy that the market is working properly, and much of our effort in the past four years – from the Electricity Inquiry in 2000 to the establishment of the Electricity Commission last year – has been focused on fixing various deficiencies.

We have also been making sure that climate change policy – which is intimately connected with energy policy – also works towards our energy goals. More on that later.

We are continually working on the Resource Management Act, to make sure it does not put unnecessary obstacles in the way of energy developments.

And, of course, we keep close tabs on what electricity companies are planning by way of new generation.

From time to time I release an updated list of projects that we know are coming on in the next four years.

[Slide 6: new generation proposals]

Here's the latest one.

There are a number of smaller generation projects in addition to those you see here, including geothermal, improvements to the efficiency of existing hydro, and cogeneration.

The total coming on from this year until 2007 is about 840 megawatts. The average over the next four years, in other words, is over 200 megawatts a year — when as a rough rule of thumb New Zealand needs to average about 150 megawatts of new generation a year to keep up with growth in demand.

Looking at progress over a longer timeframe, the average growth rate between 1990 and 2007 will be about 160 megawatts a year.

This is a conservative list of what is coming onstream: many more proposals than those listed are under assessment within the energy sector.

For next year, for example, we are aware of projects totalling more than 600 megawatts which their owners currently rate as having a low to medium chance of coming onstream.

Some of these will sneak up on us quickly — announced one year and built the next, like Meridian's Te Apiti windfarm.

We will also have to factor in anything the Electricity Commission chooses to build by way of reserve generation, or provide for by way of demand management.

This is not to say I am completely relaxed about how much new generation is coming on. On the contrary, I have this information because I am watching very, very closely. This is an activist Government and I am an activist minister.

Based on what we know about our energy resources and the costs of new generation, we can look ahead and make some judgements about the likely course of electricity development. [Slide 7: electricity generation options]

Here’s an assessment from the Ministry of Economic Development of what resources we have available, at what prices, over the next 20 years.

Hydro will continue to be an important source of generation. But its massive dominance of our electricity system will gradually be eroded. The advantage will be a gradually decreasing vulnerability to the risk of shortages in dry years. The disadvantage will be that other new generation sources will not be as cheap. Wind power is becoming more attractive as capital costs fall and electricity prices rise. It is about to grow rapidly into a significant minority or our generation capacity. It will quadruple over the next year or so, and by international standards our wind resource is very good.

Clearly, however, wind cannot be the only answer to our growing electricity needs. It has a relatively low load factor. There are technical limits on how much wind generation can be handled by the national grid. And the best wind sites will become more expensive with time, after the easiest locations have been taken.

Geothermal power is another significant minority player. While it is a generally stable source of power, it too is unlikely to become a major source of energy for our future growth.

So the future of electricity generation from renewables is not continued dominance by hydro, or a shift from hydro to geothermal, or a shift from hydro to wind, but continuing growth in all of these. It remains true that most new generation in the foreseeable future will be from renewable sources, because they are cheaper.

Gas has been the main fuel for new thermal generation in the last couple of decades, given the abundant and flexible supply from Maui. Facing the future without Maui gas is probably the biggest energy challenge we face right now. [Slide 8: gas supply and demand]

Here's what our gas situation looks like.

Maui is not dead yet. Existing small fields are still producing. Pohokura, Kupe and presumably Karewa are on their way into production. Total known reserves might therefore get us through to about 2015, if consumption averaged about 140 petajoules a year. But there are no known supplies beyond that, and this is a country that has allowed itself to believe that there was always loads of proven, available gas.

Exploration has increased significantly with the impending demise of Maui. The number of wells drilled per year has doubled since the early 1990s and Crown Minerals is active in marketing exploration blocks. We have an attractive fiscal regime and our international ranking for prospectivity is now high.

The question now before the Government is whether this is enough, and we think not. We have been actively investigating whether we can provide an even more positive environment for gas exploration, and expect to make decisions soon. There is no doubt that New Zealand has plenty of gas — we just have to drill enough holes to find it, in economic quantities and locations, and attract the capital necessary to develop the fields.

Similarly there is no doubt that we have plenty of coal.

What is not clear yet is what the future balance between these two fuels will be within our electricity system. To a large extent that will be determined by what gas is found, where and at what price. It will not be determined, contrary to some suggestions, by whether or not New Zealand has a carbon tax.

The carbon charge this Government's climate change policy envisages would add perhaps a cent to the unit cost of new gas generation and a cent-and-a-half per unit to the cost of new coal generation. It will not radically alter the price differential between gas and coal. And it is a small variable compared to the level of uncertainty about wholesale gas prices, which are in the process of doubling and could rise still further.

A carbon charge is not so much about pricing fossil fuels out of the market as about pricing alternative, low-emission and efficient energy technologies into it.

We might well see new coal-fired electricity generation built in New Zealand in the next decade, especially if it is co-generation. A carbon charge will not prevent that happening. It will simply ensure that the price we pay for that electricity will be a little more reflective of the environmental cost of choosing that source of energy.

Another climate change policy that is pricing new, cleaner energy technologies into the market is called Projects to Reduce Emissions.

This offers carbon credits by tender to anyone with a project that will reduce greenhouse gas emissions – and the bulk of the successful bidders are projects that will also help make New Zealand’s electricity supply more secure in the next few years. They include wind farms, geothermal and hydro-electricity schemes.

We've had one tender round for Projects. If all of the successful bidders proceed with their developments, the result for the electricity system is equivalent to more than a third of the cancelled Project Aqua hydro scheme.

Climate change policy, the National Energy Efficiency and Conservation Strategy, electricity market policy, gas exploration – all these things, and more, have to pull together, towards a secure and sustainable energy future. I'm confident that they do, and I've tried to show how.

There are of course many issues I haven't been able to go into. Fortunately we have Heather Staley here to tell you about her organisation's work on energy efficiency and conservation, and Roy Hemmingway to talk about the work of the Electricity Commission.

I haven't touched at all on the amazing research on energy technologies that is going on in New Zealand, so I'm glad that someone from Industrial Research will be along next week to talk about their work on fuel cells. I'm a technological optimist, so I do think that new technologies will be critical in meeting our future energy needs.

For now, however, I am out of time. I hope I have been able to give you a feel for our energy situation, the challenges that face us, the government's approach to them and the way that various energy-related policies fit together.

Thank you for your attention.

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