Hon David Parker
Minister of Energy
Minister responsible for Climate Change issues

26 February 2007

Speech notes

Transforming the power sector
Address to the 9th Annual National Power New Zealand Conference
2pm, Sky City Convention Centre, Auckland

I’d like to thank the organisers of this conference for the opportunity to address you.

The title of my talk is transforming the power sector. Why do we need to do this?

In the 1980s and 1990s New Zealand had a surplus of generation capacity. The enormously expensive Clyde dam came on stream. Economic growth was flat. The country had been in the doldrums. The focus was correctly on the efficiency of markets. This was especially true of the electricity sector where a competitive market was introduced. For the best part of a decade now economic growth has been strong, in both metropolitan and energy intensive agriculture – a lot more irrigation, and a lot more milk processing.

Just as we approached the point of needing more generation, Maui gas reserves unexpectedly declined, forcing New Zealand to burn new coal.

Environmental considerations are much more to the forefront, most significantly climate change concerns. This affects the kind of generation we build, where we build it, and how much we build.

This demands a new approach from you and from me.

This government has made sustainability a priority – a concept with enormous relevance to your sector.

Sustainability for the electricity sector means not only ensuring the lights stay on, but that we do not exhaust our energy resources – or- in the case of climate change – we do not exhaust the earth's ability to deal with greenhouse gas emissions.

So today I would like to talk about how our quest for sustainability impacts on the electricity sector, the implications it has for demand and supply, and what it means for policy in this area.

As you are no doubt aware, we released our draft New Zealand Energy Strategy before Christmas. This is a landmark document. It is the first national energy strategy, and if implemented it will see energy related carbon emissions decreasing for the first time since industrialisation began in New Zealand.
How will we achieve this?

Demand versus supply

First I will speak about demand and supply. We tend to focus on supply – but it is important that we recognise the significant contribution that demand-side response can make.

One of the issues that the NZES looks at is the role of demand-side response in a competitive market such as we have in this country.
Without some demand-side response ability, electricity markets could be more prone to supply failure, price volatility and market power abuses when supply is tight.

But right now, we don’t think the demand-side response currently provided by our market is meeting its full potential.
Price signals are considerably muted for residential customers and small to medium sized business customers on fixed-price contracts.

To promote demand-side management we need work to strengthen levels of innovation, and institutional arrangements.

We intend to investigate opportunities for allowing cost-effective demand-side response, and we've asked users to provide feedback on possible initiatives. It is pleasing to see various electricity companies advancing their own initiatives for their customers, including smart meters.
A very important component of demand-side management is the encouragement of energy efficiency measures.

As a country, we can be more efficient in the way we use energy, and there are a range of opportunities to make improvements.

You probably heard recent news stories about the idea of banning incandescent light bulbs. This is a proposal that's come up in Australia, and is certainly something we would consider in the future, after careful consideration of the pros and cons. I would certainly like to see stronger incentives for people to use energy efficient light bulbs. They use a fifth of the power of a normal lightbulb, and therefore could cut our energy use substantially, if used in all New Zealand homes.

I bring this up as an example of an innovation that can make a significant difference to energy demand.

In the NZES we propose that investment in energy efficiency measures should take place where it is cheaper in the long run, than building extra generation capacity – that's including external environmental impacts, such as the cost of greenhouse gas emissions – which are presently unpriced.

All electricity generation has an environmental impact, so it simply makes sense to look at saving energy where we can first, before building more power plants.

Energy efficiency measures can also help contribute to security of electricity supply, by reducing both overall demand, and especially if usage patterns can be modified to reduce peak loads.

As well, such measures also contribute to a broad range of other benefits.
For example, improved building insulation can make people healthier, reduce heating costs and energy-related greenhouse gas emissions, and ease energy supply constraints in winter.

Therefore, for a range of reasons, it makes sense for government to involve itself in removing barriers to greater energy efficiency.

Our options for actions which target energy efficiency, energy conservation and the use of renewable energy are covered in the replacement New Zealand Energy Efficiency and Conservation Strategy.

One of the criticisms of the previous strategy was that it was too broad brush – the revised NZEECS focuses on implementation by sector, identifying the main measures, policy instruments and who is responsible.

For example, we want to see the development of better products; healthier homes; smarter commercial buildings; increased energy productivity in industry; and smarter electricity networks.
We intend that the government will lead the way through partnership and innovation.

Supply

I would now like to talk about sustainability of supply.
In one sense, as I have indicated, this means that supply does not run out.
One consequence of the current market arrangements is that there is no longer a central plan for investment in generation, and investment decisions are made by individual firms in response to commercial drivers.
This sometimes tends to create a perception that the electricity system is insecure.
In dry years, various market participants are affected by a shortage of fuels and higher spot market prices.

Exposure of larger users to significant price fluctuations tends to result in complaints and exaggerated predictions about the impact of price rises.
This, in turn, can affect public confidence in current market arrangements.
Our experience is, however, that investment in new generation is in fact occurring, and in the near to medium term, sufficient generation is planned to ensure adequate overall generation capacity.

I have reviewed the Electricity Market arrangements, and we have decided that no radical reform will be undertaken. This does not mean the system is perfect, however. MED and the Electricity Commission are currently working on a number of projects to improve the functions of the market.

One of the "tweaks" is to make it easier for electricity lines companies to invest in generation, thereby increasing competitive pressures in the market.
This will require legislative amendment, and is a priority for me.
Officials are presently carrying out the necessary drafting work, and I hope to have a Bill in House by mid-year, with the target of enacting the legislative amendments by the end of the year.
The other aspect of ensuring sustainable supply, is that the source of our energy does not unduly impact on the environment.
In the New Zealand Energy Strategy, we have articulated our vision of a reliable and resilient system delivering New Zealand sustainable low-emissions energy.
We are in the fortunate position of being able to produce large amounts of low-emissions electricity from renewable sources such as geothermal, wind and hydro.
Our renewable energy sources are plentiful and cheap by world standards.
Therefore it makes sense to maximize the proportion of energy that comes from our abundant renewable energy resources.
As you will know, the NZES proposes that all new electricity generation should be renewable, except where necessary to ensure security of supply.

There is likely to be enough geothermal, wind and hydro energy to meet our electricity demand for the next 10 to 20 years while still meeting appropriate environmental standards.

If marine generation or solar photovoltaic generation become economically viable within that period, we will be able to utilise predominantly renewable electricity sources for even longer.

The use of the RMA to improve processes
If we are to make the most of our renewable resources, we must ensure enough of the best and most appropriate sites gain consents.

All forms of power generation have some adverse environmental effect.
The draft strategy emphasizes the development of renewable sources of energy because of the need to reduce greenhouse gas emissions.
This doesn't mean ignoring adverse local effects caused by renewable energy projects.

There is a balance to be struck, and there will always be some proposals that are unacceptable.

We have already dammed many of our rivers to provide hydroelectricity – and we don't want, or need, to dam them all; or put wind farms on all our ridgelines.
But we do need substantial overall increases in renewable capacity.

The RMA can strike a balance between local environmental effects and energy objectives, and we will support this process by actively providing consent authorities with the information that government departments and agencies have about the various trade-offs involved.

Over the longer term, the role of national guidance under the RMA for renewable energy could be further considered. We added emphasis to the importance of renewable electricity generation by amending S.7 of the RMA in 2005. We are advancing an NES for transmission.

I have received various opinions about the merits of further guidance in the form of an NPS or NES for electricity generation, and I’m happy to consider this further. Some advice to me to date suggests this may be of limited utility.

We can also take the lead in ensuring that consenting processes are started and finished in time for sensible energy planning and construction.
We are considering a consolidated consenting process for wind and geothermal projects that would enable a pool of projects to be called in and considered by the same decision making panel.
While such a mechanism would not guarantee the outcome for any individual project, it would, on balance, be likely to speed up decision making process and increase the quantity of consented sites and establish de-facto benchmarks for environmental performance.

The role of geothermal energy
In the debate over the increasing use of renewable sources, geothermal energy hasn’t always received the attention that it deserves – and in my view, its bright future deserves more recognition.

Geothermal energy is an environmentally responsible alternative to energy derived from fossil fuels, because it is a low carbon-emitting source relative to fossil fuels.

Carbon dioxide emissions could be significantly reduced if the potential of geothermal energy was to be fully exploited, and thereby assist New Zealand in meeting its commitments under the Kyoto Protocol.
Geothermal energy is renewable, requires no external fuel, and in some instances may cost less than other types of renewable electricity.
It also operates at high load factors.

Our geothermal resource base is large, and is currently the second largest renewable energy source contributing to the national energy supply.
About 6 percent of total electricity generation, and 34 percent of primary renewable energy supply, is derived from this source.

One of the considerable advantages of geothermal energy is that supply is not dependent on wind or rain.

It therefore has a very important role to play in providing diversity of secure energy supply during dry or calm periods in our weather patterns.
Its importance has, received more recognition recently.

In the last year or so, Tuaropaki Power’s Mokai extensions have been opened; Contact Energy has commissioned a new steam supply for kiln drying at the Tennon site on the Tauhara field; the Ngawha and Kawerau resource consent appeals have been settled with Mighty River Power starting construction of the Kawerau station and Top Energy gearing up for expansion at Ngawha, and of course Contact made major announcements last Friday about its plans.

Graphs in the draft NZES, for typical new electricity generation costs, suggest that around 1,000 MW of available geothermal resources could be brought on line at or less than the price of modern gas-fired power stations, excluding any cost of carbon.

The importance of a strong grid
I cannot overemphasise the importance of a strong national grid to support the resilience and reliability of the electricity system – for both energy security and diversity of supply.

It is also a prerequisite for full competition by the sector in both generation and retail activities. Transmission constraints can give market power to generators on the inside of transmission constraints.

Reflecting this, Transpower has tripled its capital expenditure on the grid – from an average of less than $100 million per annum over the last decade, to over $300 million last year – and expected to increase further.

A strong grid also plays an important role in the goal of reducing our energy-related greenhouse gas emissions, since renewable generation sources are often located some distance from load centres.

Recognising the importance of a strong grid, and security of supply, we as a government have taken steps to improve the arrangements governing investment in electricity transmission and distribution networks.
Towards the end of last year we issued revised policy statements to the Electricity Commission and the Commerce Commission with these goals in mind.
These identified three priority areas for security of supply and reserve generation, namely:
• Priority of investment in the transmission grid
• Hedge market arrangements
• Demand-side participation.
A full review of the regulatory control provisions in the Commerce Act is also under way, in association with a review of other parts of the Act, and recommendations are expected by the end of this year.
The review will consider how to maintain the incentives for both Transpower and lines businesses to invest in new and upgraded lines and to improve quality, including reducing line losses, while continuing to protect consumers from excessive prices.

Our sustainable future

As the Prime Minister noted in her Statement to Parliament a couple of weeks ago, without a commitment to greater sustainability in our resource use and way of life, we risk not only damaging our own environment, but also exposing our economy to significant risk.
We can aim to be the first nation to be to be truly sustainable, and can aspire to be carbon neutral in both our economy and our way of life.
The NZES sets out proposals for moving towards greenhouse gas pricing. In the medium term we are looking to broad-based measures across the economy, as covered in a paper directed at greenhouse gas emissions reduction. This is a very, very important issue for you as an industry and for our country. The issue of how broad future emissions pricing should be is a topic that I hope the energy industries will submit on by the 30 March close of submissions.
We need to ensure compatibility between longer-term and shorter-term actions, noting that new fossil fuels will face the full cost of carbon, while emissions from existing fossil fuels will traverse a transitional path towards full costs.

We must also recognise the benefits of new renewables.
We are considering introducing, prior to 2012, transitional measures to encourage investment in low-emissions stationary energy, in order to meet additional demand over the next decade.

Such measures would aim to avoid future emissions-intensive investments that would lock in greenhouse gas emissions.

This is especially important in the non-transport energy sector because of the long lives of investments such as power stations.
I'm delighted to see the strategy is already having an impact. You'll have noted Contact Energy's recent announcement that subject to being able to consent renewables it has put off investment in a gas-fired power station at Otahuhu, and will instead be looking to wind and geothermal.
This is an exciting change in direction, which proves to me that once government puts good, clear signals in place, business will respond accordingly.

Conclusion

Renewable energy is affordable – we have the figures that show that. And New Zealand is better placed than most to produce its energy from clean green sources. I believe this can be a point of comparative advantage in a world where carbon is likely to carry a cost in the future.

And just as importantly it is a sensible and responsible use of the finite resources we have in this country.

We're entering a brave new world, but I have no doubt the energy sector can respond in transforming itself in response. This will allow us to keep the lights on – generation not just for this generation – but also for the many other generations coming after us.

Ends

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