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Bridges: Speech to NZ Energy Conference 2014

Simon Bridges

20 MARCH, 2014

Speech to NZ Energy Conference 2014

The Global Energy Challenge

Energy is an integral part of our lives.

It is the foundation on which we build economic growth, prosperity and progress in our societies.

Across the globe, we are all facing the same basic energy challenge.

We want our citizens and countries to continue to develop and prosper.

But we need to reduce carbon emissions from our energy use and respond to climate change.

We also need a supply of energy that’s reliable and affordable.

At the moment, the world is in a transition phase towards a low carbon future.

In this transition, fossil fuels remain an important part of the mix.

The International Energy Agency expects coal, oil and natural gas will continue to account for more than half the world’s energy needs until at least 2035.

The National Government’s energy policy understands this reality.

In the US, President Obama speaks of an “all of the above” policy on energy.

That is also what we have here in New Zealand.

New Zealand’s mixed and balanced approach to energy

Our balanced and mixed approach means that I am motivated by the opportunities petroleum development presents for New Zealand socially, economically and environmentally.

It is widely acknowledged that gas will play a critical role in reducing carbon emissions worldwide, and New Zealand could play a real part in this if a significant gas find were made.

This is why we have worked hard to attract major international companies to invest in petroleum and minerals exploration and development in New Zealand.

New Zealand has to compete with other countries for investment capital.

It’s encouraging to see world class companies like Statoil from Norway and Woodside from Australia choosing to invest in New Zealand.

But while I am motivated about petroleum development, I am also excited about renewables.

It is renewables and smart technology that will be the key to meeting longer term global energy needs. Innovation and competitive markets are the smart way to ensure this happens.

Innovation and competition is driving change in the energy sector

One of the best examples of a competitive and innovative market that’s already delivering secure, affordable and environmentally sound energy is New Zealand’s electricity market.

New Zealand is extremely fortunate in having abundant renewable resources, like water, geothermal and wind. Electricity generation from renewables now makes up about 75% of our electricity generation.

This makes us fourth in the OECD for renewable generation.

New generation capacity being built here is mainly using renewables, particularly geothermal and wind. This is happening based on competition between generators, without the need for government subsidies or incentives.

There is currently 166MW of geothermal capacity and 60MW of wind capacity under construction. In the future, gas-fuelled plants are likely to be used mainly for peak periods and in dry years.

New Zealand is now a world leader in our use of geothermal resources for electricity. The world’s largest binary cycle geothermal power station was recently commissioned here.

In the last six years New Zealand has doubled our geothermal electricity generation capacity and seen more than $2 billion invested in geothermal plant. In that period 1,100MW of geothermal energy was installed around the world – half of it (550MW) here in New Zealand.

New Zealand is now also making good use of our high quality wind resources – a turbine on a New Zealand wind farm runs on average 40% of the time, compared to around 30% internationally.

Wind is now playing a small but significant role in electricity generation. It contributed around 5% of our electricity in the year to 30 September 2013 and, given the large number of additional potential sites, wind and geothermal electricity generation could double or even treble over the next couple of decades.

It is the economics of these options for wind and geothermal generation that have made them increasingly attractive to generators.

The generators compete with each other to build the next best generation option. A forward hedge market sends longer term signals to investors on what the market is prepared to pay for electricity going forward.

This competitive market for electricity generation delivers the lowest-cost sources of energy, for retailers to sell to consumers.

New capacity based on renewables is also increasingly crowding out the older thermal stations.

For example, the 30 year old Huntly power station has retired two of its 250 MW units over the past two years, which halved its coal-burning generation capacity.

In addition, gas plant is now increasingly used as "firming" plant, filling in when demand peaks or wind or hydro generation is reduced.

Changes made to the competitive market also mean New Zealand is now much better able to cope with a dry year, without the need for consumer conservation campaigns.

The 2012 year was one of the driest on record, but this went largely unnoticed by consumers.

The reason for this is that if a conservation campaign is called then electricity companies will now need to compensate consumers. It’s good to see how changing incentives can have a positive effect on water management strategies and market behaviour.

Of course success and economic growth doesn’t have to mean consuming more and more energy.

A recent OECD study looked at the relationship between ICT and the demand for energy.

ICT is key to driving productivity and innovation, and with initiatives like the Ultra-Fast Broadband programme it’s a big focus for the government.

Interestingly the OECD study found that increased ICT use in an economy comes with a reduction in total energy demand and an increase in the relative demand for electric over non-electric energy.

Having a secure supply of clean, affordable electricity generation will stand New Zealand in good stead in a digital future where electricity becomes even more important as an energy source.

Electric energy also offers a wide range of other future possibilities, including an opportunity to reduce our use of fossil fuels in transport through increased use of electric cars.

With renewable electricity generation already at 75% in New Zealand, we’re aiming for a target of 90% of electricity generation from renewables by 2025. This is a real advantage for our country.

By contrast, Australia currently generates about 13% of its electricity from renewables and has a target of 20% by 2020; the United Kingdom has a 10.3% share of electricity from renewables, with a target of 50% by 2015; and Germany has 21% from renewables with a target of 35% by 2020.

Solar and subsidies

Some governments have gone down the track of introducing subsidies and other government interventions to try to accelerate the move towards renewables.

Generous feed-in tariffs have been used in both Spain and Germany to incentivise solar energy.

These tariffs provide a guaranteed, regulated payment to people who use photovoltaic generators, which is above the wholesale price and even sometimes above the retail price.

This has seen significant expansion of solar technology in these countries, but it has also had some unintended consequences. Electricity prices have increased and in Germany they are over 50% higher than in New Zealand.

There’s now enough photovoltaic capacity to meet 30-40% of Germany’s daytime load, but this has created grid stability issues.

It’s not easy to shut off solar PV, so if Germany finds itself unable to export excess electricity to neighbouring countries, this creates congestion on the German grid.

And there’s a different problem on days when the sun isn’t shining.

The rapid uptake of solar in Germany has also contributed to increased electricity generation emissions, as it has encouraged the construction of more thermal generation to ensure adequate electricity supplies when solar isn’t available.

In New Zealand, where we already have a high proportion of renewables driven by market forces, solar photovoltaic comes in at about three times the cost of geothermal or wind. For most people, the economics don’t stack up.

In by far the majority of cases, New Zealand households would not recoup the cost of installing a solar PV system, even over a period of 15 years or longer. Subsidies might increase uptake but they don’t work for solar in New Zealand.

New Zealand needs to take a smarter approach and think about how emerging technologies such as solar could work better in a more integrated way.

Vector is currently running a successful pilot programme of domestic solar PV in combination with batteries.

The storage batteries enable some surplus energy to be stored during the day when the house is empty, and released as needed – at night when the household is busy turning on lights, cooking the evening meal and using other electrical appliances.

End-users can monitor what’s happening on their smartphones, using the internet and smart meter technology.

The batteries are also connected to the grid, so Vector has the ability to release energy from them to reduce peak demand and manage traffic on their distribution network. This could enable Vector to avoid unnecessary expenditure in network capacity.

Customers will respond to technologies when it delivers what they want – not what policy makers, politicians, environmental activists or energy experts think they should want.

In the Vector pilot all of these technologies are working together to deliver on what customers almost certainly want – better service, more control, more reliability and cost savings for end-users and for the network, as well as delivering on environmental objectives.

It is this sort of smart thinking that’s needed to make technologies like solar really succeed in New Zealand. Without subsidies, I might add.

The future of energy markets

And this also gives us a glimpse of what some of the key drivers of energy markets in the future may be.

Dispersed small scale generation where investment is happening at the customer level, smart meters giving customers much more information and control over how they use energy, and using the internet to network these dispersed sources of power together, thus allowing the optimisation of the system as a whole.

So this means some sources of new generation may be located closer to users, and be on a much smaller scale than the huge energy projects of the past, with individual customers selling their surplus energy back into the grid for distribution to other users.

This is a significant change from the historic model of large-scale, centralised power stations disseminating electricity from a central grid.

The new technology being developed empowers consumers by giving them more information and control.

In many ways this is the ICT revolution coming to the energy markets.

The internet, the explosion of cheap computing power and the smartphone revolution are busy turning other industries on their heads, as well as the energy sector.

A number of local electricity retailers are already offering tools such as real time household electricity monitoring via smartphone apps.

In the future this is likely to develop into highly sophisticated tools that allow customers to control, rather than just monitor, their usage, for example to take advantage of low cost periods.

A smarter grid

The way markets and customers can interact in future will be key to unlocking the benefits of smart electricity technologies and increasing energy efficiency.

This is about communications and ICT, and it’s also about having a robust and smart electricity grid that can deal with fluctuations in supply, and conveys market-based signals quickly and efficiently between the different components of the electricity system – generators, transmission, retailers, and users.

Internationally, spending on smart grid technologies such as advanced metering and fault management is increasing. In 2012, global spend on smart grids was $13.9 billion, with around half of this being spent on smart metering and related infrastructure and services.

This investment was 7% higher than in 2011, and is expected to rise to $25.2 billion by 2018.

In New Zealand we can build on the work that’s happening overseas.

Global investment in distribution automation, demand response, home energy management or smart electric vehicle charging will deliver technical advances that we can use to reduce energy consumption, keep our businesses competitive, or make our homes more comfortable.

Smart meters are already in more than 50 percent of New Zealand homes and growing.

When combined with smart pricing plans, smart appliances and home automation, they can help consumers use less power at peak times (when it is expensive) and more at off-peak times.

Enough changes in consumption patterns across the whole power system could mean fewer peak generators and smaller power lines required, and lower costs.

The International Energy Agency has called energy efficiency the world’s “first fuel”.

It means we can avoid using energy sources that cost more and damage the environment.

Using energy more efficiently will also help to displace ageing infrastructure, and reduce carbon emissions.

On the supply side, advances in technology mean transmission networks can make use of more granular and timely information to help them manage their assets better and to provide better services.

For example, faster identification of a network fault – such as a tree fallen on a line – would enable quicker repair and power restoration for affected households.

And better information about the condition of power system assets – like poles and transformers – could mean less time and money spent on routine maintenance and renewal – resulting in lower costs for consumers.

These emerging technologies will make very different demands on the electricity systems of the future. We need to make sure New Zealand is well positioned to capture the benefits of solar energy, electric vehicles, and advanced meters as well as developments in distributed automation, distributed storage and demand response.

All parts of the system need to come together to make this happen – generators, retailers, distributors, businesses, scientists, consumers, investors.

New Zealand Smart Grid Forum

This is why the Government has worked with the Electricity Networks Authority to set up a Smart Grid Forum. The new Smart Grid Forum will provide a platform for dialogue between senior representatives from all parts of the electricity system, including consumers, as well as business, scientific and academic interests.

Similar forums have already been set up in a number of other countries.

I announced the Forum in February. Today I’m very pleased to tell you who has been appointed to the Forum. The members are (please bear with me as there are a few to get through)

• Dr Allan Miller - University of Canterbury

• Ralph Sims - Massey University

• Rogan Clarke - Advanced Meter Services

• Neil Cheyne - Fisher & Paykel Appliances

• Ryno Verster - Vector

• Jaun Park - Unison

• Derek Todd - Delta Utility Services Ltd

• Stephen Drew - EnerNOC New Zealand

• Simon Clarke - Trustpower

• Matt Olde - Mighty River Power

• Ari Sargent - Powershop

• Richard Manaton - Countdown Progressive

• John Carnegie - Business New Zealand

• Lynda Amitrano - Building Research Association New Zealand

• Hamish Wilson - Consumer New Zealand

• John Clarke - Transpower

• Gareth Wilson - Ministry Business, Innovation and Employment (convenor)

• John Hancock - Secretariat

• Paul Atkins - National Energy Research Institute (chair)

• John Hamill - Commerce Commission (observer)

• Craig Evans - Electricity Authority (observer)

• Terry Collins - Energy Efficiency & Conservation Authority (observer)

The Forum is due to meet for the first time this month, and I’m confident they will make a strong contribution to the development of smart electricity networks in New Zealand.

Conclusion

As I said at the outset of this speech, energy is integral to our lives. The National Government’s mixed and balanced approach is making the most of all of New Zealand’s energy opportunities.

The smart and integrated use of developing technologies, coupled with our abundant renewable resources and our competitive electricity market creates an exciting future for energy in our country.

I believe the new Smart Grid Forum can play a significant role in all of this.


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