Michael Cullen: Address to Oamaru Rotary Club

Address to Oamaru Rotary Club - 19 August 2003 Speech Notes

Rotarians,

Thank you for the opportunity to meet and mingle with you this evening. It is always good to be back in this part of the world. There is a certain solidity and timelessness about Oamaru, in the virtuous sense of those words. Now all that may change, and the citizens are understandably curious to find out what change may bring. That is why you have asked me to speak about Meridian Energy's proposed hydro-electricity generating, irrigation spin-off Project Aqua.

I am not one to duck hard issues, but you need to appreciate that I am walking a very fine line here tonight. I wear one hat as a shareholding Minister in Meridian. There is always the risk that I can be seen to be advocating a position that enhances the interests of the owner in the State Owned Enterprise. My second hat is the hat worn by the Minister of Finance. The economic assessment commissioned by Meridian Energy suggests that Aqua will generate $600 million of national economic benefit. That would add one third of a per cent to the size of the economy: a not inconsiderable chunk of activity and the associated revenue that goes with it.

I also chair a committee of Ministers that is charged with co-ordinating advice to Cabinet on infrastructure issues. I have to make sure that my comments are not seen to be favouring one aspect of infrastructure development over others - say putting electricity ahead of roads - or one provider of infrastructure over others.

Finally, as Deputy Prime Minister I must be acutely aware that there are employment, economic development, community, and environmental aspects associated with this project. We have processes in place to resolve disputes over how potential conflicts around these different interests are resolved, and I need to make it clear that nothing I might say should in any way at all be construed as pre-empting final decisions on this issue. So thank you for placing me squarely in the middle of this political minefield with the topic you have given me! I am wearing so many hats that I thought I would take advantage of Edward de Bono's approach to thinking about issues and pinch his concept of using different coloured hats to approach aspects of this topic.

First, the white hat. The white hat is the hat to wear when we gather information and facts and assemble our thoughts in a logical and coherent way.

Aqua is primarily about expanding electricity generating capacity. The project goes to the heart of the elusive goal of security of electricity supply. In its most simple terms, this means that when we turn the switch, the light goes on. Easy to say, not so easy to do. There are three large problems sitting in behind the electricity system that make it hard to guarantee absolute security of electricity supply.

First, there is the problem of lags. Demand for electricity grows in a somewhat unpredictable way as the economy expands; new technologies are developed to either conserve or use electricity, and migration numbers ebb and flow. Supply, on the other hand, is both lumpy - we tend to add big chunks to our generating capacity rather than move it along incrementally as demand edges up - and slow.

It takes many years from bright idea to first light as the supply side goes through its engineering and financial feasibility stages, resource consent process and construction and commissioning. If we advance capacity ahead of demand, there is the problem of how to pay for idle capacity. If we do not, there is the problem of how to manage use around what is available.

Second, the problem of fuel. We have an electricity system that is largely - not exclusively - a mix of hydro and thermal: water and gas. We tend to have a lot of electricity capacity: it is just that from time to time there isn't quite as much water as we would like and from time to time a gas field that we have been using runs out.

Finally, the problem of price. When the electricity market was deregulated, we did it at a time when the vast Maui field had been found and developed, and the hydro dams and stations had been built and paid for. The costs had been sunk into the electricity structure we inherited, and that structure could be operated to generate electricity at an incredibly low cost.

It has been put to me that the operating costs of our system are probably the lowest they have ever been anywhere and the lowest they will ever be again. The costs structure has been compared to an atomic powered electricity system without any decommissioning expense. The result was that we got very cheap power by international standards. That creates two problems. Users get accustomed to cheap power and resist any upward drift in prices. The second problem is that unless prices drift upwards it is uneconomic to invest in new capacity.

Demand is increasing, supply inevitably lags, supply is uneven when gas runs out and it stops raining, and the market is resisting the prices that would be needed to stimulate investment. It is time to put the green hat on. The green hat is used to think creatively, and to explore new ways of approaching the facts that we have isolated with the white hat on.

I am not going to explore all of the other bits of the jigsaw that the government thinks will go to making up a coherent picture to match and manage electricity supply and demand. I am confining myself to where Aqua fits in. Aqua is a very creative contribution to a possible solution, from a number of perspectives.

It uses renewable resources. The government has identified renewable energy as a key objective of its energy policy. There are two reasons for this: one is that it makes sense from an environmental and sustainable development point of view and the other is that it reduces dependency on finding alternative fuel sources when a non-renewable source runs out.

Aqua uses the same water time and time again. That is very clever, and is far more creative that building a dam to get the height to drive a turbine once. It also allows a staged development of generation capacity and reduces the lumpiness of adding to supply capacity.

It can also link in to more extensive irrigation, and so we get additional benefits other than the simple one of a few more lights staying on a bit longer. Those benefits are regionally concentrated, so there is a better geographical spread of economic growth, something else that the government is keen to encourage.

I sometimes think that debate on many policy issues in New Zealand concentrates too much on the proposal on the table and not enough on the alternative. If not Aqua, then what?

I suppose we could solve our security of supply problem by building a whole lot generators that use petroleum based liquid fuels or burn mountains of coal imported from Australia. That will keep the lights on, no doubt about it. But it would be inefficient, expensive and would create additional pressure on the environment, not just through emissions but also in generating the transport systems in getting fuel to plant. I really wish that those who oppose one solution do so in full acceptance of the total consequences of the realistic, not fanciful, alternative.

Let me now put my red hat on. The red hat allows for hunches and intuition. My intuition tells me that New Zealanders are highly innovative and have well developed problem solving skills. It tells me that we have a strong institutional memory and good intellectual property that has built up around hydro-electricity generation and the use of renewable energy sources.

My intuition tells me that there are robust checks and balances built into our land use processes, so any scheme like Aqua has to be defended from a very thorough researching of its technical, financial, economic and environmental merits or it will simply not get the go ahead.

It is time to test the hunches by taking the red hat off and putting the black hat on. The black hat allows us to play devil's advocate: to test why the proposal may not work. I am not going to talk about the engineering feasibility: I will simply assume that Meridian would not have gone as far as it has with Aqua without checking that enough water will flow downhill fast enough to drive its turbines.

There are three key issues that need to be addressed in assessing whether Aqua is a good idea. All are incredibly complex. The first is the environmental sustainability of diverting the river flow, the degree of risk attached to it, and the substance of any damage arising out of that risk. I stress the substance of the environmental risk, because we are dealing with issues of materiality here.

The second area is the use of water. This issue is looming as a significant one for the government, and I am not talking about the foreshore question. The issue is the tension between who owns and who can use water flows, when and at what rate. Water, along with transport and energy, has been identified as a priority area for examination by the committee of Ministers examining infrastructure issues. Competing uses for water can be critical in determining whether Aqua should get the go ahead.

The final question mark is not one that is resolved through legal process, but is rather a matter of planning and the co-ordination of economic development initiatives. The question I have is whether there is the capacity in the sub-region to take full advantage of the economic stimulus that a large infrastructural investment must inevitably deliver. Full benefit is taken when local people and local firms gear up to supply services to the project, and when they capture downstream benefits once it is completed.

In this last regard I am talking about whether further processing of any irrigation enhanced production takes place in this region or is shipped out to Christchurch or Dunedin for added value.

This is a challenge for the community in its different dimensions: regional and local government, business organisations, training providers and the like. Much of the answer to the question "will it deliver?" lies in the answer to another question: "what will you do to make it deliver for you?"

I have now reached the stage where I reach for the blue hat. The blue hat is how we think about the process for making decisions. In this day and age the tendency is to reach for the lawyer and to pass the buck to some appointed adjudicator, and then to tie the decision up in legal red tape with reviews and appeals if the adjudicator finds against our particular prejudice.

There is obviously a proper statutory process to go through, and the process is important in sifting out some of the factual basis and diffusing some of the emotion that can surround a major decision like this. I would like to think, though, that we are small enough, and know each other well enough, and have enough faith in each others motivations and good intentions that process can be more than litigation. Discussion, explanation, education, contribution and compromise are all aspects of good process that we have perhaps lost sight of in recent years.

The final decision needs to be based on what is in the best interests of the nation. That best interest has to have many, at times competing, dimensions: financial, regional, environmental and economic.

Finally, to the yellow hat. The yellow hat is about optimism. I have said it before but it is worth saying again: commentators on public policy issues have a predilection to look for the dark cloud inside every silver lining. I am optimistic about our collective capacity to use our abundant natural endowment and our natural talent for innovation to keep New Zealand moving forward on the frontiers of best economic, social and environmental practice. What we need is to recognise and celebrate those attributes.

We are all in this together. There is no insider-outsider thing about a project like Aqua. It is a New Zealand thing that New Zealanders will resolve in a New Zealand way. We have to be optimistic that when all the talking and hearing and ruling is done, the best decision will have been made. Anything less is an admission of despair. There is no hat colour for despair.

Thank you.

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