Hon. Pete Hodgson
Wednesday, 31 March 2004 Speech Notes

After Aqua: NZ's electricity future

[Address to "National Power NZ 2004" conference, Hilton Auckland]

Unsurprisingly, I thought I would begin by discussing Meridian's surprise announcement earlier this week that it was stopping work on Project Aqua.

I hope the conference organisers gave Keith Turner an extra sausage roll in appreciation of the extra interest and attention he generated for this event.

At over 500 megawatts, Project Aqua loomed large in this country's energy future, particularly because Meridian was confident it could be built affordably. It promised a large amount of competitively priced baseload generation, starting in about five years or so.

The shelving of the project will inevitably prompt a reassessment by everybody in the electricity generation business of the opportunities they have for new projects around the end of this decade.

The reassessment will concern both the capacity for new megawatts and the price at which that capacity will be competitive. That price is likely to be a little higher than it would have been with Aqua around.

I have been given two estimates of the possible increase – one of about a cent a unit, another of about half a cent, both cutting in around the end of this decade.

Either way, we can expect a reasonably wide range of projects to come into contention.

The positive feature of Meridian's decision for those involved in planning future generation is that it has come so early.

The Government’s position on Aqua has always been that if it is to proceed it should proceed on time — and if it is not to proceed the country needs to know that sooner rather than later.

In the event we have found out sooner than any of us expected. Meridian has made its decision in good time for other generation options to be rescheduled and for new proposals to be developed.

Given that power from Aqua was due to come on progressively from 2009 till 2012, there does not appear to be any good reason to fear that alternatives might not be brought onstream in time.

Rather than causing any immediate problems, the cancellation of Aqua brings about a major realignment further out.

Yesterday I released an updated list of projects that we know are coming on in the next four years. I think it's important to lay this out, because I have heard a number of commentators in the last couple of days claiming that nothing is being built.

At times I wonder if the study of journalism or engineering might cause an optical disorder that renders anything less than about 400 megawatts invisible. This morning's Herald editorial, for example, claims that investment in new generation is "almost stalled", which is patently untrue.

The list of confirmed new projects includes:
- Trustpower's expansion of its Tararua wind farm by about 40 megawatts, on target for completion in May;
- the Government's 150 megawatt oil-fired reserve generation plant at Whirinaki, Hawke's Bay, on track for commissioning in a few weeks;
- Genesis' new open-cycle gas turbine of 40-odd megawatts at Huntly, due to be commissioned by the beginning of July;
- Meridian's Te Apiti wind farm, of about 90 megawatts, due to come onstream progressively over the next year or so;
- a further 40 megawatts at the Mokai geothermal station, due by Autumn 2005; and
- Genesis' "e3p" combined cycle gas turbine at Huntly, about 400 megawatts, which the company says it expects to commission in December 2006.

There are a number of smaller generation projects as well, including geothermal, improvements to the efficiency of existing hydro, and cogeneration.

The total coming on from this year until 2007 is about 840 megawatts.

The average over the next four years, in other words, is over 200 megawatts a year — when New Zealand needs to average about 150 megawatts of new generation a year to keep up with growth in demand.

Looking at progress over a longer timeframe, the average growth rate between 1990 and 2007 will be about 160 megawatts a year.

And this is working from a conservative assessment of what is coming onstream. Many more proposals than those listed are under assessment within the energy sector.

Some of these will sneak up on us quickly — announced one year and built the next, like Meridian's Te Apiti windfarm.

We will also have to factor in anything the Electricity Commission chooses to build by way of reserve generation, or provide for by way of demand management.

This is an activist Government and I am an activist minister. I am not setting out this information by way of saying "She'll be right". In particular I haven't yet touched on gas reserves or the Resource Management Act.

I am simply trying to intrude some facts into the debate about our future electricity needs.

There are some real challenges ahead. We are at a turning point in New Zealand's energy history.

Hydro has been our mainstay for decades, providing New Zealand with some of the cheapest electricity in the developed world.

But future hydro development is likely to be small to micro in scale. It will continue to be an important source of electricity, but its massive dominance of our electricity system will gradually be eroded.

The advantage will be a gradually decreasing vulnerability to the risk of shortages in dry years. The disadvantage will be that other new generation sources will not be as cheap.

Wind power is becoming more attractive as capital costs fall and electricity prices rise. It is about to grow rapidly into a significant minority or our generation capacity. It will quadruple over the next year or so, and by international standards our wind resource is very good.

Clearly, however, wind cannot be the only answer to our growing electricity needs. It has a relatively low load factor. There are technical limits on how much wind generation can be handled by the national grid. And the best wind sites will become more expensive with time, after the easiest locations have been taken.

Geothermal power is another significant minority player. While it is a generally stable source of power, it too is unlikely to become a major source of energy for our future growth.

Gas has been the main fuel for new thermal generation in the last couple of decades, given the abundant and flexible supply from Maui.

Facing the future without Maui is probably the biggest energy challenge ahead of us.

Maui is not dead yet. Existing small fields are still producing. Pohokura, Kupe and presumably Karewa are on their way into production.

Total known reserves might therefore get us through to about 2015, if consumption averaged about 140 petajoules a year.

But there are no known supplies beyond that, and this is a country that has allowed itself to believe that there was always loads of proven, available gas. More exploration is needed.

It is true that exploration has increased significantly with the impending demise of Maui. The number of wells drilled per year has doubled since the early 1990s.

Crown Minerals is active in marketing exploration blocks, with a new Northland block offer announced earlier this month and work under way on at least two more, for Taranaki and the East Coast, over the next twelve months.

The question now before the Government is whether this is enough. The answer appears to be: "Perhaps not". We have an attractive fiscal regime and our international ranking for prospectivity is now high. But no stone can be left unturned here.
Therefore we have been actively investigating, for a little while now, whether we can provide an even more positive environment for gas exploration, and expect to make decisions in the next month or two.

The electricity sector is taking its own initiatives in this area, with Contact and Mighty River setting up their joint fund for gas exploration, and Contact joining Genesis in funding a feasibility study into the importation of LNG. These are prudent, useful moves.

There is no doubt that New Zealand has plenty of gas — we just have to drill enough holes to find it, and attract the capital necessary to develop the fields.

Similarly there is no doubt that we have plenty of coal.

What is not clear yet is what the future balance between these two fuels will be within our electricity system.

To a large extent that will be determined by what gas is found, where and at what price.

It will not be determined, contrary to some suggestions I have heard, by whether or not New Zealand has a carbon tax.

The carbon charge this Government's climate change policy envisages would add perhaps a cent to the unit cost of new gas generation and a cent-and-a-half per unit to the cost of new coal generation.

It will not radically alter the price differential between gas and coal. And it is a small variable compared to the level of uncertainty about wholesale gas prices, which are in the process of doubling and could rise still further.

Perhaps the industry's current tendency to focus on the prospect of a carbon charge arises from the superficially reasonable premise that, unlike the future price of gas, it is entirely within the Government's power to clarify what the charge will be.

We have provided some clarity by specifying that the charge will be no more than $NZ25 a tonne of carbon. Industry might want to think very carefully about what calls for more clarity might entail. A minimum charge? A fixed price now?

Those who wish that this would all just go away, or hope that it will if the Kyoto Protocol does not come into force, have missed a fundamental point about global energy politics.

Whether by Kyoto or some other mechanism, we are heading into what is now usually referred to as a carbon-constrained world. A price on carbon is being gradually and irreversibly embedded in the global economy.

New Zealand cannot shut itself off from this development. Attempting to do so would simply turn us into a museum for outdated energy technologies, just as we once managed to turn our nation into a quaint South Pacific car museum.

A carbon charge is not so much about pricing fossil fuels out of the market as about pricing alternative, low-emission and efficient energy technologies into it.

We might well see new coal-fired electricity generation built in New Zealand in the next decade. A carbon charge will not prevent that happening. It will simply ensure that the price we pay for that electricity will be a little more reflective of the environmental cost of choosing that source of energy.

There is also a real benefit for the energy sector from climate change policy that is too easily overlooked. It is called Projects to Reduce Emissions.

Last year's Budget contained, for the first time, two currencies. One was the New Zealand dollar. The other was 4 million tonnes of carbon credits. These credits were offered by tender to anyone with a project that would reduce greenhouse gas emissions, but which was not quite economic on a business-as-usual analysis.

The bulk of the successful bidders are projects that will help make New Zealand’s electricity supply more secure in the next few years, as well as reducing emissions. They include wind farms, geothermal and hydro-electricity schemes.

I recently signed the last few contracts to be concluded from the tender round and I'll be announcing the total results tomorrow. If all of the contracted projects proceed, the result for the electricity system is equivalent to more than a third of Project Aqua. And if a contract is to proceed it will need to be done by 1 January 2008, or the credits won't be earned.

Without the Kyoto Protocol, this wouldn't be happening.

Like the Protocol, the Resource Management Act won't prevent new thermal generation being built — or new renewables, for that matter.

More than 2000 megawatts of new generation capacity has been built in New Zealand since 1990, most of it, obviously, under the RMA.

The RMA did not create the NIMBY syndrome, nor did it inspire a previously unknown human and commercial capacity for mercenary or vexatious objections to new projects.

Of course it can be improved.

This Government has already made amendments to streamline consent processes generally, as well as more specific amendments to ensure better consideration of the benefits of energy efficiency and renewables when decisions are made on energy projects.

We have also increased the resources of the Environment Court, enabling it to slash its backlog of cases in half and cut the time taken to hear cases by even more than that.

There will inevitably be more change to come, as we keep the whole RMA framework under constant review. My colleague David Benson-Pope has been speaking publicly about that today.

But there will always be a need to consult communities about developments affecting them, particularly major infrastructure projects. People have a right to air legitimate concerns about any proposal. In fact we compromise our ability to make wise decisions if we do not allow such scrutiny.

Already, inevitably, the critics have picked up Project Aqua as Exhibit A in their case against the RMA.

I appreciate Keith Turner's careful, honest insistence that the decision on Aqua was not simply a case of consent fatigue, despite endless invitations to do so.

I also appreciate his call yesterday for the industry to think strategically and suggest practical improvements to the law, rather than simply complaining to the Government.

And I would remind those who take the demise of Aqua as an indictment of the RMA that Meridian also has a remarkable story to tell about a project that shot through the consent process in a flash. It secured consents for its Te Apiti wind farm in a matter of days.

Let me close with some brief comments on energy efficiency and conservation, the other side of the story about our future energy needs.

I have been talking mostly about the supply side today because that is where interest has been focussed by the Project Aqua announcement, but many of you will be aware that my interest in the demand side is just as strong.

A key factor in the sequencing of new generation over coming decades will be the extent to which we are successful in moderating demand growth by increasing energy efficiency and conservation.

The National Energy Efficiency and Conservation Strategy aims for a 20 percent improvement in the nation's energy efficiency by 2012, and is currently on track to achieve that.

The more we save energy, the more we moderate the need for costly investment in new generation.

It has been argued at this conference that New Zealand has limited scope for improving energy efficiency without an expensive and unlikely turnover of capital stock – and that demand growth will inevitably march ahead in lockstep with economic growth, forever.

That is not the experience of other modern economies, where demand growth is increasingly being decoupled from economic growth.

Yet this kind of supply-side thinking has dominated in this country for decades. It needs to be spiked.

Let me do that with a few quick examples.

Chelsea Sugar replaced a sugar purification process that had run with little change for almost 120 years. Chelsea halved its gas consumption, saved on labour, water, wastewater, heat and air pollution, and expects the $7 million it spent on new plant to repay itself in four years.

Sealord focussed on energy use at its Nelson and Dunedin processing plants and cut it by 6.5 percent while increasing production by 7.5 percent.

DB saved about 10 percent on its annual electricity bill and 30 percent of its gas consumption by improving efficiency.

Norske Skog Tasman replaced fuel oil with wood waste to heat their boilers and saved $500,000 worth of electricity a year, enough for about 3500 homes.

EECA's EnergyWise Awards tonight will show off even more such examples.

New Zealand's electricity has always been so cheap that it should not surprise us when we find we have not been using it as efficiently as we should.

Of course we can do more with less, and the incentives to do so rise with prices. They also rise with our aspirations for a more sustainable energy future — or the realisation that inefficient use of energy is just a bit dumb.

The demand side embraces energy efficiency, load shifting, energy conservation, and, by some people's reckoning, fuel switching. If we look at it as a resource, alongside supply resources, its potential for helping meet our energy needs is large indeed.

The problem with the demand side resource is that it is very diffuse and difficult to identify, unless you set out determinedly to do so. It is, however, cheap. And if we are interested in achieving the holy grail of a secure electricity supply at an affordable price, the demand side demands more attention. From all of us.

Thank you.

ENDS

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