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Parker: The outlook for energy supply

Hon David Parker
Minister of Energy

12 September 2006

The outlook for energy supply

Address to the Employers and Manufacturers' Association (Northern) CEO network breakfast 7.30am, Crowne Plaza Hotel, Auckland.

Thank you for inviting me to your CEO’s Breakfast this morning.

I always enjoy opportunities to meet business people in regional groupings, as it provides a useful way of focusing on the issues from a local angle.

And Auckland has certainly been in the news from an electricity perspective over the last three months, starting with the blackout on 12th June.

No one wants to see the lights go out in our main city, least of all this government.

Our Economic Transformation agenda includes a particular focus on Auckland infrastructure issues, including roading, public transport, and ensuring an adequate and secure electricity supply.
The events on 12th June have been a lesson for everyone, and I won't dwell on them.

What went wrong has been well documented, including by the consultants I called in to review the events, and by Transpower in its subsequent acceptance of the consultants’ recommendations.

The four remedial steps are:
 To electrically bond all the earthwire connections at Otahuhu and at similar substations elsewhere
 To underground the existing 220 kV circuits that cross over the 110 kV portion of the substation
 Remove all conductors and earthwires which cross over busbars at Otahuhu
 Introduce a higher level of risk analysis and maintenance management system (including physical audits) for sites or assets where the consequences of an outage are more significant.

I was also pleased to learn of the recent accord between Transpower and Vector in the form of a Memorandum of Understanding, which outlines a process for Transpower to gain access to some of Vector’s electricity network assets, notably its tunnel under central Auckland.

This is a step forward in industry cooperation, and will address some of the security of supply issues within and across Auckland, and to the north of Auckland.

One outcome of the June the 12th blackout is that improvements to the Otahuhu substation are being brought forward.

Transpower had originally planned to upgrade the substation by 2011 as part of the proposed new transmission line in to Auckland from the south.

It has now separated out this development and submitted it to the Electricity Commission for approval at a cost of around 77 million dollars, with a completion target two years after receiving approval.

The proposal includes undergrounding the 220 kV circuits that cross over the existing switchyards, and the establishment of a new physically separate, enclosed, high reliability 220 kV switchyard at Otahuhu.

The main incoming and outgoing 220 kV circuits will be shared between the old and new switchyards, which will also give the benefits of additional load-sharing flexibility.

As far as the new transmission line into Auckland goes, this is currently being discussed in some detail by Transpower and the Electricity Commission.

The intention is that by the time Transpower formally submits its revised proposal, it can be reasonably confident that its approach to analyzing the costs and benefits will meet the Commission’s requirements for that analysis.

Turning to your local lines company, you will all, no doubt, be aware of the Commerce Commission’s notice of its intention to take control of Vector’s prices.

That's based on the Commission’s view that Vector has not moved quickly enough to rebalance tariffs across its regions and customer classes.

I will not comment on the specifics of that announcement.

It is entirely a matter to be resolved by the Commission as an independent regulator, and the company.

I would point out, however, that there is not any inconsistency between the Commission’s actions and our regulatory framework for the energy industry.

Under the Commerce Act, the Commission is required to have regard to the new section 26 statement of government policy issued recently, but that does not constrain the Commission’s ability to carry out its statutory duties.

The section 26 statement is a general statement of the government‘s policy regarding the importance that the government places on investment by regulated businesses, particularly where security of supply is concerned.

We all agree that prospects for investment will be enhanced by regulatory stability, transparency and certainty, and by rates of return that are commercially realistic.

The Commission must, however, also ensure that consumers are protected from excessive pricing.

Issues related to pricing matters are complex, and simple one-line answers cannot always do justice to those complexities.

The government is concerned to ensure that consumers’ interests are protected while necessary investment in infrastructure goes ahead.

Getting the balance right is essential.

The government does consider it desirable that the Commission and Vector work at an early resolution, if appropriate through an administrative settlement.

Turning now to the current electricity market. It's obvious that improvements are going to be needed, to ensure ongoing confidence in security of supply and in prices that are as competitive as possible.

Possible changes will be integrated with the development of the New Zealand Energy Strategy, which is already underway.

Changes introduced over recent years, including the government’s reserve energy policy, have improved the outcomes delivered by the electricity sector.

There is, however, scope for further improvement.

This could include further refinement to the regulatory arrangements relating to electricity transmission and distribution.

At the same time, and also as part of the development of the New Zealand Energy Strategy, the government will be working with stakeholders to put in place policies to reduce the impact of the electricity sector on climate change.

I was pleased to learn that steps are being taken at an Auckland regional level to address the lack of a framework for the sustainable development of the region and its communities.

The START framework (“Sustaining The Auckland Region Together”), being developed by the Auckland Regional Council and all seven territorial authorities with partnership support from the government, is an excellent initiative.

All partners in the project have recognized the importance of developing a framework that will provide a shared long-term view of what is required to make the region sustainable.

I was also pleased to learn about the Auckland Energy Prospectus, being led by the Auckland Regional Council, which will define the energy needs of the regional population and business community over the next 30 years.

It will certainly help influence the decisions that will be made by central government.

As I mentioned, the New Zealand Energy Strategy is under development.

This might be a good time to look at where some of the thinking is heading on the issues the strategy is grappling with.

One of the main issues is how to address climate change. This is a serious problem facing all countries. Given the imperative for the world to reduce greenhouse gas emissions, and the likelihood that emissions will carry an economic cost to the country in future, it is vital that New Zealand alter its growing emissions path.

Modeling suggests that New Zealand’s energy-related greenhouse gas emissions would increase by 30 percent in the next 25 years under a ‘business-as-usual’ scenario.

It is neither in our environmental nor our economic interests to allow our emissions to grow unchecked in this way.

But even if there were no such thing as climate change, we would want to be more careful about our energy use.

The era of historically cheap power in New Zealand is over. Historically low prices have meant relatively low levels of investment in energy efficiency at residential, commercial and light industrial levels.

The draft strategy will consider how we can more effectively manage the energy we use. The strategy will therefore consider changing behavior around capital and technology investment decisions, and consumer lifestyle choices. It will look at making available technologies particularly suited to New Zealand’s conditions; and it will ensure energy efficiency is duly considered in the upgrade, design, location and management of activities, processes, buildings and infrastructure.

We are also working on a replacement National Energy Efficiency and Conservation Strategy, which is a subset of the draft energy strategy. Its specific focus is promoting more efficient use of energy and renewable sources of energy.

It's important to note the co-benefits of many of the initiatives that have been announced or are being developed – for example, – insulated, warmer homes means healthier families with lower power bills. More efficient, well-tuned cars mean cleaner air, a healthier environment, and lower fuel costs.

Reliable access to the energy resources needed to support a vibrant economy remains at the core of the strategy. The draft strategy will aim to address uncertainties around investment in energy infrastructure.

Clarity on areas such as climate change policy and regulation will help facilitate timely and cost effective investments through time.

Similarly it will be important that the strategy is clear about the role of renewables and thermal fuels in the transition to New Zealand’s sustainable energy future. At some stage in the future I expect that greenhouse gas emissions from electricity producers will bear a cost and be devolved to emitters. This will provide an incentive to change to production and consumption activities and capital investments with a lower emissions profile.

However, until that time I believe that the New Zealand Energy Strategy will need to look at the extent and by what means we can meet the demand for energy services in ways that avoid increasing greenhouse gas emissions.

In the absence of a carbon price I think it will be necessary to show a preference for new generation to be renewable, at least until such time clean technologies as carbon capture and sequestration is proven to be both practical and economic.

To this end the Strategy will consider various incentive options to support the development of additional cost-competitive renewable energy sources. The Strategy will also address deployment hurdles for low- and zero-carbon energy alternatives by providing more planning certainty, boosting R&D and deployment investments, and addressing issues in relation to the transmission grid.

Transport is another important part of the strategy. We are not going to see the end of oil in the near future, but if we can reduce New Zealand’s dependence on oil we'll reduce the economic and social impacts of greater price volatility, oil market disruptions and international costs of carbon. In addition, if we can make our vehicles more efficient, and encourage more public transport use, we'll reduce roading and vehicle owner costs and contribute to sustainable development more generally.

We all know it's important to get the infrastructure right, especially for our largest city. That's especially true as Auckland looks forward to hosting the Rugby World Cup in 2011. That's why the government has poured money into Auckland's transport systems, and that's why I am personally doing all I can, to provide a sustainable energy future.

ENDS

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