1st November 2007
Pan Industry letter to Ministers regarding policy to limit new base-load thermal generation
Hon Dr Michael Cullen
Minister of Finance
Hon Trevor Mallard
Minister for State Owned Enterprises
Hon David Parker
Minister of Energy and Minister for Climate Change Issues
Sent by email
Dear Ministers
The undersigned groups, representing many sectors of the New Zealand economy, are very concerned at the announcement by
the Minister of Energy Hon David Parker that new base-load thermal generation is to be limited for the next 10 years as
part of the New Zealand Energy Strategy (NZES).
We understand that this has been communicated to the electricity supplier State Owned Enterprises (SOEs) via a letter of
instruction. Government is also considering a legislative intervention to apply to all potential new investors in
generation.
We have major concerns at both the rationale behind this proposal and the way it is being implemented. This letter is
intended to raise those concerns with you as SOE shareholding Ministers and as the Minister responsible for the Energy
and Climate Change Issues portfolios.
The rationale behind the proposal is flawed. A just released cost-benefit analysis of the proposal from the Ministry of
Economic Development fails to reasonably inform the debate. The key trade-off between the higher costs of the proposal
including additional transmission investment and security of supply has not been explained. The robustness of the
proposal to a scenario where we achieve very high rates of GDP growth and hence higher energy demand forecasts has not
been analysed. We should be aspiring to catch up to better performing countries GDP growth rates and any policy that
might be a barrier to that goal, such as limiting new base-load thermal generation, should be discounted.
Less tangible, but nevertheless important, will be the chilling effect the proposal will have on petroleum exploration
investment in New Zealand. Even the assumed modest rate of new gas discoveries to continue to meet current non-thermal
generation gas demand may be at risk.
The adverse effect on attracting investment is likely to be wider than just the petroleum industry. If this proposal
proceeds New Zealand will be the only country in the OECD and probably the world to limit new base-load thermal
generation. The international capital market may view the proposal as a significant unpredicted and unjustified
intervention and hence will increase our sovereign risk.
This proposal is a very heavy-handed approach when the government intends to introduce a price on green house gases
which should incentivise otherwise marginally economic renewables over thermal in any event. Even before the final NZES
was announced investors in new base-load thermal power stations would have been carefully considering the timing and
extent that a price or tax on carbon emissions would apply against the costs of alternative forms of generation.
Suggestions that the proposed limit at least clarifies the policy for the next 10 years are not helpful as the practical
result will, in our view, be higher electricity costs and greater risks to security of supply.
Overall we are disappointed at having to raise these concerns publicly in reaction to the final NZES announcements. This
proposal wasn’t canvassed in the draft NZES. Had it been then we are sure the factors mentioned above would have been
sufficient to deter Ministers from deciding to adopt this proposal.
We are also mindful of the risk of a poor precedent by way of political interference that is at odds with the
requirements of the State-Owned Enterprises Act 1986. Any changes to a SOEs commercial direction must be made through a
change to its Statement of Corporate Intent and not via a letter of instruction. It is our understanding SOEs are bound
to act within the law, and have an explicit statutory obligation to operate as a successful business and to be as
profitable and efficient as comparable privately owned businesses. In addition SOEs are under a requirement to exhibit
social responsibility.
If the government wants to take the radical step of limiting new base-load thermal generation we believe it should be
done through a transparent process, that is the parliamentary process, which should be subject to scrutiny and debate
about the costs versus the benefits, and the impacts not just on the electricity sector and electricity consumers, but
also the petroleum exploration sector and the economy as a whole.
In our view an appropriate response is to allow the market to decide the appropriate diversity of generation sources
with government intervening to fix any clear market failures. The uncertainties and risks related to global greenhouse
gas effects are an example of such an externality. One of the things that markets do very well is to assess future risk
and to create options to manage that uncertainty. Genesis Energy’s proposal to seek consents for a base-load thermal
power station at Rodney is an excellent example of keeping open an option for the future. We believe Genesis Energy
should continue to pursue that option because of its importance for the future New Zealand supply portfolio and its
particular value to increase diversity of electricity supply to Auckland.
While this letter focuses on the proposed limit on new base-load thermal generation and the impact on prices and
security of supply, the primary driver for the proposed policy is climate change. The preceding paragraph put forward a
view on how a market approach with interventions to fix market failures is preferred. All of the signatories to this
letter have publicly expressed concerns about the recent announcements on the New Zealand Emissions Trading Scheme
(ETS). While the ETS is a market approach, it is in the details and timing of the ETS that we have serious reservations.
We would welcome the opportunity to brief you directly on our concerns. To progress a meeting or for any correspondence
please contact Ralph Matthes of the Major Electricity Users’ Group who is acting as coordinator on this issue.
Yours faithfully
Michael Barnett
Chief Executive
Auckland Chamber of Commerce
Alasdair Thompson
Chief Executive
Employer's & Manufacturers' Association (Northern)
Catherine Beard
Executive Director
Greenhouse Policy Coalition
Ralph Matthes
Executive Director
Major Electricity Users’ Group
Roger Kerr
Executive Director
New Zealand Business Roundtable
John Pfahlert
Executive Officer
Petroleum Exploration & Production Association of New Zealand
Charles Finny
Chief Executive
Wellington Regional Chamber of Commerce
Peter Bodeker
Chief Executive
Wood Processors Association of New Zealand
Copy to SOE electricity suppliers:
Mr Brian Corban, Chair, Genesis Energy Limited
Mr Wayne Boyd, Chair, Meridian Energy Limited
Ms Carole Durbin, Chair, Mighty River Power Limited
ENDS