Frequently Asked Questions
1. What Is the Purpose of the New Zealand Energy Strategy?
The government has set the challenge for New Zealand to become the first truly sustainable nation – and dare to aspire to be carbon neutral. The New Zealand Energy Strategy (NZES) is a whole of system energy response to the challenges of providing enough energy to meet the needs of a growing economy, maintaining security of supply and reducing greenhouse gas emissions to 2050.
2. Why do we need a NZES?
The NZES provides government leadership for investment in the energy sector, including renewable energy for power and transport, energy efficiency and new low emissions technologies. By setting clear policy direction for the energy sector, the government can provide more regulatory stability and confidence to industry players, investors and consumers. This will facilitate the transition to a more sustainable energy future by providing the right conditions for timely investment in energy efficiency and increasingly renewable energy supplies.
3. What does the NZES mean for New Zealand's energy future?
The NZES vision is for "a reliable and resilient system delivering NZ sustainable, low emissions energy services". The NZES action plan focuses on:
- providing clear direction on the future of New Zealand's energy system
- utilising markets and focused regulation to securely deliver energy services at competitive prices
- reducing greenhouse gas emissions, including through an emissions trading scheme
- maximising the contribution of cost-effective energy efficiency and conservation of energy
- maximising the contribution of cost-effective renewable energy resources while safeguarding our environment
- promoting early adoption of environmentally sustainable energy technologies and
- supporting customers through the transition.
4. Why to 2050?
The long lead times for changing the way we produce and use energy mean that decisions and investments made, or avoided, in the next few years, will have effects for decades to come. Over the next few decades, we also expect new technologies to become viable and open up new options.
5. How does the NZES contribute to our economic goals?
By focusing on the delivery of low emissions energy, the NZES makes a direct contribution to the economic transformation theme of achieving world class infrastructure. Security of supply is critical to a modern economy.
6. How does the NZES fit with the Emissions Trading Scheme (ETS) and sustainability aspirations the government announced recently?
The NZES supports the introduction of ETS and contains complementary measures to overcome barriers and deliver outcomes earlier than an ETS would alone. The NZES will contribute to the first three of the four sectoral targets to move New Zealand towards greater sustainability and carbon neutrality (as announced with the ETS):
- by 2025 our target is to have 90 percent of electricity generated from renewable sources;
- by 2040 our target is to reduce by half per capita emissions from transport;
- we aim to be one of the first countries to introduce electric vehicles widely, and;
- by 2020 we aim to achieve a net increase in forest area of 250,000 hectares.
7. What are the highlights?
Key policies of the NZES:
- A target for 90 percent of generated electricity from renewable energy sources by 2025.
- The government is considering options through the Electricity Act to support the government's objectives for limiting new baseload fossil fuel generation over the next ten years.
- A decision to proceed with a national policy statement on renewable energy to provide guidance to local authorities.
- The government is preparing a national policy statement on electricity transmission to provide guidance to local authorities.
- Relaxing restrictions on generation and retailing by lines companies to increase competition in the electricity market
- Using a lower discount rate to assess the net benefits of energy efficiency initiatives.
- A target to halve domestic transport emissions per capita by 2040 relative to 2007 emissions.
- An in-principle decision to be one of the first countries in the world to widely deploy electric vehicles.
- Establishment of an expert group to consider implications of higher levels of biofuels and the introduction of plug-in electric vehicles.
- A minimum biofuels sales obligation to encourage the use of alternative fuels. The Biofuel Bill will be introduced this week, with its first reading next week.
- The establishment of a Low Carbon Energy Technologies Fund to provide $12 million over three years from July 2008 to support the demonstration and deployment of sustainable energy technologies.
- Opening of the Marine Energy Fund for applications for the deployment of marine energy technologies.
- Initiatives to help low and modest income households through the transition to a sustainable low emissions energy system.
8. How will we achieve a resilient, low carbon transport system?
The NZES sets the transport energy and climate change objectives of the New Zealand Transport Strategy, which will be updated in 2008. The four priority areas for action include:
- developing and adopting alternative renewable fuels such as biofuels or electricity
- improving the fuel efficiency of vehicles on New Zealand's roads
- using more efficient modes of transport, and
- managing demand through smarter planning.
9. How is the government ensuring security of electricity supply?
The government's actions build on several initiatives to ensure competition in energy markets, timely investment in transmission and distribution networks, and a move to more diverse gas supplies. Specific measures include enhancing existing regulatory measures, reducing legislative barriers to generation and related retailing for lines companies, developing policies to manage the increasing contribution of wind and other intermittent renewable energy sources, and continuing the development of gas wholesale market arrangements.
10. How will New Zealand make the transition to a low emissions power and heat system?
The government has taken an in-principle decision to introduce an emissions trading scheme. With an emissions price of around $25t/tonne of carbon, substantial quantities of new renewable capacity are likely to be less than or close to the cost of fossil fuel alternatives for power generation. The government is confident that sufficient quantities of renewable generation can be developed without unacceptable environmental effects. To provide greater certainty about the consenting processes for renewable generation projects the government will develop a national policy statement on renewable energy to provide guidance on balancing local and national interests in the development of local renewable resources.
11. How will energy efficiency be improved?
The government's policies, objectives, targets and means for energy efficiency, energy conservation and use of renewable energy are set out in the New Zealand Energy Efficiency and Conservation Strategy (NZEECS), which is a companion to the NZES. Actions have been developed focusing on Energywise homes, businesses, farms and rural communities, transport, renewable energy and government leading the way.
12. What will be done to promote environmentally sustainable energy technologies?
Proposed actions include strengthening capabilities, collaboration and networks among researchers, industry and government agencies and introducing incentives for private sector innovation such as tax credits for research and development and a fund to accelerate getting promising low emissions technologies to market. The government has also established a contestable fund to assist deployment of marine-based electricity generation.
13. How will the NZES affect affordability and consumers' well-being?
The government is considering additional measures to reduce the cost impact of higher electricity prices arising from the introduction of emissions trading on low and modest income households.
14. What is the future for New Zealand's fossil fuels in the NZES?
Fossil fuels will play a critical role in meeting New Zealand's energy supply requirements as we make the transition to a sustainable energy future. Fossil fuel generation will continue to be needed to manage hydrological variability and intermittent sources such as wind. Overtime, as the proportion of renewable generation increases, the utilisation of fossil fuel generation will fall and probably operate at a lower average level.
Where fossil fuels are required, the preference will be given to the lowest carbon-emitting indigenous energy supply, gas in preference to coal and distillate, and for security reasons, indigenous resources in preference to imports.
Coal and lignite represent important indigenous resources. If carbon capture and storage proves technically viable and economic in the future, these resources will become an attractive option in the future.
The government believes that the Minerals Programme for Petroleum, which came into force in January 2005, provides sufficient incentives for hydrocarbon exploration activity in New Zealand. New discoveries of indigenous hydrocarbons would benefit our economy and would also reduce the possibility that we have to import gas to meet existing domestic demand in future.
15. What is the potential for reducing greenhouse gas emissions in the energy sector?
This strategy shows how New Zealand can advance towards carbon neutrality. There are several pathways available to achieve significant reductions in greenhouse gas emissions over the long term, but all will require focus on energy efficiency, and advances in new vehicle and low emissions electricity generation and their uptake.
16. Why is an emissions trading scheme preferred as the primary measure to reduce emissions from the energy sector?
The impacts of various interventions in the energy sector have been modelled to quantify the impact of each on energy prices, emissions and industry costs. Further detail on quantitative results of analysis of the various interventions can be found on the MED website.
Modelling shows that emissions pricing can result in significant reductions in emissions from electricity generation without incurring unreasonably high additional generation costs. This arises from New Zealand's abundance of cost-effective renewable energy resources.
An emissions trading scheme is also flexible, provides greater certainty about the emissions outcome, promotes least cost emissions abatement behaviour and is least likely to introduce distortions into energy markets. It is also consistent with wider government sustainability polices and progress towards carbon neutrality.
17. How have measures been analysed?
The analysis uses a range of models to assess the impact of interventions. The overarching model is MED's Supply and Demand Energy Model (SADEM), with the Electricity Commission's Generation Expansion Model (GEM) used for measures that affect electricity generation, and the Ministry of Transport's Vehicle Fleet Emissions Model (VFEM) for the transport sector.
Actions to improve energy efficiency have been assessed using information on potential efficiency improvements from external studies commissioned by EECA and the Electricity Commission, as well as data on existing programmes.
Further detail on quantitative results of analysis of the various interventions can be found on the EECA and Electricity Commission websites:
18. What costs and benefits have been considered?
The key benefits considered relate to the value of energy savings and emissions reductions. Costs are those that arise from increased investment in energy efficiency, or additional investment and operation and maintenance costs associated with altering the electricity generation mix from business as usual.
Energy and input price increases are transfers among different parties in the economy, so do not represent a net cost to New Zealand. However, these transfers, particularly in terms of consumer energy price increases, raise particular policy issues that government has introduced measures to address.
19. Why does the NZES use a 5% discount rate?
The Treasury prescribes that government benefit-cost assessments use a 10% real discount rate. High discount rates place less value on benefits and costs that occur in the distant future. For example, at a simple 10% interest rate, a dollar thirty years from now is worth less than five cents today.
For the assessment of initiatives under the NZES, a lower discount rate has been adopted. Based on the methodology used to derive an appropriate discount rate for similar types of analysis in the United Kingdom, a preferred central estimate of 5% real has been adopted. The United Kingdom uses a 3.5% discount rate.
20. What will be the impact of these measures on electricity prices?
The level of an emissions price depends to a large extent on the nature and stringency of international arrangements for emissions reduction. In addition, a number of factors also affect wholesale and retail electricity prices. Submissions on the draft Energy Strategy showed a wide range of views on this from a number of well informed parties.
That said, modelling suggests that introducing an emissions trading scheme will impact on the price of electricity, gas and transport fuels. A $15 per tonne emissions price is expected to increase retail electricity prices by 5%.
Pursuing renewable generation is likely to keep electricity prices lower in the longer term than if we rely on more fossil fuel-based generation that will need to bear the cost of its greenhouse gas emissions, or the cost of carbon capture and storage.
Over time, a high renewable generation mix means that New Zealand's electricity prices will be less affected by emissions pricing than in other countries that are more reliant on fossil fuel generation.
21. What is the expected increase in electricity demand?
If New Zealand continues on its current path, MED predicts that electricity demand will grow, on average, at around 1.3 per cent per annum out to 2025.
Many factors are considered when projecting electricity demand growth. These include energy efficiency improvements, fuel switching, population and GDP growth. Projections for heavy industry users such as the metals and forestry industries and their potential for growth and expansion are also considered (the long-term projections for six heavy industries in New Zealand are available in the report Heavy Industry Energy Demand.
Peak demand is expected to increase at roughly the same rate as total electricity demand, all else being equal.
22. How much new renewable generation is required to meet the 90% by 2025 renewable electricity target whilst meeting growth in electricity demand?
New Zealand currently has around 6100 MW of renewable generation capacity, and 2700 MW of fossil fuel generation, providing around 40,000 gigawatt hours of electricity. Under current forecasts, electricity demand is expected to grow by around 24% by 2025, which would require approximately 3500 MW of additional generation capacity to maintain security of supply.
The NZES establishes the principle that, for the foreseeable future, it is preferable that all new electricity generation be renewable, except to the extent necessary to maintain security of supply. To achieve the renewable electricity target whilst aligning with this principle, the majority of new generation investment would need to be renewable. Some new fossil fuel generation investment may be required in later years to meet peak and dry year demand.
Around 1700 MW of new renewable generation capacity is currently considered as capable of generating at less than 9c per kilowatt hour. Almost all of this new renewable capacity is cheaper that thermal baseload under a medium term emissions price of $25 per tonne and a gas price of $9/gigajoule.
23. Can the electricity system absorb the amount of wind generation modelled?
Modelling suggests that meeting the target could result in wind providing around 8% of electricity generation in 2025.
The Electricity Commission's Wind Generation Investigation Project was established to determine the appropriate means to accommodate the connection of further wind generation over the next 5 to 10 years, whilst maintaining the integrity of the power system and electricity market.
Preliminary findings indicate that the amount of wind generation included in the modelling undertaken for the NZES can be absorbed by the electricity system. The options developed under the Wind Generation Investigation Project will further ease the integration of wind into the electricity system.
24. What will achieving the target of 90% renewables by 2025 mean for emissions?
In the absence of the policies set out in the New Zealand Energy Strategy, greenhouse gas emissions from electricity generation were expected to increase by approximately 50% by 2030, to a total of around 10 million tonnes of CO2-e.
With 90% of electricity generated from renewables in 2025, emissions from electricity generation would be between 3 and 4 million tonnes of carbon dioxide equivalent, although the actual level would depend on the relative amounts of coal and gas used. In 1990, emissions from electricity generation were 3.5 million tonnes.
25. Will the target lead to blackouts?
No. New Zealand has sufficient renewable generation potential to meet projected increases in electricity demand. All modelling assessing the impacts of the target requires that the Electricity Commission's 1 in 60 dry year constraint is maintained and that enough new firm generation capacity is constructed to meet cold-year winter peaks.
The Electricity Commission will continue its role of ensuring a secure electricity supply through implementation of its reserve generation policy.
Some flexible fossil fuel capacity will continue to be required to meet peak demand, and maintain security in dry years and during prolonged calm or extreme wind conditions. Geothermal generation also provides baseload generation that is not dependent on meteorological conditions.
26. Will the target be enforced?
At this stage there are no plans to introduce an enforcement mechanism in relation to achievement of the target. This will be reconsidered when reviewing the target.
27. Will the target increase electricity prices?
The government's view is that the measures within the NZES and the proposed emissions trading scheme are sufficient to ensure progress towards achievement of the target. Accordingly, the target should not place additional pressure on electricity prices.
28. Why not adopt a 100% renewable electricity generation target?
Because of the variability of wind and hydro generation, maintaining a secure electricity supply made up of 100% renewable electricity generation would involve significant excess capacity in an average year, resulting in substantial additional generation and transmission costs and increased electricity prices.
"Spill" occurs when more water has to be released from hydro dams than can be used for generation or when wind farms are restricted from generating at their full output for the given wind speed and the available amount of electricity generation exceeds electricity demand. The level of spill is an indicator of how efficiently the electricity sector is using its renewable sources of energy.
With 90% renewable generation, spill is equivalent to around 0.1% of average annual generation. With 95% renewable generation, spill would be around 4% of average annual generation.
29. Will all new renewable generation proposals be consented?
Councils and the courts will continue weigh up the benefits and costs of any new renewable generation proposal under the Resource Management Act (RMA). Projects deemed to have unacceptable adverse environmental effects will not be granted consents.
The government is, however, aware of concerns that have been raised regarding consents for new renewable generation projects. It is developing a national policy statement on renewable energy to provide guidance to decision-makers on balancing national benefits of renewable generation with local effects.
30. What is a National Policy Statement?
Under the RMA, the government can prepare a national policy statement (NPS) for matters of national significance. Councils must give effect to a NPS in their regional policy statements and regional and district plans. Councils and the Environment Court must have regard to a NPS when considering consent applications.
31. What will be in the National Policy Statement on renewable energy?
The NPS will contain objectives and policies on renewable energy. Before the government begins drafting the NPS, the RMA requires the Minister for the Environment to consult with iwi authorities and other appropriate persons and organisations. Decisions on the structure of the proposed NPS will be made after this consultation. It could, for example, include policies for specific generation types, such as wind or geothermal.
32. When will the NPS be in place?
The intention is for the NPS to be in place by late 2008.
33. Why not just fast-track all renewable energy consents?
Under the RMA, the Minister for the Environment can "call-in" projects of national significance that are likely to be appealed anyway and refer them to a Board of Inquiry or directly to the Environment Court for hearing. This is potentially a faster process for complex projects, as it means one hearing instead of two, and as appeals are only allowed on points of law.
The RMA sets out criteria that projects that request call-in will be assessed against. The Minister would continue to consider calling-in projects on a case-by-case basis.
Greater guidance on the use of the call-in powers under the RMA will also be provided by the Ministry for the Environment.
34. What additional steps has the government taken to support the renewable electricity target?
The government is considering regulatory options under the Electricity Act to limit new baseload fossil fuel generation. Further information on this issue can be found on the MED website.
35. What will the uptake of electric vehicles mean for electricity demand?
The impact on electricity demand of increased numbers of electric vehicles would depend on when vehicles are recharged. For example, if recharging occurred around the clock, then increased firm generation capacity would be needed to help meet peak demand. Alternatively, if recharging was confined to off-peak periods, e.g. through price-based or regulatory measures, then demand from electric vehicles would not add to peak demand and could be met by baseload generation.
Further work is underway to more accurately assess the likely impact of electric vehicles on electricity demand.
36. What will the NZES mean for gas exploration in New Zealand?
Fossil fuel electricity generation will continue to play an important role in the electricity sector in maintaining security of supply. New gas-fired electricity generation technologies, such as combined cycle gas turbines, provide very high efficiencies.
A moratorium that covers new fossil-fuel baseload generation will not affect demand for gas by existing fossil fuel generation, or reticulated use. In 2006, around 56% of natural gas produced in New Zealand was used for electricity generation.
Exploration in frontier regions like the Great South Basin are unlikely to be affected by these policies as explorers will continue to target large accumulations of hydrocarbons that would likely be beyond the capacity of the local market to fully consume.
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