Harry Duynhoven

17 September, 2008
Leading the way in powering New Zealand

I have been asked to talk about the challenges the energy industry faces moving forward, and how the government is working to meet them.

I will start by talking about the government’s goals for the energy sector and the programmes we are putting in place to reach these objectives.

I will then talk about the policy instruments we are pursuing in setting the direction for meeting New Zealand’s future energy needs. Many of you will already be familiar with these, others less so.

New Zealand Energy Strategy and a Renewable Electricity Target

Our vision for the energy sector is set out in the New Zealand Energy Strategy, released last October. This Strategy fits within the government’s broader economic transformation and environmental sustainability agendas and sets out our vision for a sustainable, low emissions energy system.

Combined with the Emissions Trading Scheme, it aims to move the energy sector from more fossil-fuel based electricity generation to renewable energy alternatives.

We have set a target to reach 90 per cent of electricity from renewable sources by 2025, and we are already on the way to achieving that.

New Zealand currently has around 6100 megawatts of renewable generation capacity, and 3000 megawatts of fossil fuel generation, providing around 42,000 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 to reach our 90 percent target by 2025. 400 MW is under construction right now, and a total of 1400 MW is expected to be added over the next five years.

Geothermal

Three more geothermal projects have been, or are being, constructed this year by Contact Energy, Mighty River Power, and Top Energy. These will add 125 megawatts of generating capacity over the next two years. Three more plants totalling 350 megawatts have been consented in the central North Island, including Te Mihi which will provide over 200 megawatts alone and serve as a worthy replacement for the aging Wairakei stations from around 2011.

The reliability and relative abundance of geothermal energy sources in New Zealand means it will play an important role as a stable source of baseload generation. It is a proven technology, is economic and presents great opportunity for further innovation, particularly for low enthalpy direct use applications and deeper sources of geothermal energy.

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 313 megawatts, have been consented. To give you an idea of the interest in wind generation, 14 more projects, totalling another 2850 megawatts, are at various stages of the consenting process. With a new geothermal project of 220 megawatts announced in this morning’s paper.

Hydro

New Zealand’s existing hydro capacity provides great balance for wind, but the government recognises that the most accessible hydro projects have already been completed. Nevertheless resource consents have been lodged for five South Island hydro projects that would deliver collectively up to 364 megawatts of capacity.

Commerce Amendment Bill

The Commerce Amendment Bill has just been passed and two changes to the Commerce Act contained in the Bill will be of interest to those of you involved in the electricity distribution business. They are:

· A much simpler and more predictable regime for lines businesses, removing the threat of relatively heavy-handed regulation for minor breaches of thresholds, and with time limits for Commerce Commission decisions; and

· A more appropriate regime of information disclosure for small locally consumer-owned electricity lines businesses where customers are essentially the owners of the business. This will lower their compliance costs and result in savings to consumers.

The changes represent a particular win for 100 percent consumer-owned electricity lines companies, which are currently subject to the same regulatory requirements as the large, investor-owned companies.

In future, they will only have to disclose information to the Commerce Commission, rather than meet the more demanding requirements faced by other electricity lines companies.

This is because they're owned by their consumers, which means that the businesses are more likely to act in the consumers’ interests. Excessive profit-taking is less likely, as the consumers are also the owners.

Nevertheless, protection for consumers lies in the provision allowing consumers of a lines business to petition the Commerce Commission to recommend to the Minister that the business be made subject to the same regime as non consumer-owned lines businesses.

There are special provisions applying to Transpower to recognise its unique position among lines companies.

Electricity Industry Reform Amendment Bill

Then there is the Electricity Industry Reform Amendment Bill. The purpose of this Bill was to implement three main policy changes.

The first was to make it easier for owners of lines businesses to sell the output of the generation they were permitted to own under the earlier amendments to the Reform Act – EIRA as we know it.

The objective is to encourage the owners of lines businesses to invest in permitted generation, especially generation from renewable energy sources.

In summary, this will be achieved by:

· Allowing sales of electricity of up to 100 percent of the nominal annual output capacity of permitted generation;

· Allowing electricity generated from permitted generation to be traded via financial hedges to manage spot market risks; and

· Lowering the cost of corporate separation and compliance with arms length rules.

The second main change was to narrow the scope of ownership separation by focusing on geographic areas where there is potential for the exercise of market power and anti-competitive practices – namely, where lines and supply are co-located.

This will be achieved by allowing owners of lines businesses to be involved in generation and retailing without limits outside of their lines area.

At the same time, ownership separation rules will be retained where lines and supply are located in the same area.

The third main change was to amend the definition of renewables.

Currently, the owner of a lines business can only invest without quantity limitations in “new renewables”, which are defined to exclude hydro and geothermal generation using traditional technologies.

The new definition will include all renewables, to reflect the government’s policy of encouraging the development of renewable energy.

Supply to rural customers

You will also be aware of our review of continuance of supply to rural consumers post 2013.

The obligation to supply to those places supplied as at 1 April 1993 was due to expire at the end of March 2013. Following consultation, we decided to revise section 62 of the Electricity Act so that this obligation to supply will no longer expire in 2013.

This continuing obligation to supply may be met either by using lines, or by alternative local generation where the local consumers agree.

We are allowing lines companies to meet this obligation in a more cost-effective way by providing the flexibility to accommodate new energy technologies as they become feasible and cost-effective in various situations.

This will remove anxiety for some rural communities. Maintaining security of supply is a priority and this applies to rural consumers just as much as to those in towns and cities.

Now that consumers will have that certainty, I hope to see lines companies and consumers focus on whether there are better ways to meet their energy needs – for example, utilising on-site renewable sources and improving efficiency.

Energy Efficiency

It’s encouraging to see the numerous commercial opportunities being presented in the development of renewable electricity generation and in demand-side management. This is particularly true in the areas of smart metering technology and other end-use efficiency measures.

There are also very significant gains to be made from improved efficiency of energy use and there is considerable potential for many of our businesses and homes to improve their energy efficiency.

The New Zealand Energy Efficiency and Conservation Strategy illustrates this point and we have many programmes underway to help New Zealanders improve their end-use efficiency.

Programmes for household energy efficiency particularly will receive a significant boost from the one billion dollar energy efficiency fund to be set up to complement the Emissions Trading Scheme. It is the biggest investment in energy efficiency this country has ever seen, and will help consumers adapt to electricity price rises.

Resource Management Act

To achieve our 90 percent renewables target, it’s essential for suitable renewable energy projects to gain resource consents.

Here are some statistics that demonstrate that the Resource Management Act is no barrier to renewable energy investment.

· 119 megawatts completed so far this year;

· 217 megawatts by the end of 2009; and

· 155 megawatts by the end of 2010.

A further 487 megawatts has been consented but construction has not yet commenced.

Transpower is investing $460 million in transmission during the 2008/09 year. Again, the Resource Management Act is not stopping this from being achieved.

For projects of national significance we can use the call-in powers that exist under the Resource Management Act to provide for a one-step hearing process under a Board of Inquiry or the Environment Court. These powers have been used for Transpower’s North Island grid upgrade, Unison Networks’ Te Waka wind farm proposal, and for Contact Energy’s Te Mihi geothermal and Waikato wind farm proposals.

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.

The Policy Statement has been given to the Board of Inquiry and they have notified it for public consultation.

Two very important pieces of legislation have just been passed by the House - namely the Emissions Trading Scheme and the Biofuels Bill.

Emissions Trading Scheme

As you may have heard the legislation covering the Emissions Trading Scheme passed its third reading in the House on 10 September and is now set to become law.

It is landmark legislation and a very necessary tool to help New Zealand meet its international climate change obligations, so we can play our part in the global action to limit climate change.

It is a broad price-based measure that allows the market to seek the least cost means of reducing emissions.

Increases in emissions will cost and decreases are rewarded. Price changes will influence investment decisions and the purchase decisions of producers and consumers across the economy, driving emission reductions and expansion of more environmentally friendly alternatives.

The scheme will include every major sector of the economy, starting with forestry this year, stationary energy and industrial processes in 2010, liquid fuels (primarily transport) in 2011, and agriculture, waste and other sectors will follow in 2013.

We will continue to monitor the scheme to make sure its implementation is as fair and effective as possible.

Biofuels Bill

The Biofuel Bill was recently passed by Parliament. The legislation introduces the biofuels obligation from 1 October this year. It requires oil companies to supply biofuels in New Zealand, beginning at an amount equal to 0.5% of their annual petrol and diesel supplies and increasing in 0.5% increments annually thereafter to reach 2.5% in 2012.

To ensure that biofuels supplied towards the obligation deliver genuine environmental improvements, the legislation requires biofuels sustainability requirements to be introduced.

The Future for the Petroleum Sector

Although it is important to start the move away from our reliance on imported fossil fuels through biofuels and other substitutes, of course we will be dependent on oil for some time to come. There remains significant opportunity for the petroleum sector in delivering New Zealand’s future energy needs.

Oil

The petroleum production sector is looking particularly buoyant with four new major projects at or nearing fruition. As most of you are aware, New Zealand’s liquids production has been in decline since the Maui field peaked in 1997.

This is all about to change with the Tui, Maari, Kupe, and Pohokura projects. These projects will reach peak production by about 2010 and bring 140 million barrels of new reserves into the market. New Zealand’s total oil production will then be at a record level not seen since the heady days of Maui.

As you will know, over the past year or so, world oil prices have trended upwards, although Brent Crude has recently fallen back to below US$100 a barrel.

The prospects for the oil market provide opportunities for our economy and our companies who operate in this arena. In particular, the opportunities provided by the exploration and development of our under-explored hydrocarbon prospects are especially interesting.

The Great South Basin is one of our largest petroleum basins, covering approximately half a million square kilometres. The remoteness of the basin, the extreme weather, and water depths make exploration a high risk and costly activity.

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

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 next cab off the rank later this year will undoubtedly be the Raukumara blocks offer. Crown Minerals has previously expressed confidence that Raukumara has all the necessary components for hydrocarbon generation, migration and trapping mechanisms.

The Government is continuing to support oil and gas exploration, recognising that these resources will be required as part of our immediate and longer-term energy requirements.

Gas

Gas will continue to play an important, and possibly increasing, role in the industrial, commercial and residential sectors where the direct use of gas can offer advantages in terms of lower greenhouse gas emissions and reducing the load on the country’s electricity supply.

To underpin this commitment, the Government has outlined its objectives for the gas sector in the revised Government Policy Statement on Gas Governance released in April of this year.

This revised GPS was updated to take into account the New Zealand Energy Strategy and the updated New Zealand Energy Efficiency and Conservation Strategy.

Contact Energy has also announced its intention to develop gas storage at the depleted Tariki/Ahuroa field. This would be the first gas storage facility in New Zealand.

The Minister has approved rules to govern gas processing facilities, downstream reconciliation, and switching arrangements between retailers.

Regulations providing for an enforcement regime to promote compliance with the three sets of rules outlined above have been made regulations for the effective management of critical gas contingencies have been recommended to the Minister and are being processed as we speak.

The Minister has also approved a recommendation for the commissioning of an electronic matching platform for short-term wholesale gas trades. I am advised that the Gas Industry Company is very close to commissioning this platform and making it available to industry participants. The Government considers it will be important for industry participants to positively engage this initiative and to participate fully in delivering its success.

According to current projections, sometime between mid way of the next decade and 2025, a gas shortfall is indicated.

The Government’s current Onshore Taranaki Blocks Offer is therefore structured to maximise the chances of new gas being brought to market in a timely manner. I am advised that the results of this Blocks offer are due to be released shortly.

Coal

New Zealand’s lignite coal deposits are significant, particularly in Southland.

However, significant environmental challenges remain for New Zealand to maximise the use of its coal and lignite reserves. Substantial increases in the use of coal will not be favoured until technologies such as carbon capture and storage become viable.

Carbon capture and storage

Carbon capture and storage is a very important technology in order for the whole of the world to successfully tackle climate change.

A number of international research projects that are currently making progress on this issue but it will be some years before this technology is both economically viable and environmentally proven on a large scale.

Meanwhile, the government is closely monitoring developments in this space.

We have established a carbon capture and storage Policy Group, lead by the Ministry of Economic Development, and a Research Steering Group which includes industry participants who collectively have been tasked to examine the geological capacity of New Zealand to provide future carbon capture and storage capabilities.

New Zealand is also a member of a number of international partnerships and has applied to join the Carbon Sequestration Leadership Forum.

Summary

In summary, the government has set out a clear and achievable path towards a sustainable and profitable energy future.

We are lucky in our abundant natural resources, and these can form the backbone of a strong, resilient energy sector.

It remains essential for all parts of New Zealand’s economy and the energy industry in particular to continue to work together in maintaining the security of our energy supplies.

Over the next couple of days, you will hear from many prominent and influential figures from across the energy sector, both here in New Zealand and from a wider international context.

I hope you will contribute to the discussions on a variety of energy related issues and to consider how you can contribute to achieving New Zealand’s energy demands and environmental obligations.

ENDS

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