Fri, 18 June 2004

Hon Pete Hodgson Address to the Electricity Engineers' Association of NZ Conference 2004

Overview of energy sector developments

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Thank you for inviting me to open this year's conference and congratulations to your organisation reaching the ripe old age of 75.

Your conference theme was chosen months ago, but recent events, the shelving of Project Aqua and the unfolding of events around the upper South Island's grid capacity, certainly reinforce just how relevant this topic will always be.

I'll come back to Grid issues, but first I'd like to catch up on a couple of major events since I was here last year.

We've moved from the announcement to the actual establishment of the Electricity Commission and it has already been in the thick of doing exactly what it was set up to do.

The first reserve plant, Whirinaki, was commissioned just three weeks ago and the Commission is working with many of you in bringing the industry together to ameliorate capacity constraints.

The Whirinaki plant is an insurance policy to be called upon in during a dry year, or to meet demand caused by localised generation or grid problems. The Commission has already decided that not seek additional reserve capacity for next winter. Whirinaki, assurances about fuel supplies at Huntly and other thermal plants, reinforced by the outcome of the Maui renegotiations, will contribute sufficiently to the increased security desired.

This and the ongoing work around managing grid development are important in themselves, but are simply illustrative of the role, value and effectiveness of the Commission in promoting security of supply.

While these issues have taken the Commission's immediate attention, they are by no means the limit of its responsibilities. It has a broad remit to encourage and facilitate action in many other areas including energy efficiency, system operation, transmission, distribution, distributed generation, retail competition - and more.

This brief is laid out in the Government Policy Statement on Electricity Governance, or GPS, which is in effect the blueprint for the commission's work. The GPS, which will be finalised shortly, outlines the Government's expectations for the effective operation of the electricity market and will identify four priority areas:

· Security of supply and reserve generation; · Priority investment in the transmission grid; · Hedge market arrangements and demand-side participation; and · Energy efficiency.

As engineers, you'll know only too well the need for a comprehensive and well thought out specification for anything that is likely to achieve its designer's aims. We have attempted to achieve this with the scope and detail of the document.

There is one more important document connected to the Commission. This is the Electricity and Gas Industries Bill and it is this that will further empower the Commission to do its job. While this gives the Commission the teeth it needs. So far the industry has been reassured by the Commission's clear intention to get its job done by encouraging co-operation across the sector, and holding back the use of regulatory powers as a last resort.

The Commission's is no small task, but it is already proving to be well up to it.

Very significant developments have also been made within the gas industry to address forward supply issues around Maui.

Firstly, I announced three weeks ago the result of around 15 months of negotiations around the division of remaining Maui gas. This has been hard work but the result is one that is very good for New Zealand. Allowing a more realistic market price means that remaining reserves will be maximised, and delivered in a way that provides a deal of certainty to many of the biggest users.

While many purchasers have enjoyed years of relatively cheap Maui gas, this has had the unwanted effect of depressing new exploration, as the price achievable for new discoveries would have been at a level deemed by many to be too low to warrant the cost of developing new fields. In allowing the price to move to market levels, we've provided a major incentive for new exploration.

Within the same timeframe, Pohokura gas has been marketed, adding yet more realism to price discovery in our market.

Both of these outcomes should provide the market with sufficient volumes for the short term.

My concern though is ensuring we have enough gas through the next decade. Today, this is by no means certain. On Monday, I announced a package of measures designed to increase gas exploration over the next four and half years. The measures have been carefully designed to stimulate new discoveries and investment so that we have new fields in production as Maui and other fields become exhausted.

This is a far sighted and prudent policy to help ensure our needs are met well into the next decade and one that has been well received by the exploration community. [OF course they'd have liked more still, but they do see the value in what's on the table.]

Gas fired generation will continue to make a critical contribution to providing security of supply well into the next decade. New gas supplies are needed to secure this future.

This then is what's been happening on the government side of the industry.

It has though been an eventful year for the generating companies, Meridian in particular and It's decision to shelve project Aqua.

Some people have expressed surprise that the Government did not react with alarm to this announcement. Let's be quite clear about this - The Government has always held the view that Project Aqua would need to stand or fall on its own merits. In other words, the Government is not in the business of trying to pick winners in what is, by its very nature, a complex business.

All developers face engineering challenges and each type of generation has as many advocates as detractors. In the end, Meridian took a commercial decision not to go ahead based on what they learnt as they continued with the engineering and public consultation around the project. The decision was theirs.

Aqua was one of many different power projects under active consideration, or at the planning stage and we should not be overly concerned that the country might run short of electricity.

Ministry of Economic Development data shows that we're still on track to have an additional 220 Megawatts of new generating capacity in this calendar year to be followed by in successive years by an additional 150, 70 and 400 Megawatts - a total of around 840 Megawatts over the four-year period. These are however conservative estimates.

These figures should be viewed against the background that we need around 150 MW of new generation each year to keep up with predicted increases in demand.

A significant and growing portion of this new capaicty is being brought forward as a result of the excellent response to the first tender round for carbon credits. These are projects that might otherwise have not been pursued without this incentve but that will make a valauble reduction to New Zealand's greenhouse gas emissions.

The first offer of four million carbon credits resulted in awards of credits to 15 emission-reducing projects out of 46 bids. These including wind farms, hydro-electricity, bioenergy and landfill gas schemes, and cogeneration plants.

Our view that was New Zealand businesses would be very willing to grasp opportunities to bring forward innovative, cleaner energy developments. This has been confirmed. A new bidding round will be run later this year under which another six million credits awill be available.

So we can see, there is little shortage of new projects being brought forward. The only question is which will proceed.

All projects must though gain the necessary consents and manage the fact that there are upsides and downsides, supporters and detractors for each type of generation.

Take wind generation for example. Many people think that wind farms are a great idea as long as they don't have to see or hear the windmills. Or hydro generation. Again, in some people's minds they're a logical way to go but issues around access to water, flooding, environmental and conservation considerations must be properly addressed.

We have to put in place the ground rules and standards against which all proposals for future development can be judged.

The Resource Management Act is a primary tool in our kit. Certainly there are some areas of it that need improvement. In particularly those around how the national benefits of energy infrastructure (new generation/Grid infrastructure/or even gas infrastructure) are weighted against local impacts.

We are not, I should emphasise, carrying out a wholesale review, because protecting the environment must remain a cornerstone principle of the RMA. Rather, we are looking closely at those areas that have proved to be the more difficult hurdles to cross. The aim is to develop the Act to provide greater certainty and clarity in the way it operates and is applied, to improve the quality of decision-making, and to further reduce delays and uncertainty about costs.

But addressing issues on the supply side is only half the story.

As a nation, we must put more effort into energy conservation and efficiency. To some extent this has been an historic function of relatively low energy costs compared to paying to make our homes and businesses more energy efficient. It also reflects that many of use simply do not pay enough attention to energy efficiency or take any action to address it - even to the extent of taking no-cost action such as turning down the thermostat on hot water tanks.

The Government is targeting an improvement in overall energy efficiency of 20 percent by 2012.

I make no apology for repeating the point that when this Government updated the Building Code in 2000 to raise the energy efficiency standards, it was the first time that this had been done since 1977. It is essential that energy efficiency is built into our national housing stock.

Or the point that when we introduced the National Energy Efficiency and Conservation Strategy in September 2001, it was the first such strategy in New Zealand's history.

Or the point that the minimum energy performance standards for electrical goods and machinery that we began to introduce in 2002 are also the first we've had.

We must make further improvements in the nation's energy efficiency, because we simply can't continue spending our hard earned dollars on energy we simply don't need to use. Reducing the overall rate of demand growth will, of course, also suppress increases in the marginal cost of energy.

We must do more to moderate demand and to make the best use of energy efficient practices and technology so that we can make the best use of what we already have at the best price. Everybody in New Zealand has a part to play in this and I'm determined to make more people see the reason and benefits of thinking about energy efficiency in their everyday lives.

Every time we succeed in doing more with less, we delay by another fraction the need for expensive new energy infrastructure.

This leads me on to sustainable development and what it means for the energy sector. Sustainable development is a key government priority. There are many definitions of sustainable development, but I'm talking about meeting our current and future needs in a way that has the least impact on ability of future generations to meet theirs.

Early in 2003, the Government published a Sustainable Development Programme of Action, a document that identified energy as a central issues.

Many government departments are involved in developing an overall framework to guide our thinking on sustainable energy into the future. Such a structure is vital if we are to meet the challenges that lie ahead, including those posed by climate change.

Emissions reduction plays a key part in tackling climate change issues. It's worth remembering that renewable energy already makes up 29% of New Zealand's total consumer energy - one of the highest levels in the world. But we have the potential to do even better than that. [While maintaining grid stability and security of supply]

We have the target of an additional 30PJ of consumer energy from renewable sources by 2012.

While a focus on greenhouse gas emissions and the part we play as a nation in addressing the global issue of climate change is important, the supply of energy has environmental impacts much closer to home. Poor air quality, localised smog from motor vehicles and wood and coal fires, the flooding of land for hydroelectricity generation, and the local effect of geothermal generation all need to be managed.

Our challenge is to provide security of supply in a way that promotes sustainable development on economic as well as environmental grounds. A win-win approach must be found.

You might, by now, be wondering if I've forgotten about the recently revealed transmission constraints in the upper South Island. As you can imagine, this is an issue that has taken a great deal of my attention in recent weeks.

I spoke about the role of the Electricity Commission earlier. They are playing a key role in addressing the immediate problem in the upper South Island. The primary focus is to do all that is reasonably possible to reduce to a minimum the risk of supply interruptions this winter. The Commission has taken the lead role in facilitating this work and, together with the industry, has put in place the following measures, particularly around the early evening peak:

· full ripple control of water heating by lines companies; · additional use of customer-owned generation - typically standby generators; · maximising the output of existing generating stations; · connecting Timaru to other transmission lines so that it does not add to the upper South Island load; · adding capacitors to at least one local network; · enabling higher transmission capacities on existing lines by means of a contingency management plan.

I am sure many of you have been directly involved in what has been a true industry wide response to this challenge. While I've had close contact with the Electricity Commission and several meeting with Transpower, I've often not had the opportunity to speak to the many people that have been putting the solutions in place on the ground. I'd like to take this opportunity to thank you for your efforts.

While we'd all rather things had not got to the stage that they had in the upper South Island, it has once again proved that the industry can work well together to overcome common difficulties. As Energy Minister, that gives me no small degree of comfort.

It is important to me to emphasis that the Commission's work on this issue is not restricted to this immediate problem. Both the Commission and Transpower, along with the rest of the sector, are looking hard at the Grid to see if there is any potential for such problems elsewhere in the country in the short term.

They are also continuing to develop an effective management strategy around future grid investment to minimise the likelihood of such problems over the medium to long term. One significant factor in this is the Commission's ability to have a view of plans for both Grid development and new generation. Such an overarching view puts it in a good position to advise on how best companies can coordinate their efforts to build network security.

In closing, I hope that my comments have set the scene for some interesting and lively discussion during the course of your conference.

You have an interesting range of speakers scheduled and I've no doubt your programme will spark some lively debate. I expect many of you are particularly looking forward to hearing from Transpower's Dr Ralph Craven.

I wish you well, and trust that the Christchurch weather behaves itself for the duration of your stay.

ENDS

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