Hon David Parker
Minister of Energy
Minister Responsible for Climate Change Issues

1 March 2006

Speech

Power conference speech

Good afternoon everyone and thank you for the opportunity to address you. As many of you will know, this is one of my first chances, since being given my energy and climate change responsibilities, to address a widely representative gathering of the energy industry and interested observers.

I think that it would be useful to start by summarising briefly the government’s achievements in the energy area over the past six years. These provide the base from which to move forward into what will be a very crucial couple of decades in the long-term development of New Zealand.

Key initiatives and enhancements to improve the performance of our energy sector have included:

- Establishing the Electricity Commission to take responsibility for the governance and regulation of the electricity industry, along with promoting and facilitating energy efficiency initiatives;
- Formulating the Government Policy Statement on Electricity Governance setting out the objectives for the Electricity Commission’s operations, including security of supply and reserve energy concerns;
- Establishing the Gas Industry Company and the associated Government Policy Statement on Gas Governance;

- Establishing the Energy Efficiency and Conservation Authority and the associated national strategy to promote improvements in energy efficiency and renewable sources of energy;
- Releasing the Sustainable Energy discussion document which has served to focus our thinking on sector and public concerns about long-term energy security, affordability and sustainability issues
- Implementing gas exploration incentives to help us in our efforts to secure future gas supplies.

Looking ahead over the current government term, the clear challenge for our energy policy programme is meeting New Zealand’s future energy needs in a way that protects our way of life, our economy and the environment. Specifically, we must, over time, develop a national energy system that balances the three sustainable energy outcomes:

- Reliability and resilience, balanced against the costs involved;
- Environmental responsibility, both locally and globally; and
- Fair and efficient pricing.

I'd like to cover off an issue that we are all well aware of - South Island hydro lake levels. The Electricity Commission was set up in part to deal with this issue.

I am regularly updated on lake levels by commission, whose job it is to monitor lake levels and take appropriate steps to ensure security if supply.

I am advised that while the decline in lake levels is of concern, storage levels are still well within the range where we expect the normal operation of the electricity system to meet the demands on it. Of course the position would be more comfortable next year, by which time the new gas-fired station at Huntly, E3P, will be on line.

This year there will be more North Island thermal generation than on average and less South Island hydro. But I am informed that there is a low probability of the situation becoming dire this year. So while it's possible, it's unlikely.

The commission will continue to monitor the situation and, if the storage levels worsen dramatically, will alert the public as to the need to take action to reduce electricity demand.

To help us all concentrate our minds on the issues facing the energy sector, the government announced last year that we would develop a National Energy Strategy.

We expect this to provide long-term direction and leadership for New Zealand to put us firmly on the path to an energy system that supports economic development, while being environmentally responsible.

The terms of reference are currently being finalised, with the target of developing and consulting on the draft strategy over the next sixth months. The process will be highly consultative, and there will be ample opportunity for input by stakeholders to the draft strategy and development of key issues.

The principal challenge is to strike an appropriate balance between flexibility around the various options open to us and the direction needed to provide a reasonable level of certainty that strategic objectives will be met.
We also need to achieve integration of the strategy with other existing work programmes, including the National Energy Efficiency and Conservation Strategy, the New Zealand Transport Strategy and climate change policies.
Government decisions following the Climate Change Review will also have a bearing on further measures that the government may wish to adopt.
I think that it would be useful at this point to outline some general principles which need to guide the proposed strategy.

It needs to take a long-term view recognising, of course, that it is impossible to set energy policy in concrete owing to the uncertainty of future events and developments. The strategy will therefore:

- explore a range of future energy scenarios
- facilitate stakeholders’ views on possible transition paths
- identify key values and objectives
- set strategic priorities.

Specifically, the development of the strategy will aim to:
- Clarify and set out existing government policies and other actions
- Integrate energy policy with related policy areas such as climate change
- Highlight further development of existing policy where necessary
- Identify new cost-effective actions or initiatives required to meet New Zealand’s energy and related goals and objectives.

Just as an example, the government will look at energy research and determine what are the priority areas.

The strategy may well develop a number of possible different transition paths, and then explore the role of both government and market actions in pursuit of outcomes.

The strategy will need to incorporate a system-wide view, covering both demand and supply and related policy areas such as climate change. Security of supply of both stationary and transport fuels must remain a key priority and the strategy will draw on various scenarios that explore New Zealand’s energy options.

We accept, of course, that some thermal power from fossil fuels will be needed in our energy system for the foreseeable future, to allow for the vagaries of our weather that affect both hydro and wind generation. The strategy will model the mix of generation types that we have available. It will also assess the scope for reducing greenhouse gas emissions by changing the generation mix while maintaining acceptable thresholds of price and security.

The strategy will also explore the impact of energy choices more broadly – for example, the potential impact a change in land use to grow of biofuel feed stocks would have on competing agriculture activities.

The strategy will be aligned with the replacement National Energy Efficiency and Conservation Strategy. Both strategies will combine to push for more aggressive uptake of energy efficiency and renewable energy.

I am determined to maintain, and where possible increase, the proportion of energy supplied from renewable sources. Although renewables constitute a high proportion of electricity generation in New Zealand compared with overseas averages, renewable electricity has decreased its market share of total electricity supply over recent years.

We use virtually no renewable energy sources in our transport fuels at present. This too needs to be addressed in New Zealand, as it is being in other countries as diverse as Sweden, Canada, the US and Brazil.

In electricity, a focus will be on new viable and affordable renewable sources of energy, to augment existing renewable energy supplies, 500 megawatts of which have come on-stream over the past six years. Energy efficiency can compete very favourably with the cost of new generation, and will be considered as an alternative to some new generation.

The strategy will need to address any outstanding barriers that might limit opportunities for renewable energy improvements – for instance, from smaller scale generation technologies or the use of local energy sources.

Work is already underway on two subset areas of the strategy to explore whether there is a useful role for a national policy statement or other form of guidance under the RMA, on the development of further generation projects and the enhancement of our electricity transmission system.

Hand-in-hand with these studies will be an assessment of the related transmission, grid control and load management issues associated with various types of distributed generation, particularly where generator outputs vary markedly with time.

The strategy needs to continue to promote a favourable investment environment in the energy sector. Businesses will be key players in future energy sector developments, and will be central to promoting and promulgating sustainable energy practices – particularly through long-lived, energy-efficient and emission-reducing capital investments.

The strategy will also provide a long-term focus for energy R&D priorities and programmes, and will highlight the potentials of new energy technologies or further development of existing technologies like geothermal, and any roadblocks to their development. This will be important because timely access to new technologies and energy resources is something which will remain important over the next two decades.

I am sure most agree, that an enduring and sustainable long-term vision benefits from strong contributions from both the energy sector and the wider community. The development of the strategy will include a robust, transparent process that encourages engagement with all interested parties.

A key role for the government will be to facilitate the processes and the associated debate, and to ensure everyone has the opportunity to have their say. A draft strategy is likely to be available for wide consultation sometime during the second half of this year.

Of course the strategy will not be the “silver bullet”, and it cannot provide the level of certainty of outcomes that some may desire. Inherent unknowns include New Zealand’s future climate change obligations, the timing of a decline in oil reserves, future prices and the availability of new technologies.

As you can no doubt appreciate the scope and scale of the work programme ahead is considerable. We have a great deal of research and evaluation to carry out over the next few years, and I would invite you all, as well as the wider community, to contribute to this important work. At the same time, we expect that work already underway on energy efficiency concepts and renewable energy sources will carry on apace.

Now for some comments on Transpower’s future plans, the gas sector and my climate change responsibilities.

Transpower’s grid upgrade plans have understandably had a very high profile over the last year or so, and the wide range of viewpoints on these plans must be acknowledged. Nevertheless, I have confidence that the detailed Electricity Commission process that we have put in place to evaluate proposed transmission grid upgrades, and any alternatives to those upgrades, will produce fair and reasonable outcomes at the end of each study.

I agree with Keith Turner's comments earlier today than an industry-wide consensus is desirable. I have asked major generators with capability in assessing transmission alternatives to give high priority to their engagement with the Electricity Commission and the proposals from both the commission and Transpower. It is important that they understand the various proposals and their implications so that differences between the parties can be narrowed and that the principles underlying any remaining differences can be understood and clearly articulated. These issues are critical.

It is also important to recognise that all costs associated with transmission upgrades must ultimately be picked up by those that benefit from the delivery of power in the desired quantities from a transmission grid that meets the required high standards of reliability.

The detail of how and when those costs are passed through is also subject to regulatory oversight. I am confident that that the regulatory arrangements in place will result – in the end – in consumers paying the right amount, at the right time, for the right level of service.

Turning now to the gas sector – you will know that the Gas Industry Company is the central component of the new co-regulatory regime. I’m pleased to note that the company has now moved past its establishment phase, and is diligently applying itself to the development of the necessary arrangements, including regulations and rules.

I therefore expect that this year I will receive a number of recommendations from the company on an array of industry arrangements.

I think that it’s important, at this juncture, to re-iterate that the Gas Industry Company is first and foremost a regulator – one which develops regulations and ensures enforcement and compliance with those regulations.

It achieves this through bottom-up involvement of industry and consumer stakeholders and a close partnership with the government. I am confident that we have a very good regulatory model to work with which to work – one that will meet the government’s expectations for this sector.

Since taking over this portfolio, I have noted, and been the recipient of, substantial commentary on an imminent “gas supply gap”. I can assure you that the government, through its officials is keeping abreast of the gas demand and supply situation, which includes receiving regular updates from industry players.

You are no doubt aware that in forecasting gas demand and supply, there is significant uncertainty around a range of factors on both the demand and supply sides.

For example, gas demand will be affected by the demand from gas-fired electricity plant, which in turn will be dependent on hydro lake levels. Gas demand will also be dependent on the level of methanol production in New Zealand, which is difficult to predict.

On the supply side, there is potential for further gas discoveries or higher yields from existing fields.

Even with the best of current modelling, it is not clear when a “gas supply gap” will occur, because the level of gas banking – that is, deferred consumption of gas until latter years – is uncertain. The model, however, suggests demand and supply constraints around 2012.

I stress again that this is but one scenario. No doubt, others will have models that show different conclusion but may be equally defensible. The process of modelling gas demand and supply is a dynamic process that officials are updating as new information comes to hand.

I recognise, as one would expect, that in response to this gas supply uncertainty a number of companies are exploring options, including importing Liquefied Natural Gas or Compressed Natural Gas.

Regardless of the exact timing of the “gas supply gap”, it does serve to heighten our awareness that additional supplies of gas will be needed. The uncertainties as supply in turn cause significant uncertainty about future gas and electricity prices.

These uncertainties underline the desirability of finding more gas.

I’m pleased that the initiatives we have put in place over the past 18 months are helping to accelerate petroleum, and especially gas, exploration in New Zealand. The international demand for drilling rigs, however, presents something of a challenge in attracting exploration equipment to this part of the globe.

Nevertheless, we are hoping that the increased interest and activity we are currently experiencing bears fruit in the form of further gas discoveries.

Moving on now to climate change policy, I want to emphasise two important points.

The first is that responsible policy makers all around the world have concluded, as New Zealand has, that climate change is accelerating and poses a significant threat to our economy, our environment and our way of life. Secondly, the government is committed to reducing greenhouse gas emissions and to meeting our international obligations.

In policy terms, these two terms are not up for debate, but how we reduce emissions is currently under review.

Late last year we announced we will not be proceeding with the proposed carbon tax. Instead we will consider other ways of managing New Zealand’s greenhouse gas emissions

This means that there will not be a carbon tax, or other broad-based tax, in the Kyoto Protocol’s first commitment period from 2008 to 2012). A more narrowly focused tax is, however, still a possibility.

The decision regarding the carbon tax, and the need to review our current climate change policies, directly followed the receipt of a major report from a cross-departmental team responsible for undertaking a stock-take of New Zealand’s climate change policies.

This review was timely, given the changes that have occurred since the 2002 policy package was introduced. Since then we have had higher than prior rates of economic growth (amongst the highest in the developed world) and related growth in emissions.

The government has asked officials to undertake further policy analysis, and then report back to Ministers during March on a climate change policy work programme. I will be discussing this advice with my colleagues, and we will then provide further guidance – probably by early April.

The March report-back will include work programmes for the following issues that are relevant to the energy sector:

- Revisiting New Zealand’s climate change goal
- Looking at short and long term alternatives to the carbon tax, including emissions trading
- Consideration of Negotiated Greenhouse Gas Agreements, including their possible retention or replacement with other voluntary or mandatory arrangements
- Reviewing the role of the Kyoto Protocol mechanisms – Joint Implementation, the Clean Development Mechanism and International Emissions Trading – in a unit purchasing strategy;
- Looking at incentives for renewable energy and disincentives for fossil fuel- based electricity generation

- Evaluating opportunities to reduce energy emissions generally, including the development of the National Energy Strategy and energy research priorities
- Reviewing the National Energy Efficiency and Conservation Strategy
- Developing incentives or disincentives for purchase and use of different transport modes and improving the efficiency of our vehicle fleet
- Biofuels
- Assessing the need for, and future shape of, incentive programmes such as Projects to Reduce Emissions.

Once the work programmes are scoped, there is likely to be further stakeholder consultation on the detail of policy options. Many areas of climate change policy require consideration alongside policy for other sectors like forestry.

I wish to emphasise that the government is open to consideration of a wide range of possible policy responses, while also wanting to initiate developed policies as soon as possible. This will present some coordination challenges for all parties involved, and I look forward to the energy sector’s contribution to this very important process over the coming months.

So, you can see that we have a busy and challenging year ahead of us. I'm looking forward to it and I hope you are too.

ENDS

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