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Parker: Building a secure and sustainable energy s

Hon David Parker
Minister of Energy

27 February 2008

Speech notes

Building a secure and sustainable energy system
Address to the Annual National Power Conference
9.40am, Sky City Convention Centre, Auckland


SLIDE 1: Introduction
Good morning. I’m very pleased to again be attending this annual gathering of leaders in the energy industry.

Last year I spoke to you about the Labour-led government’s aims to make this country more sustainable, and the implications that has for how we source and use energy.

We had set out our proposals in the draft New Zealand Energy Strategy. A great many of you commented on that draft, and I thank you for that. It is a better document because of it.

Living and working in a sustainable way, to preserve a decent standard of living and environment for future generations, should be a no-brainer. But in reality, humans tend to over-exploit resources and damage the environment they live in, for short term gain. Your government believes this needs to change and that is why we have set a clear direction for the kind of country we want to live in – one that is sustainable for families, businesses and the environment.

These elements are reflected in the final Energy Strategy which we released last October.

We have said from the outset that we will not sacrifice security of energy supply.

We are also mindful that we must respond to the global imperatives of climate change and to fast-changing international markets.

The importance of our clean, green image to our exports and to our economy internationally cannot be underestimated, particularly for food exports and inbound tourism.

Our economy must be environmentally and financially sustainable. Our energy sector must be a part of this transformation.

The Emissions Trading Scheme legislation, which was introduced into Parliament before Christmas, establishes the framework for pricing all greenhouse gas emissions.

It is a comprehensive scheme which will, over time, include all sectors of the economy, and all types of greenhouse gases.


SLIDE 2: Renewable electricity target
Through the NZES we have provided clear direction for the energy industry.

Along with the ETS, it signals a shift of infrastructure investment away from more fossil fuel-based electricity generation to renewable energy options.

We are also supporting innovation and new technology deployment for both the supply and demand sides of the energy industry.

There are numerous commercial opportunities already opening up both in development of renewable electricity generation and in demand-side management – from smart metering technology to end-use efficiency measures.

As you know, we have set a target for 90 per cent of electricity generation to be from renewable sources by 2025.

SLIDE 3: Renewables future makes economic sense
Having a high renewables target makes economic sense for New Zealand.

This graph shows the expected costs for new electricity generation from various sources.

We know, from recent investment by major companies in wind and geothermal generation, that many of these projects are already competitive with fossil fuel alternatives.

The graph assumes a medium-term emissions price of $25 per tonne of CO2 emissions, and a gas price of $9 per gigajoule.

It shows that there are substantial additional quantities of new geothermal and wind generation that are competitive with fossil fuel alternatives.

Let’s talk about what the 90 per cent target translates to in terms of the electricity generation that will be needed.

New Zealand currently has around 6100 megawatts of renewable generation capacity, and 2800 megawatts of fossil fuel generation, providing around 40,000 gigawatt hours of electricity.

Electricity demand is expected to grow by 20 to 25 percent by 2025. Taking into account load factors, this requires approximately 3500 megawatts of additional generation capacity. Most of this needs to be renewable. In other words, we need around 175 megawatts of new renewable generation capacity per annum.

At one level it’s that simple. By building around 175 megawatts of renewables per annum we will achieve 90% renewable electricity by 2025. It’s not too hard.

SLIDE 4: Forecast electricity generation
There is a lot of investment in renewables now occurring.

Geothermal
Three more geothermal plants are being constructed by Contact, Mighty River and Top Energy. These will add 125 megawatts of capacity in the next two years. Two more plants totalling 130 mega-watts have been consented in the central North Island. Another project, Te Mihi, over 200 megawatts, is currently seeking consent. And I am aware of a number of other significant proposals being prepared.

Geothermal energy is consistent, reliable and not weather dependent, so it will play an important role as a stable source of baseload. It is a proven technology, which is plainly economic.

Wind
Two more wind projects, in Manawatu and Wellington, are now under construction and are expected to deliver 188 megawatts. A further five wind farms collectively totalling 312 megawatts have been consented. To give you an idea of the interest in wind generation, applications for resource consent have been lodged for nine more projects totalling another 1700 megawatts. Yet more projects are in the wind. New Zealand’s hydro capacity provides great balance for wind, and its future looks assured.

Hydro
With respect to hydro, resource consents have been lodged for five South Island hydro projects that would deliver collectively up to 415 mega watts of capacity.

The actual proportion of hydro to wind to geothermal will depend on commercial decisions and environment court decisions outside the control of government.

SLIDE 5: Role of fossil fuel generation
Our view is that additional electricity generation should be renewable, except to the extent needed to ensure security of supply.

We didn’t go for a 100 percent renewable target. 100% by 2025 would have been expensive, 90% isn’t.

Fossil fuels, especially gas, will continue to have an important role for some time to come.

They provide security, versatility and stability in the delivery of electricity.

But while some new fossil fuelled electricity generation will be needed, we don’t need lots more of it, and we don’t need it to be baseload.

I am pleased with Contact’s announcement last week that it has secured contracts to store and use gas to fuel its planned peaking plant.

You all know of the recent pressures the electricity system has faced, as a number of adverse contingencies have occurred contemporaneously. That the system has coped shows how resilient our system is.

But these recent challenges in the electricity system are being used by some as an excuse to push their interest in more fossil fuelled baseload thermal generation. I don’t follow their logic, particularly given that the majority of constraints have been the unavailability of major fossil fuelled generation plants, for a range of reasons.

We do not shrink away from the reality that in the electricity sector a greater emphasis on renewables means demand for gas will not grow as it might otherwise have. That is axiomatic. But nor do we accept some of the rhetoric being put about that the gas market will fail. The gas for electricity market is not going to disappear.

Other uses for gas also exist. It is interesting that the gas-to-methanol facility is being re-opened. I was one of those who thought electricity policy would be likely to have an influence on this outcome. Emissions pricing will also improve the competitiveness of gas against coal in other parts of the economy.

SLIDE 6: Renewables preference
The Emissions Trading Scheme, as you know, was introduced to Parliament before Christmas, and passed it’s first reading 119 votes to 2.

The Bill includes provisions to amend the Electricity Act to limit new baseload fossil fuel generation over the next ten years.

It creates a 10-year restriction on the construction of fossil fuel thermal generation above 10 MW whose fuel source contains more than 20 percent fossil fuels.

Exemptions to the restriction will be allowed under specific criteria.

The Emissions Trading Scheme by itself would not have precluded growth in fossil fuelled thermal.

For instance, if gas prices were dropped to marginally below the cost of renewables, because of our size it would only have taken a handful of new gas plants to take us down a largely non-renewable path.

This path would have higher emissions, and would not cause a significant drop in electricity prices.

We consider that investment in a major new fossil-fuelled plant during the next 10 years would not be consistent with our vision of transitioning to sustainable low emissions energy.

Indeed our energy modelling predicts that there is sufficient cost-competitive renewable energy generation so that no extra baseload fossil-fuelled thermal generation would be needed for 20 years.

The pricing of emissions, together with the renewables preference, will give a strong signal to investors that they should build renewables rather than more gas or coal-fired stations.

SLIDE 7: Key actions on renewables
To achieve our 90 percent renewables target, it’s essential for suitable renewable energy projects to gain resource consents.

We are providing guidance for local authorities on the importance of renewable energy, through a National Policy Statement on Renewable Energy.

This will influence consent decisions as well as regional and local plans as they are revised.

We intend to have this policy statement in place by the end of this year – to influence the many renewable energy projects that are being proposed.

This does not mean renewables at any environmental cost. We don’t need to dam every river or have wind turbines on every ridge line. But the government’s commitment to renewable electricity, and to reducing energy greenhouse gas emissions, requires a substantial increase in renewable capacity overall.

The Minister for the Environment can 'call-in' consent applications for nationally significant projects and refer them to a Board of Inquiry or directly to the Environment Court – speeding up decisions that would in all likelihood be appealed anyway.

Using call in processes is not a criticism of local authorities and does not undercut environmental protections. The same environmental rules apply, but the one-step process can save developers, objectors and councils the time, stress and cost of two hearings where an appeal seems almost inevitable.

In January, the Minister for the Environment called in the Te Waka wind project in Hastings and referred it to the Environment Court, and the Te Mihi geothermal project, and referred that to a Board of Inquiry.

SLIDE 8: Using energy more efficiently
Looking for a moment at the demand side management of the energy equation, this graph suggests that improving energy efficiency is cost effective.

It’s an illustration of the volume and the costs of international greenhouse gas reduction opportunities.

While our costs in some areas differ from the international averages, the point made on the left hand side of the graph holds true for us.

There are very significant gains to be made from improved efficiency of energy use. New Zealand will save more money than it costs.

The NZES states that, as a country, we should invest in energy efficiency where this is cheaper than building new generating capacity. This bleedingly obvious principle has never been part of our energy policy settings until now.

There is considerable potential for many of our businesses and homes to improve their energy efficiency, and cost effectively reduce their ongoing energy usage.

SLIDE 9: Energy efficiency
The New Zealand Energy Efficiency and Conservation Strategy, and its underlying cost benefit analysis, proves this point and we have many programmes underway to help New Zealanders improve their end-use efficiency. I have not got the time today to do justice to this topic, but I’m sure Mike Underhill from EECA will.

SLIDE 10: Oil prices
As you’ll know, over the past year or so, world oil prices have risen dramatically – nearly doubling in US dollars.

The International Energy Agency is projecting an increasingly tight oil market, with possible processing constraints around 2012 cause for concern. Major oil companies are openly talking about the transition beyond conventional oil.

The prospects for the oil market pose both threats and opportunities for our economy. The opportunities include the exploration and development of our underexplored hydrocarbon prospects.

Our richness in renewables resources is also a huge plus for our country’s future wealth. It is already clear that the world is starting to transition to a lower carbon world (for energy security and climate change reasons). The relative costs of the transition over the coming decades will be lower in New Zealand than in most countries of the world.

The rise in oil prices, and the challenges of energy security add urgency to our initiatives to move to a more sustainable transport system.

Our initiatives include:
- approaches to urban design;
- alternatives including public transport, walking and cycling;
- increased efficiency of the vehicle fleet;
- diversification of the fuel mix;
- better broadband;
- increased uptake of rail and sea freight, as well as more efficient road freight services;
- more fuel-efficient aviation practices and aircraft; and
- preparedness for short-term oil supply disruptions.

Obviously these initiatives are smart things to do for a number of reasons, and higher oil prices mean that they will be increasingly demanded by the market.

There are, of course, spin-off benefits other than reducing greenhouse gas emissions, such as:

 improved public health through reduced pollution;
 reduced traffic congestion and roading costs;
 improved balance of trade.

You will probably be aware that the government has before Parliament a Biofuel Bill which implements a biofuels sales obligation.

This is an essential initial step in creating the infrastructure needed for current and second generation biofuels.

The Select Committee is scheduled to report back to the House by the middle of April. I am aware that some oil companies are concerned about the rate at which the biofuel obligation increases, and the government will be considering those concerns.

SLIDE 11: Great South Basin exploration
The Great South Basin is one of our largest petroleum basins, covering approximately half a million square kilometres, and is only very lightly explored.

The remoteness of the basin, the extreme weather, and water depths make exploration a high risk and costly activity.

In order to attract investment, we commissioned an extensive seismic survey of the northern section of the basin, the data from which was then offered freely to explorers.

This data indicates that this basin may have the greatest petroleum volume of all of our basins.

In particular, it has the thick sediments required to produce hydrocarbons, favourable reservoirs and source rocks, and is not affected by large-scale seismic faults found in most of our other basins.

The level of interest shown by major exploration companies is unprecedented for New Zealand.

The work proposed to be carried out in the first five years of exploration in the Great South Basin totals approximately 1.2 billion dollars. This is double the current total level of exploration expenditure all over the country – on and offshore.

Of course a major find would provide a very significant boost for the economy.

The Labour-led government is continuing to support oil and gas exploration, recognising that these resources will continue to be used for some time to come, and we stand to benefit from investment in our territory.

SLIDE 12: The future for coal
Our lignite coal deposits are a world-scale economic opportunity that could make us self-sufficient in terms of transport fuel for several hundred years.

In other words, if environmental challenges can be overcome in the years to come, we could move from being a net consumer to a net supplier of world energy commodities.

Southland lignite is a proven, accessible resource, and may be one of the most-competitively priced energy resources in the world.

Gasification of coal to create a synthetic gas for use in a variety of end products is a proven technology.

Our very substantial lignite reserves could also be used to produce large quantities of hydrogen for transport.

But there are significant environmental challenges to overcome.

The large CO2 emissions from use of lignite would need to be substantially resolved by Carbon Capture and Storage.

There is a degree of wishful thinking and exaggeration around how close clean-coal technology really is. If the government was to apply the same brave assumptions to new technology renewables as are relied upon by some coal proponents we would be pilloried. A dose of reality is required.

CCS technology is as yet neither economically nor technically proven at scale.

An editorial in a New Scientist magazine this month made the point that Britain, the EU and the US have all recently shied away from the investment needed to prove and scale up CCS technology.

I quote from the editorial: “There has been a lot of talk in the past two or three years that the world can carry on burning coal because CCS is just around the corner, ready to be bolted onto coal-fired power stations from China to California. Cynics say this was always a smokescreen put up by a beleaguered industry and its political backers. If the proponents of coal really do think that CCS is the future, now’s the time to show the cynics are wrong.”

Nevertheless, in my view, the world will need CCS, and there is continuing research underway internationally. Australia is leading some of it. The government is closely monitoring developments.

A combined government and industry group has contracted research into our geological capacity to store CO2, and officials are in regular contact with their Australian counterparts.

The government has also been considering relevant legislation, such as the Crown Minerals Act and the Resource Management Act.

It is identifying gaps and priorities for legislative action.

Some of the outstanding issues are:
- who should assume liability for the long-term storage of CO2; and
- who owns the CO2 and the pore spaces it would occupy in a storage site.


SLIDE 13: Emissions Trading Scheme
We need a broad price-based measure so that the New Zealand economy sees an economic signal that reflects our international obligation to control emissions.

For this reason, the government has proposed a New Zealand Emissions Trading Scheme.

Emissions trading is emerging internationally as a favoured measure amongst developed countries.

Our approach, while tailored to New Zealand’s particular needs, is in line with that of other countries developing or using such schemes.

We are not out ahead of the crowd; and nor are we being hair shirt.

Very simply, the ETS will make it more expensive to behave in ways that increase emissions, and reward actions that decrease emissions.

Price changes will influence the decisions of investors, producers and consumers across the economy, driving emission reductions and the expansion of lower emission alternatives.

The scheme will eventually include every sector of the economy. Forestry will be first in, this year, and will have the benefits of carbon sequestration devolved to it. Liquid fossil fuels – primarily transport – follow in 2009, stationary energy and industrial processes in 2010, and agriculture, waste and other sectors in 2013.

It will be linked internationally to other Kyoto trading markets. This will limit the cost of carbon to the international price which substantially reduces prices risks. This is an important point often ignored by those who make doomsday predictions of the future cost of carbon.

It will be introduced gradually, allowing for smooth adjustments across the economy, and we are continuing to engage with the wider community on how to make the scheme as fair and effective as possible.

SLIDE 14: Future cost of carbon
There are various predictions as to the future cost of carbon shown on this graph. Contrast these with the recent projection by the Business Round Table and PEPANZ based on a cost of carbon worked around the absurd suggestion that there will be no technological advances, and ignoring the basic design principle that limits price risks by linking to international markets. I find it hard to escape the conclusion that their ambition is to derail emissions pricing for their private interest, rather than a measured contribution to the debate. The Business Roundtable and PEPANZ publicity material also overstated their case and was not borne out by the study they had commissioned.

Even if their predictions looked like they would come to pass, and I for one think they are so over the top as to lack credibility, the review clauses in the legislation would enable future governments to modify the regime so as to moderate price effects.

SLIDE 15: Electrical substitution in transport
Over the coming decades the world will transition from its dependence on oil to other fuels. This is driven by both energy security and environmental constraints. This transition will rely upon technological change to make these new fuels, and the vehicles required to use them, available.

The NZES has highlighted that a low carbon scenario for transport requires fuel substitution – in particular the widespread adoption of second generation biofuels, or hydrogen or electric vehicles.

In the case of electricity, the fuel is already widely available, and the vehicles are getting closer.

Our goal is to position New Zealand to leverage the benefits of our highly renewable and low carbon electricity supply to provide for our transport needs as electric vehicle technology reaches maturity.

In particular, we believe it will be beneficial for New Zealand to be one of the first nations to adopt plug-in hybrid and purely electric vehicles.

Plug-in hybrids are, in concept, similar to current hybrid vehicles, with the added ability to recharge the battery from the standard household electric power supply.

They are expected to be capable of running purely on electricity for typically around 60 kilometres, with the ability to complete longer journeys, by supplementing the battery with a conventional internal combustion engine (which may be a generator topping up the batteries).

Most commuters should be able to operate wholly on electric power for most of their existing travel.

Whilst in the electric mode, these vehicles will of course have zero exhaust emissions, leading to cleaner air in our cities and associated savings in health costs.

Coupled with our low carbon electricity supply, they will lead to very low levels of CO2 emissions.

So when does the future arrive? …...

General Motors unveiled their “Volt” at the 2007 Detroit Motor Show, with production plans targeting a November 2010 launch date.

Toyota has announced that it has joined the “race for plug-in hybrid” and plans to develop a plug-in “Prius” for release in 2010.

Not to be outdone, European carmakers are also in the race with Volvo’s “Recharge” announced in 2007. Recently China’s BYD Motors announced the production of a plug-in by the end of this year.

Nissan, Subaru, Mitsubishi and several niche manufacturers have also announced their intention to begin producing electric and plug-in vehicles in the near future. Mitsubishi’s purely electric vehicle is expected to go into mass production within just a few years.

Israel have this year announced a joint venture with Renault for fully electric vehicles for their fleet.

Joint ventures are being spawned between car makers and electricity utilities.

We are continuing to see advances in battery technology.

So they are certainly on their way.

In early years their sales will no doubt be limited by availability and by price.

The price premium will be determined largely by the battery cost, which can be expected to reduce markedly once production ramps up.

Between 2010 and 2015 we’ll see a few electric cars arriving and being used in New Zealand.

SLIDE 16: Longer-term predictions
Our NZES scenario assumed a slow ramp-up in sales of light electric vehicles starting from 2015, reaching 30 percent of light vehicle sales by 2030, followed by higher growth.

Our scenario assumed that by 2030 17 percent of the light fleet will be plug-in hybrid, then growing to 60 percent by 2050, with 80 percent of their travel in full electric mode.

And how much electricity would this require?

Currently our light vehicle fleet consumes around 130 petajoules of energy.

A key point in this discussion is the inherent efficiency advantage of the electric motor over the internal combustion engine.

So allowing for growth in travel demand, this 60 percent of the light vehicle fleet might be expected to require less than 30 petajoules of consumer electricity for this transport task – that is, around 8 TWh.

We are expecting that the typical annual electricity demand to be about 60 TWh by 2050, so this additional 8 TWh is a not too daunting additional 14 percent.

Certainly there will be issues for the power industry in both generation and transmission planning areas, and in ensuring that not everyone plugs their vehicle in at the same time that they are cooking dinner.

In terms of managing peak load, there is a potential benefit from having so many batteries connected to the grid with the ability for power to be drawn from the batteries to the grid – the so called “V2G” or vehicle to grid arrangement.

And during the off-peak periods, there will be benefits in enabling more ‘must-run” generation to be dispatched.

Perhaps electric vehicles will enable more of the normal electricity demand to be met from intermittent renewables than would otherwise be the case.

Within government, work has already begun in modelling the implications of this level of electricity in transport.

We’ve also set up a group of experts to provide advice on how to overcome barriers and advance towards these new technologies.

SLIDE 17
It is essential that all parts of the industry continue to work together to maintain the security of our energy supplies, while taking advantage of the economic opportunities that our abundant natural energy resources provide. I believe the government has set out a clear and achievable path towards a sustainable and profitable energy future.

This has great importance for New Zealand, given our Achilles heel – the emissions from our agricultural sector.

The following quote from the Institute of Policy Studies 2007 book titled “Towards a New Global Climate Treaty – Looking Beyond 2012” makes the point very well:
“If New Zealand wants special recognition of its agricultural sector’s unusually high contribution to its greenhouse gas emissions compared with other rich economies, it may need to make more strenuous efforts to improve energy efficiency, reverse the fall in renewables-generated electricity, increase the role of public transport, and accelerate the switch to alternative fuels for cars and trucks.”

I couldn’t agree more.

Thank you for your attention. The prospects for New Zealand are truly exciting, and I invite you to take advantage of the clear direction the Labour-led government has set for the industry.

In doing so you will be helping not just the economy but also the environment and lifestyle that will be enjoyed by your children and theirs.


ENDS

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