Meeting the energy challenge - the New Zealand Energy Strategy to 2050

In October 2007, the Government released the final version of its Energy Strategy which sets out a long-term framework for addressing the main challenges New Zealand faces, namely the reduction of greenhouse gas emissions to tackle climate change and the security of energy supply. In this update we set out some of the key Government policy initiatives set out in the Energy Strategy designed to achieve those two aims.

We do not set out in detail all of the matters discussed in the New Zealand Energy Strategy (NZES) since it generally follows the goals and initiatives proposed in the draft strategy released in December 2006. (For a review of the draft strategy please refer to the article "Draft New Zealand Energy Strategy released on 11 December 2006" in the Summer 2007 Commercial Quarterly). However, this is not to say that the Government ignored the 331 submissions it received on the draft strategy. In the Cabinet paper on the final NZES, the Minister of Energy, David Parker, notes that the NZES vision had been amended to better recognise:

• the importance of both energy supply and demand aspects;

• the role of appropriately regulated markets in delivering security and competitive prices;

• the role of an economy-wide Emissions Trading System in reducing emissions;

• that measures to promote energy efficiency and renewables should be cost-effective;

• that the local environmental impacts of energy generation and transmission should be managed, particularly in the case of renewables; and

• the need to support consumers (both households and businesses) through the transition to emission pricing.

Overview

The development of the NZES has been a whole-of-government process and it is linked to Government's policies on economic development; sustainability; climate change; carbon neutrality; transport; resource management; and research, science and technology. In particular it is designed to work alongside:

• the New Zealand Energy Efficiency and Conversation Strategy (NZEECS) released at the same time as the NZES which sets out the Government's policies, objectives, targets and means for energy efficiency, energy conservation and the use of renewable energy; and

• the New Zealand Transport Strategy (currently being updated by the Government).

The final NZES has retained the structure of the draft strategy and is divided in to two main parts. The first part sets out the Government's vision for a sustainable energy system and the key actions which are proposed to meet this goal. Part two details the various initiatives the Government proposes to follow both now and in the future. Overall the NZES focuses on seven areas, with proposed actions in each area. These are:

• providing clear direction on the future of New Zealand's energy system;

• utilising markets and focused regulation to deliver energy services at competitive prices;

• reducing greenhouse gas emissions;

• maximising the contribution of cost-effective renewable energy resources while safeguarding the environment;

• promoting early adoption of environmentally sustainable energy technologies; and

• supporting consumers through the transition.

Strategic direction for the energy sector

One of the main aims of the NZES is to encourage capital investment in the energy sector by providing clear priorities for the sector. To this end, the Government has based the NZES on two guiding principles, namely:

• investment should occur in energy efficiency measures where this is cheaper than the long-term costs of building extra generation capacity, including environmental costs; and

• for the foreseeable future it is preferable that all new electricity generation be renewable, except to the extent necessary to maintain security of supply. Indeed the NZES states that "there should not be a need for any new baseload fossil fuel generation investment for the next ten years".

The Government expects all generators, including state owned enterprises (which generate around two-thirds of New Zealand's electricity) , to take this view into account when considering new generation investments. It is hoped that this will deliver a more diverse energy base, and one less reliant on imported or locally sourced fossil fuels. In particular the NZES predicts a huge increase in wind generation.

The NZES acknowledges that locally sourced gas will continue to be important for New Zealand's energy security. Concerns have been voiced that the NZES will have an adverse effect on the exploration for gas and, possibly, oil.

Strategic direction for the transport sector

For the transport sector, the key areas identified for action are:

• using renewable fuels, such as electricity and biofuels;

• significantly increasing vehicle efficiency;

• using more efficient modes of transport, including much more public transport; and

• using travel demand management through smarter planning - including the promotion of walking and cycling.

Quantitative targets given

The NZES specifies certain targets to be reached, including:

• working towards having 90% renewable electricity generation by 2025 (based on delivered electricity in an average hydrological year). This would be a significant advance on the current proportion of 70%. The Government is of the view that this target is achievable using current technology and New Zealand's own resources, and notes that it did not prescribe a 100% renewable target because of security of supply and cost;

• halving domestic transport emissions per capita by 2040; and

• encouraging the use of alternative transport fuels over the next five years.

Regulatory Framework

Of course without details the NZES risks failure of achieving its vision. To support the objectives set out in the NZES, the Government has focused on providing the "right economic framework, through an efficient market, effective infrastructure and supportive regulation". The immediate measures noted in the NZES include:

• the establishment of the New Zealand Emissions Trading Scheme (ETS) which is seen by the Government as being a core building block for the transformation of the economy. Under the ETS, the electricity sector will face the costs of greenhouse gas emissions from 2010. Electricity generated from fossil fuels will cost more to produce and thereby improve the viability of renewable alternatives. The Government has since introduced the Climate Change (Emissions Trading and Renewable Preference) Bill to establish the ETS. (For details of the framework of the ETS released in September see the article "New Zealand's Emissions Trading Scheme - how will it work and what are the implications for business?" in this issue of Commercial Quarterly);

• greater guidance to be given under the Resource Management Act (RMA). Initially this will be through two National Policy Statements under the RMA (expected to be released in 2008) and two National Environmental Standards on electricity transmission to provide guidance to local authorities when they're considering electricity transmission and renewable energy projects. The Government has also indicated that it expects more projects will be called-in (following the call-in of Transpower's North Island grid proposal) in the future under the existing provisions of the RMA and the Ministry for the Environment will be providing guidance on the use of the call-in power;

• the introduction of distributed generation regulations to process connection applications on a more fair and consistent basis;

• revision of the Government's policy statements on the governance of the gas and electricity sectors to reflect the policy directions set out in the NZES, and consideration is being given to regulatory options through the Electricity Act to limit new coal, oil or gas-fired power stations over the next ten years so that private sector power companies do not get a competitive advantage over state owned electricity generators. Since the release of the NZSE the Government has taken this a step further with the inclusion of a 10-year ban on almost all new fossil fuel generation as part of the legislation to set up the ETS (the Climate Change (Emissions Trading and Renewable Preference) Bill). The ban applies to new baseload thermal electricity generation above 10 megawatts that uses more than 20% oil, coal or gas as its fuel source, although there will be scope for exemptions to be made by the Minister of Energy on the recommendation of the Electricity Commission for specific fossil-fuelled generation proposals that address concerns over security of supply. The moratorium applies equally to all generators, whether state-owned or private. The ban will take effect through the inclusion of a new Part 6A to the Electricity Act 1992;

• reducing the limitations on investments by lines companies through amendments to the Electricity Industry Reform Act 1998 to increase supply-side competitiveness and renewable generation investment. The Government has since introduced the Electricity Industry Reform Bill;

• the introduction of a Biofuels Sale Obligation from 1 April 2008 to ensure biofuels are introduced into the New Zealand fuels market;

• the review of the regulatory control provisions in the Commerce Act (which is currently underway) relating to electricity lines businesses and Transpower with a view to increasing energy efficiency initiatives;

• the review of section 62 of the Electricity Act 1992 for lines companies' supply obligations post-2013. (For details on this review see the article "New regulations on distributed generation for New Zealand electricity sector" in this issue of Commercial Quarterly); and

• the amendment of the Electricity (Low Fixed Charge Tariff Option for Domestic Consumers) Regulations 2004 to take into account regional climate variations that have an impact on heating costs.

The details of the Government's programmes for encouraging the use of renewable energy are set out in the NZEECS through a range of policies and practical measures.

Monitoring and assessment

The Ministry of Economic Development is responsible for preparing an annual report on the progress of the NZES objectives and the implementation of the NZEECS for the Minister of Energy. The first interim progress report will cover October 2007 to June 2008.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.