3. Sustainable Energy - Challenges and Opportunities
This section discusses the strengths and weaknesses of New Zealand's energy system from the perspective of sustainability, explains the function of government policies, and suggests possible ways forward.
Making Better Use of Energy
This section begins by examining two areas of action that are fundamental to all sustainable energy objectives, namely making better use of energy and supporting energy innovation. It then discusses further specific challenges and opportunities for promoting reliable and affordable energy for New Zealand and for taking better care of the environment. For each topic some policy options for the future are identified as possible ways forward.
Energy Efficiency Delivers Broad Gains
Making better use of energy can delay the need for investment in expensive new energy supplies and infrastructure. It can reduce emissions of greenhouse gases and pollutants by reducing the amount of fuel needed for the energy service required. It can improve energy security by reducing pressure on supply, or it can increase the benefits of energy use for consumers, for example, by improving industrial productivity or home comfort without increasing energy consumption.
Energy efficiency is achieved by expanding the energy choices available to people. The more choices people have for meeting their needs, the easier it is to make good use of energy. Improving the way we use energy can lock in gains for the future, just as past energy choices continue to influence today's energy use.
Improving the way we use energy can lock in gains for the future, just as past energy choices continue to influence today's energy use.
There are two basic ways to make better use of energy:
- Energy conservation measures reduce energy waste. An example is the use of sensors in commercial buildings to switch off lights in unoccupied rooms.
- Energy efficiency measures increase the benefits from each unit of energy consumed, or use less energy to achieve the same level of service. An example is the replacement of ordinary light bulbs with compact fluorescents, which convert more of the electricity they consume into light, and less into heat.
The broad term energy efficiency is used here to include energy conservation.
New Zealand's Energy Efficiency Record Is Poor …
Compared to other developed countries, New Zealand has been slow to improve energy efficiency. An IEA review of New Zealand energy policies in 2001 noted that "New Zealand's record of energy savings has been smaller than in other IEA countries, but the trend since 1991 suggests some areas where savings might be made."
This lack of attention to energy efficiency is partly why New Zealand's energy intensity (a measure of energy use per unit of production) increased between the early 1970s and the early 1990s, while intensity was decreasing in most other developed countries. Economy-wide, New Zealand's energy intensity only began to fall in the 1990s, much later than other developed countries.
Figure 14: Energy Intensity of Selected Countries 1980-2002
Source: International Energy Annual 2002, US Energy Information Administration
New Zealand's economy has a high concentration of raw material processing - milk, wool, meat and wood - which is energy-intensive by nature. But low energy prices have given most New Zealand energy users little reason to pay close attention to the efficiency of their energy use. The significant energy efficiency gains commonly identified by businesses and households that look for improvement provide a steady flow of evidence of the scope for increasing efficiency overall.
… But Has Begun to Improve
Energy efficiency and conservation tend to improve over time as people and businesses adopt new technologies. In New Zealand the business-as-usual efficiency gain is about 0.75 percent a year. The contribution that improved energy efficiency can make to a more sustainable energy system calls for action beyond this level.
The National Energy Efficiency and Conservation Strategy introduced in September 2001 began rebalancing central government energy policy to address energy demand as well as supply. It recognises that people need energy services, not energy itself: heat, light and transport, rather than coal, electricity and oil. To deliver any particular energy service as effectively and cheaply as possible, both demand and supply-side options must be considered.
The strategy, which is implemented primarily by EECA, sets an energy efficiency target of at least a 20 percent improvement in economy-wide energy efficiency by 2012. Achieving this will require an overall energy efficiency improvement of about 1.8 percent a year - more than twice the rate of business-as-usual improvement. The strategy also sets a target for increasing use of renewable energy.
The strategy contains action plans for improving energy efficiency across five sectors: government, energy supply, industry, buildings and appliances, and transport. Key initiatives include:
- EnergyWise Home grants to retrofit existing houses with insulation and other energy saving measures;
- minimum energy performance standards (MEPS) for household appliances and equipment used in commercial buildings and industry;
- mandatory and voluntary energy efficiency labelling of household appliances, vehicles and commercial and industrial equipment;
- management, technical and other advice on managing energy consumption, such as the Emprove programme for large commercial and industrial energy users;
- monitoring and market trend information, which allows energy efficiency product and service suppliers to better understand their market;
- sector studies in medium to large sectors with common energy-using characteristics, which raise awareness of opportunities for improved energy management; and
- changing the Resource Management Act to give guidance on energy efficiency and renewable energy.
Progress towards the energy efficiency target appears promising. EECA's Year 2 Report, covering the strategy's first full year (to 31 March 2002), indicated the net national improvement in efficiency across all sectors for the year was 1.9 percent. The strategy is a 10-year project, however, and it is too early to be certain about its impact relative to other factors.
The recently established Electricity Commission has a role in promoting improved energy efficiency in electricity use, in cooperation with EECA. It is currently developing plans for efficiency programmes.
… And Much More Is Possible
The National Energy Efficiency and Conservation Strategy is a good beginning, but there remains considerable scope for further progress (Figure 15).
The business-as-usual improvement in energy efficiency is less than the economic potential, which is the possible gain if all energy consumers adopted the energy efficiency technologies and practices that would bring them economic benefits. Economic potential increases over time as new technologies become commercially viable.
Figure 15: New Zealand Energy Efficiency Potentials by Sector
Source: Energy Efficiency and Conservation Authority.
… If Barriers Are Overcome
The failure of businesses and individuals to take up cost-effective opportunities to invest in energy efficiency is a well-studied example of market failure. The reasons for it can include:
- Conflicting incentives for producers and consumers. Construction engineers and architects, for example, have strong incentives to make building design, material and energy technology choices that will minimise initial building costs. These choices could mean higher long-term energy costs for building tenants, who in turn do not have strong incentives to improve energy efficiency when they do not own the premises.
- Incomplete or inaccurate information. Poor information on the costs and benefits of energy use can limit consumers' ability to make sound decisions. Reliable information may be costly to obtain or difficult to analyse. Consumers can also be satisfied with less than complete information, often with good reason.
- Discounting of energy efficiency benefits. Uncertainty about the future benefits of energy efficiency investments can lead firms to discount the projected returns heavily. Similarly homeowners can discount the benefits of home energy efficiency improvements if they do not expect to remain in the house for long, nor to recoup the cost when it is sold.
- Inefficient prices. Prices that do not reflect the full costs of energy production and use fail to give consumers essential information, such as the real economic, environmental and health costs of their energy choices.
Social factors affecting energy efficiency improvement have not received as much attention, although they can be equally or more influential. Beliefs, perceptions, prejudices, fears, loyalties, fashions, habits, politics, traditions and culture all affect people's energy choices. Decisions about personal transport, for example, are often influenced by fashion, appearance and status more than practical or financial considerations. Such influences can play a significant part in the success or failure of policy measures, and efforts to understand them can contribute to effective policy development.
There is a role for government in addressing these market failures and social barriers to secure energy efficiency improvements that serve both the interests of individual consumers and the wider public interest. This requires the use of traditional policy tools such as information delivery, regulation, standards and financial incentives. Governments internationally are also increasingly using social marketing strategies to address social barriers, for example, by presenting information to consumers in ways tailored to suit their interests and values.
Ways Forward …
There are many policy options available for improving energy efficiency, which is the focus of considerable government attention internationally. The following is an indication of the range of possible measures that could be taken in New Zealand, building on action taken so far or advancing into areas in which other countries have acted.
The National Energy Efficiency and Conservation Strategy is a good beginning, but there is considerable scope for further progress.
… To Help New Zealanders Make Well-Informed Energy Choices
The government could expand existing information programmes including mandatory energy performance labelling in areas such as household appliances, houses, vehicles, and manufacturing equipment. It could develop an endorsement labelling programme to recognise the best energy performers, such as fuel efficient vehicles. It could more aggressively promote energy efficiency best practice to business, through guides, training, energy audits and assessments, case studies, reporting protocols, demonstration projects and sector studies. Government could provide better information and analytical tools to the finance sector for evaluating the risks of energy efficiency investments, to reduce the risk premium attached to them. It could undertake more market analysis and identification of energy efficiency potentials to underpin decisions about investment in energy services and energy efficiency. Regulatory requirements or incentives for increased provision of smart electricity meters by electricity providers could be introduced to help consumers make better choices on power use.
… To Improve the Energy Choices Available to New Zealanders
To improve the range and quality of energy choices available in New Zealand the government could increase support for the development of sustainable energy industries and services. The solar water heating industry, for example, could be further assisted with subsidies for installations. The energy management industry could be supported by more investment in tertiary and trade education. More grants could be offered to support energy efficiency investments by consumers, such as retrofits of houses. Minimum energy performance standards could be used more extensively to lift the quality of available buildings, products and vehicles. Financial incentives for fuel efficient vehicle purchases, such as differential vehicle registration charges based on fuel efficiency and bounty payments for scrapping old vehicles, could make efficient vehicles more attractive or affordable. More implementation, support or guidance for travel demand management programmes, in collaboration with local government, would increase the range of effective travel choices available. Government could lead an increase in teleworking by introducing best practice guidelines in the public sector. It could use public sector purchasing to accelerate technological change and support the development of the energy efficiency industry, for example through commissioning more energy efficient buildings or purchasing energy efficient vehicles.
Supporting Energy Innovation
Internationally, growing concerns about climate change, air pollution, and the reliability and future price of oil supplies are driving a surge in energy innovation.
Sustainable Energy Needs Innovation …
Sustainable energy requires changes in the way energy services are provided and used. Many of these changes will require innovation in energy technologies, practices and processes. In some areas, innovation will help deliver energy with limited environmental impacts at reasonable prices. It will also increase diversity in energy technologies and systems, helping make the energy system overall more resilient and adaptable to changing needs.
Innovation embraces the invention, commercialisation and diffusion of new ways of doing things. It can be incremental, producing small improvements to existing practices or processes, or radical, producing new technologies or fundamental changes in production and consumption. Open and competitive energy markets are critical in creating opportunities and incentives for innovation. There can also be a role for government in accelerating the diffusion of innovations that serve the public good, for example, through improving energy efficiency or reducing greenhouse gas emissions.
… Which Is Accelerating Internationally
Internationally, growing concerns about climate change, air pollution and the reliability and future price of oil supplies are driving a surge in energy innovation.
Energy sources and technologies under continuing development include electricity generation from wind, waves, tidal and solar energy; fuel production from biomass and biological wastes; and more efficient and lower-emitting uses of fossil fuels such as coal and oil. New technologies are being investigated to better manage electricity networks, insulate buildings and embed energy sources within infrastructure.
Many such innovations might not be commercially viable for many years. Predicting progress is notoriously difficult. Hybrid petrol-electric cars, for example, were initially expected to be available after 2010, but mass-market models are already available and sales are increasing rapidly. Electric cars were once seen as a likely major development, but now attract little interest.
… And Could Produce Radical Change
Potentially radical energy technologies include the further development and application of hydrogen fuel cells, particularly in vehicles; processes for capturing and storing greenhouse gas emissions from fossil fuels; and nuclear fusion.
Use of hydrogen as an energy carrier is the focus of considerable research and development worldwide. When run through a fuel cell to produce electricity, it emits only water vapour. If hydrogen can be economically produced using renewable energy sources and used in energy efficient fuel cells, it offers the prospect of a versatile, reliable and environmentally benign way of providing energy services. However, free hydrogen does not exist in nature, and there is currently a high energy cost in producing it. It can be extracted from fossil fuels such as coal and gas, produced by electrolysing water, or obtained - so far in small quantities - from microbial breakdown of organic matter. These production methods face unresolved questions of cost, energy efficiency and greenhouse gas emissions. Hydrogen distribution and storage systems would also need to be developed if it is to become a major energy technology, and this presents some significant technical challenges. The IEA projects hydrogen fuel cells beginning to contribute to global energy supply after 2020, mostly in stationary applications, with hydrogen vehicles possibly beginning to enter the vehicle fleet around 2030.
Figure 16: How a Hydrogen Fuel Cell Works
Source: World Fuel Cell Council
The capture and storage of carbon dioxide (CO2) emitted by or extracted from fossil fuels is being investigated as a way of avoiding the climate change impact of using them.The options include injecting the gas into depleted oil and gas reservoirs, unminable coal seams, or into highly saline underground reservoirs, which is already done with CO2 from a Norwegian gas field in the North Sea. It is also possible to store CO2 by injecting it deep into the oceans, which can absorb large amounts of the gas, although this presents difficulties in monitoring storage, and the impacts on marine life are uncertain. All these options are currently high cost per tonne of carbon dioxide compared with a number of emission reduction alternatives, although costs are likely to track downwards.
Figure 17: Options for Subterranean Storage of Carbon Dioxide
Source: IEA GHG web site
New Zealand has oil and gas reservoirs nearing depletion that could be used for CO2storage, but its young and active geology possibly adds to the risks of leakage and rupture. Sudden releases of CO2 would produce local atmospheric concentrations lethal to humans and animals, while long-term leakage could present a major problem for future generations.
Nuclear fusion, the source of the Sun's energy, has been investigated since the 1950s as a possible source of inexhaustible and environmentally responsible energy. Fusing together the atomic nuclei of light elements, such as hydrogen, to make heavier elements releases huge amounts of energy. Small experimental fusion devices have succeeded in producing small amounts of energy for short periods, but have consumed more energy than they have produced. If a commercially viable fusion reactor is possible it is expected to be several decades away. A site is currently being chosen for the proposed International Thermonuclear Experimental Reactor (ITER), which would be the largest yet built. It is backed by the European Union, Russia, Japan, China, Canada, South Korea and the United States.
New Zealand Must Be a Fast Follower …
New Zealand is largely a taker and adopter of energy technologies and practices developed internationally. To take best advantage of innovation in the transition to sustainable energy, it therefore needs to be a fast follower where it cannot be a leader. It has not always been fast enough, as its energy efficiency history shows.
New Zealand needs a culture of innovation in energy technology, processes and systems. The government has a strategy of growth through innovation, defined in the Growth and Innovation Framework. It has programmes in place to foster the development of business capabilities and supportive networks, and the creation of new, high value firms. Policies promoting effective and well-regulated energy markets are also part of creating a climate in which innovation can flourish.
Government initiatives to support innovative activity throughout the economy include increased investment in research, the formation of research funds designed to attract matching private sector support and the establishment of performance-based research funding in the tertiary education sector. The formation of venture capital funds, increased funding for the technology development agency Technology New Zealand, support for business incubators, the formation of New Zealand Trade and Enterprise and a new suite of industry and regional development programmes all underpin innovation within individual firms, sectors and regional industry clusters.
Specific energy and climate change policy initiatives supporting innovation include the climate change Projects to Reduce Emissions programme, which has supported innovative renewable energy projects including micro-hydro and landfill gas generation. The National Energy Efficiency and Conservation Strategy includes a wide range of programmes to encourage innovation in energy use and technologies, including renewables. An example is the EnergyWise Awards, which publicise successful innovations in energy efficiency and renewable energy.
International connections are vital to the capacity for innovation in a small nation. Relevant science policy initiatives include bilateral science cooperation agreements, the appointment of international science coordinators to facilitate research relationships with specific countries, and research funds designed to attract international partnership funding. New Zealand energy research in bio-energy, energy conservation in buildings, geothermal energy, greenhouse gas reduction, solar heating and cooling, hydrogen fuel cells and wind turbine systems is connected with work in other countries through IEA technology agreements. New Zealand has also joined the International Partnership for the Hydrogen Economy, a major United States-led research effort. It has cooperative climate change links with other countries that have ratified the Kyoto Protocol and has climate change cooperation agreements with the United States and Australia that promote joint research projects and the exchange of information.
… But Can Also Contribute
New Zealand also has strengths in innovation that can contribute directly or indirectly to sustainable energy. It has established expertise in hydroelectric and geothermal energy technology. It has strong and growing innovative capacity in biotechnology, which could apply to biofuel production or the extraction of energy from biomass and waste. The small but active information and communications technology sector has the potential to contribute innovative solutions to energy delivery and demand management, for network industries such as electricity and gas, for transport, or for building and plant management. Specialised areas of established or emerging capability include super-conducting materials, the extraction of hydrogen from coal for fuel cells, the use of old oil and gas wells for carbon dioxide storage, and the application of overseas technology for smart electricity metering.
These innovation capabilities are spread around Crown Research Institutes, universities, industry research associations, energy supply and distribution companies and a small number of private companies.
New Zealand has also been innovative in energy-related policy development. It has been amongst the early movers in establishing an electricity market and is the first country to tender Kyoto Protocol carbon credits to support cleaner energy projects, through the climate change Projects to Reduce Emissions programme. Policy development capacity and research coordination in the public sector still tends to have a short- to medium-term focus, however, and could be better integrated.
… Yet Research Investment Is Modest
New Zealand research investment is generally dominated by public funding and energy research is no exception.
Public funding for energy research totals about $12 million a year, spread widely across technologies and including social research on energy use. Most public research funding is allocated to projects by the Foundation for Research, Science and Technology through a contestable bidding process, with decisions guided by the government's strategic priorities, the likely national benefits and research quality. More than half of current public investment goes into renewable energy and energy efficiency.
Figure 18: Energy Research and Development Budget of New Zealand Foundation for Research Science and Technology 2003-2004
Source: Foundation for Research Science and Technology
Private sector research investment in all fields is relatively low by international standards. It is less than half the average, by the most generous measure, but has begun to increase. New Zealand business is dominated by small enterprises and relatively lacking in the high technology manufacturing businesses, including defence providers, that invest heavily in research and development elsewhere. In the energy sector, New Zealand has few technology providers and an energy service sector that has only just begun to develop.
Figure 19: Energy Research and Innovation in New Zealand - Some Examples| Forest Research Institute scientists are researching possible supply chains for biomass energy, e.g. from wood waste, to develop energy systems for new energy use sectors and models to predict demand for heat from biomass. | A NIWA researcher is investigating the suitability of small renewable energy systems for rural Māori communities, and how to adapt them for community use and trial their use in collaboration with industry and hapū. | Transpower subsidiary d-cypha is developing a system for a New Zealand futures market for electricity, which would allow suppliers and users to trade future power purchases, and help the development of a market consensus on future prices. | The Building Research Association is investigating the possibility of a zero energy house, with research on the evaluation of energy efficient technologies in building. |
| A Massey University research team is working on the development of 3rd generation solar cells and advanced nickel-zinc batteries, with the potential to develop plastic solar cells and batteries. | The potential for coal seam methane gas production, to supply the reticulated gas market, is being investigated by CRL Energy Ltd in partnership with Kenham Holdings. | Christchurch company Whispertech has developed and is exporting compact cogeneration units, suitable for household use, with original technology using external combustion Stirling engines. | Windflow Technology, in Christchurch, has developed a novel wind turbine design combining a patented gearbox and pitch-regulated two-bladed rotor. |
| The Institute of Geological and Nuclear Sciences is investigating possible long-term options for deep geothermal energy, which would require wells kilometres deep. | Scientists at Industrial Research are investigating the production of hydrogen from carbon-based fuels. | Canesis is investigating energy efficiency in the drying of wool wastes and products, and conversion of wastes into useable products such as plastics, feed, fertiliser or fuel. | Industrial Research, having developed superconductor technology now being used under licence in the United States to manufacture wires and cables, is leading work on the next generation of the technology. |
… And May Need More Focus
There is a strong view amongst New Zealanders involved in energy research and development that reduced central planning of the energy system has produced a need for stronger strategic leadership in energy research. Better connections between different centres of energy research and better alignment between government energy policy and research priorities are also advocated. Limiting factors for energy innovation identified by science stakeholders include conservative management within the energy industry, inflexible or complex electricity market arrangements in some areas, a general weakness in commercialisation capacity within the New Zealand innovation system, and energy industry investment hesitancy attributed to uncertainty over the future impact of national and international climate change action on fossil fuel costs and use.
Ways Forward …
The following is an indication of the range of possible measures that could be taken to strengthen energy innovation in New Zealand, building on action taken so far or following the lead of other countries.
… To Exploit New Zealand Strengths in Energy Innovation
New Zealand already exports its skills in mature energy technologies including hydroelectricity, geothermal energy and the use of methane from waste. We could develop more niche applications of specific benefit to our energy needs, with potential for export to other countries. Examples could include biofuel developments, building on the strength of the agricultural, forestry and biotechnology research industries. Another growth area could be the development of information and communication technologies for energy management, including metering, transport management and systems for managing the output of intermittent electricity generation. New Zealand could also increasingly adapt established geothermal and hydro generation technologies to smaller production units. The government could work through its economic development agencies in partnership with industry, technology providers and communities to assist the development of industry clusters built on areas of niche expertise. It could support the further development of niche capabilities through increased funding for sustainable energy research, or venture capital funding, or both. These could be structured to attract matching or greater private funds.
The government will lead the development of a more focused approach to energy innovation.
… To Strengthen Global Connections
The government will continue to build on New Zealand's established links with Australian, European, United States and other research efforts into renewable energy and cleaner use of fossil fuels, including cleaner burning technologies, carbon capture and storage, and preparation of fuels for advanced combustion technologies. An international sustainable energy watch and information exchange could be established to track global energy developments relevant to New Zealand and disseminate the findings. Technology New Zealand and EECA could collaborate on an energy technology transfer programme. The government could also use its international trade and investment agencies to promote New Zealand as a "test bed" for new sustainable energy technologies.
… To Focus Effort More Effectively
The government will lead the development of a more focused approach to energy innovation with a stocktake of R&D capacity in sustainable energy. This would lead into a foresight analysis of the capacity the country might need in 20 or 30 years, identifying constraints in the current system and guiding priorities for change - in basic research funding, for example. An energy innovation forum involving researchers, policy analysts, industry representatives and non-government groups will be convened to contribute to this process. New Zealand could follow the examples of the United Kingdom, Finland and the Netherlands in developing and exploiting learning networks in a partnership approach to energy policy development. The government could also work with the energy and research sectors to create an institutional hub for energy innovation, such as an energy innovation centre, a government-industry research partnership, or an energy technology incubator. It could invest more in social research into the barriers to uptake of energy innovation in key sectors such as transport, where travel behaviour change is a major challenge. It could use public sector procurement policies and standards and labelling systems, as discussed in the preceding section, to accelerate uptake of new technologies and innovations in energy services.
Promoting Reliable and Affordable Energy
Balancing Supply and Demand Is the Key
Securing reliable and affordable energy is a continuous task involving both the producers and users of energy. Energy policy and energy system management has for many years been focused largely on supply. This section discusses key supply issues, but making better use of energy and improving interaction between energy users and producers are just as important for reliability and affordability.
Demand for Oil Will Keep Growing, Prices Will Remain Volatile …
Demand for oil is expected to keep growing for the foreseeable future, with steady growth in oil product use in developed countries and more rapid growth in developing countries. Transport worldwide is very heavily dependent on oil, with no alternative energy sources yet offering serious competition for petroleum products.
Oil prices have been volatile over the past 25 years, despite the development of new oil fields in Europe, Africa and South America. This is largely due to security concerns: oil reserves and spare production capacity are increasingly concentrated in the Middle East, where war, terrorism and political upheaval cause concern in oil importing countries about long-term supply security.
Figure 20: Proved Global Oil Reserves by Region 2003
Source: BP Statistical Review of World Energy 2004
Oil prices can also be influenced significantly by decisions by the Organisation of Petroleum Exporting Countries (OPEC) on the amount of oil its members release onto the world market. High demand growth in large developing countries such as China and India is currently putting upward pressure on prices. In the longer term, further upward pressure is likely to come from governments applying increasingly stringent regulations or emission charges in response to concern about climate change, local air pollution, and the environmental costs of oil extraction and transport.
Volatility means oil prices are also likely to fall at various times. In real terms, current prices are still significantly below the peaks of the 1970s.
New Zealand is exposed to international oil market developments. Larger countries, particularly the United States, maintain large strategic oil reserves as a partial buffer against price spikes. New Zealand is too small for any strategic management of its oil stocks to affect international prices. It can, however, contribute to and benefit from international oil security arrangements and does so through membership of the IEA. The IEA's 1974 Agreement on an International Energy Programme requires member countries to hold oil stocks equivalent to at least 90 days of net oil imports and to release stocks, restrain demand, switch to other fuels, increase domestic production and share available oil, if necessary, in the event of a major oil supply disruption.
… And Oil Production Will Eventually Peak
Oil is a finite resource. Production from individual fields follows a well-established pattern of a steady increase followed by a plateau and a steady decrease until the field is abandoned. This peaking pattern is expected to hold for total global oil production. Oil prospecting technologies have improved significantly and will probably continue to do so. But at some date oil production will begin to decline as it becomes progressively more costly to recover more from known reserves.
Figure 21: World Oil Production 1965-2003
→ Full size version of Figure 21 available [16KB GIF]
Source: BP Statistical Review of World Energy 2004
Opinions differ on the likely timing of the peak in oil production. Estimates range from 2010 to the later part of this century. Views between these extremes commonly estimate a peak around the 2030s. Analysis by the United States Department of Energy's Energy Information Administration, for example, suggests oil production could peak as early as 2021 with high production growth and a conservative estimate of recoverable reserves, or as late as 2067 with low production growth and a high reserve estimate. A median estimate, with 2 percent annual production growth and a mean (50 percent probability) reserve estimate, suggests peak oil production occuring in 2037.
The variations in different analysts' estimates of the timing of peak oil production generally reflect differences in interpretation of geological survey data, differing expectations of the likelihood of finding new reserves and different expectations of oil recovery technology.
Opinions differ also on whether the peak in oil production will cause a large, sharp increase in price or a more gradual change. Historically, major supply disruptions have caused large price spikes - following an oil embargo by the Organisation of Petroleum Exporting Countries (OPEC) in 1973, for example, and after the Iran-Iraq war in the early 1980s.
Alternatives to Oil Are Currently Limited …
Alternatives to oil for transport energy exist, but are little used in New Zealand. We are, in effect, totally reliant on oil for transport energy.
LPG, while a petroleum product, is an alternative to diesel and petrol that is produced in New Zealand. About 40 percent of LPG use is for transport, but its use is very limited compared to other fuels. New Zealand supplies have tightened with the depletion of the Maui gas field and prices are likely to rise towards the international price, which for New Zealand is effectively set by Australian exports. LPG has lower greenhouse gas emissions than petrol, and the price will therefore be less affected by the proposed emissions charge.
Figure 22: New Zealand LPG Demand 1980-2003
Source: New Zealand Energy Data File, Ministry of Economic Development, July 2004 (Includes use of LPG for non-transport purposes, and a small percentage of natural gas liquids)
Use of compressed natural gas (CNG) in vehicles was encouraged in the early 1980s by government subsidies for vehicle conversions. These were removed in 1987, however, and with low oil prices the market declined rapidly from its peak in 1985. Supply facilities for CNG, which in the 1980s extended throughout the North Island, are now very limited. Without subsidies for vehicle conversion, CNG became uncompetitive with petrol for all but large cars doing very high mileage. Today only about 500 CNG vehicles are registered and there are no signs of a possible resurgence in the technology.
Figure 23: New Zealand CNG Sales 1982-2003
Source: New Zealand Energy Data File, Ministry of Economic Development, July 2004
Liquid biofuels produced from renewable biological products are little used in New Zealand, but are poised to grow. Ethanol, which is produced in New Zealand from whey, can be blended with petrol and used in unmodified vehicles. The use of blends of up to 10 percent ethanol is permitted in New Zealand and sales of blended fuel are expected to begin by early 2005. Biodiesel, which can be produced from animal or vegetable fats and oils, can be blended with diesel and used in unmodified vehicles, or used as a direct replacement. A small amount of biodiesel is being produced in New Zealand from tallow and recycled cooking oil.
Electricity use for transport is limited to the main trunk railway between Wellington and Auckland, some urban commuter train services and fewer than 100 trolley buses, most of them in Wellington.
Hydrogen may offer an alternative form of transport energy in the longer term, but widespread, affordable supply is still many years in the future.
… But Could Offer Some Security Benefits
New Zealand's transport energy supply could be made more secure by increasing use of the currently available alternatives to imported oil. The benefits would be increased self-reliance for transport energy and greater diversity in transport energy sources. Any real supply security gain would take time, however, given the very limited current use of oil alternatives. There would also be a real cost in increased use of more expensive alternatives to oil.
Increased self-reliance for oil supply would not reduce prices, which are set by global trade, but would reduce the net cost to the nation of any oil price shocks. Increasing use of gas, if supplies allow, would reduce greenhouse gas emissions per vehicle, but retain the disadvantages of reliance on fossil fuel.
Increasing use of biofuels would reduce transport greenhouse gas emissions and bring the long-term security benefit of renewability. The long-term potential for expansion of biofuel production could also be very significant, on both national and global scales. Limitations could include the land area required to produce source crops.
Increasing use of electricity, for example by extending rail and bus network electrification, would reduce greenhouse gas and other emissions locally, but contribute to increasing emissions from electricity generation if thermal fuels are used. It would also replace some oil security risk with electricity supply security risk, and require more substantial infrastructure investment than the other alternative transport energy options.
As long as transport remains dependent on oil, improvements in the efficiency of oil use will soften the impact of rising prices. So will improvements to the overall efficiency of the transport system, including increased use of travel alternatives where they meet people's needs.
Natural Gas Supplies Are Uncertain …
New Zealand's natural gas supply is declining with the depletion of the large Maui field, offshore from Taranaki. Maui has provided about 80 percent of New Zealand's gas for two decades.
Gas supply for residential and commercial gas users, who consume small volumes, is not at risk. But future supply for users requiring large volumes of gas at low prices - for methanol production and electricity generation - is less certain.
Gas prices are rising as supplies tighten. Because methanol production is an internationally competitive industry, it is more sensitive to gas price increases than is electricity generation. Electricity generators are likely to be able to pay more for gas, and methanol production may cease within a few years. Gas supply projections commonly assume this will happen.
Substantial new gas-fired electricity generation - Genesis Energy's 385 megawatt "e3p" project at Huntly - is expected to begin producing power in late 2006. Assuming methanol production halts around 2006, current total known gas reserves could meet demand for other uses until about 2012.
Figure 24: New Zealand Natural Gas Availability by Field 1970-2025
→ Full size version of Figure 24 available [29KB GIF]
Source: New Zealand Energy Outlook to 2025, Ministry of Economic Development, October 2003.
… But Gas Exploration Is Active
With rising oil prices and gas prices, exploration for new oil and gas reserves in New Zealand is increasing. The number of operational exploration permits in 2004 is the highest for several years and surveying has increased. To encourage exploration further, the government is reducing the royalty payments it collects from the developers of new oil and gas fields for a limited period and has addressed tax issues that were identified as potential barriers. It is increasing funding for geological research into the prospectivity of exploration regions, but is not contemplating any investment of public funding in gas exploration.
The oil and gas exploration companies active in New Zealand are generally small to mid-sized, rather than major global players, given the relatively small local market for gas and small scale of prospective oilfields. However, major gas users - including the methanol producer Methanex New Zealand, gas pipeline owner NGC and electricity generation companies Contact Energy, Genesis Energy and Mighty River Power - are also investing or considering investment in exploration and development of gas fields.
Areas under exploration include offshore basins to the east of the North and South Islands. Existing gas production facilities are concentrated in Taranaki and new investment in pipelines would be needed to make use of discoveries elsewhere.
New Zealand's future gas supplies are likely to be drawn from a larger number of smaller fields, rather than being dominated by a single large field as in the last 25 years. This will require more flexible and sophisticated gas trading arrangements. The government is working with the gas industry to ensure these develop, and will have backstop powers to regulate the gas market if the industry-led process fails.
New Zealand's natural gas supply is declining with the depletion of the Maui field.
… And Gas Imports Are Possible
International trade in liquefied natural gas (LNG) has grown rapidly in recent years. Imported LNG could supplement New Zealand gas supplies if new discoveries are insufficient to meet demand. Likely sources of supply would be Australia and Indonesia.
Imported LNG is expected to be more expensive than prices yet seen for New Zealand natural gas. Industry estimates of the wholesale cost, including the capital cost of import facilities, are significantly higher than current wholesale gas prices.
To use imported LNG, New Zealand would need a regasification plant. The gas is supercooled to form a liquid for transport and needs to be converted back into gas for injection into pipelines. Such a plant would cost around $600 million. To recover the cost, the plant would need long term contracts to process 60 to 100 petajoules a year of gas - enough to supply three to five power stations, which in New Zealand are typically around 350 megawatts and consume about 20 petajoules a year. The importation of LNG would therefore tie up most of the bulk market demand for gas, for a number of years at least, reducing incentives for further gas exploration.
Big Gas Users Face Difficult Choices …
Investment in LNG import facilities would be a commercial decision for energy companies, rather than the government. Contact Energy and Genesis Energy are currently funding a feasibility study.
A regasification plant would take three to four years to construct. Assuming resource consents could be obtained within two years, a decision to invest in LNG import facilities for New Zealand would have to be made in about 2008 to bring supply onstream by 2012. The decision would depend to a large extent on whether gas exploration in the next two years found new fields to extend the life of current reserves beyond about 2012.
Although it would depress interest in gas exploration, investment in LNG facilities would be unlikely to halt exploration altogether. It would therefore carry some risk that substantial new gas discoveries might become available at a lower price. Users of LNG would be exposed to price fluctuations in the international LNG market, dominated by strongly increasing demand from the United States and China.
Methanol production from natural gas in New Zealand has already dropped significantly with rising wholesale gas prices and could become uneconomic in the near future. This would strand Methanex's substantial plant in Taranaki, with a significant impact on the local economy.
… But Natural Gas Has an Important Future
Natural gas will continue to be a reliable source of energy for commercial and household purposes. Despite the current uncertainty about medium- to long-term supply for bulk use, it will remain an important fuel for electricity generation for many years. The prospects of further supply security from new discoveries in New Zealand are positive, particularly at a higher price. Imported supplies would be reasonably secure, also at a higher price.
Coal Is Plentiful …
Coal is New Zealand's most abundant fossil fuel, with economically recoverable reserves estimated at 8.6 billion tonnes - enough to maintain current production for hundreds of years. Eighty percent of New Zealand's coal is lignite, a low-grade coal, located mainly in Southland. Higher-grade coals are produced from fields in the Waikato and on the West Coast. Little exploration for new coal reserves is occurring, as the industry concentrates on extending reserves within existing mining licence areas.
… And Provides Flexibility
The availability of coal is a source of resilience in New Zealand's energy system. In recent years coal has been a backstop source of energy for electricity generation, substituting for tight gas supplies. The 1000 megawatt Huntly power station, New Zealand's largest single power plant, is able to run on gas or coal and since 2003 has run largely on coal. Its owner, Genesis Energy, has also built up a coal stockpile and a more diverse supply chain to enhance the plant's ability to generate when required.
Coal could fuel some new electricity generation around the end of this decade, if proposals currently under development prove competitive with other new generation options. Coal also provides a back-up option for industrial gas users if gas becomes more difficult or expensive to obtain.
The government has established an Electricity Commission to regulate the industry and manage the risk of supply shortages when hydro lake inflows are low.
Providing Reliable Electricity Is Challenging …
The dominance of hydro generation in New Zealand's electricity system produces cheap power but also the risk of shortages in very dry periods. Water storage for hydro generation is limited to the equivalent of about six weeks of normal hydro generation. This means hydro must be backed up with other forms of generation that can be relied upon to run when water is short. Balancing hydro and other generation will remain a challenge for the New Zealand electricity system as long as hydro dominates.
Demand for electricity tends to grow with New Zealand's economy and population, and has been rising steadily. Increasing efficiency in electricity use delays but does not eliminate the need for new generation capacity. Decisions on investment in new generation are commercial decisions, made by electricity generators rather than the government. Investment has generally been timely, but uncertainty about future gas supply and the fuel cost implications of climate change policies has delayed some decisions lately.
The transmission capacity of the national grid must grow with electricity production and demand. The grid is currently in need of significant new investment, partly due to upgrades being deferred in anticipation of more distributed generation, which has developed less than Transpower anticipated. In general the systems for maintaining grid security are well developed, but errors, equipment failures and technical difficulties can potentially mean supply shortages for large numbers of consumers. Failures and errors in the management of distribution networks can also cause major supply disruptions.
… Major Issues Have Been Addressed
The government has established an Electricity Commission to regulate the electricity industry. Its responsibilities include ensuring that the electricity system has enough reserve energy to maintain secure supply in up to a 1-in-60 dry year without the need for urgent conservation campaigns. The Commission has a range of powers to achieve this, including the ability to contract for the provision of reserve generation plant and for electricity users to shed or shift load. The first new reserve generation plant - a 155 megawatt diesel turbine plant - has been built by the government in Hawke's Bay.
Other policies facilitate the development of new baseload generation, particularly from renewable energy sources. Statutory limits on generation by lines companies have been loosened. The RMA has been amended, reducing some of the costs of the consent process and requiring local authorities to have regard to the benefits of renewable energy when considering consents. Through EECA and the Ministry of Economic Development, the government has also been expressing its support for some forms of energy development in submissions on resource consent applications. It has agreed with Genesis Energy to share some of the financial risk of any future gas shortages to enable the company's new e3p gas combined cycle power station to be commissioned in 2006. The climate change Projects to Reduce Emissions programme provides Kyoto Protocol "carbon credits" for cleaner energy projects and this has accelerated the development of wind generation in particular.
… More Changes Are On the Way
In coming years the Electricity Commission will continue to evaluate the case for a portfolio of reserve energy options. It is also likely to invest much more in demand management measures than New Zealand has previously seen. To enable new investment in the national grid the Commission is overseeing the establishment of a decision-making process and pricing methodology. Transpower, the national grid company, is planning a major 10-year grid upgrade.
The government also has further proposals for resource management reform. These address issues including the balance between local environmental effects and national benefits, and the risk of inconsistent local body decision-making on infrastructure networks, such as transmission lines, that cross regional boundaries. The government proposes to improve the expression of the national interest in the resource management process by providing more guidance through national policy statements and standards. Energy infrastructure has been identified as a priority for national policy statement development. Further proposals for reform are focused on improving natural resource allocation, including the allocation of water among competing uses such as hydro generation, irrigation and recreation. The regime for allocation of geothermal energy resources is also scheduled for review.
… And a New Kind of Electricity System Is Likely to Develop
Electricity generation capacity has mostly expanded in large steps, with the periodic addition of large new power stations, but this is likely to change to some degree.
New technologies have reduced economies of scale in electricity generation. Smaller generation plants are increasingly economic. This change, coupled with increasing public concern about the environmental impacts of major electricity projects, means that future expansion is likely to involve fewer large projects and more frequent additions of smaller new power stations. There is some evidence of this trend beginning in New Zealand, with increasing development of small co-generation plants, small wind farms and small or micro-hydro projects.
Much of this new capacity will be distributed generation, which produces power for use on site, supplies other users through local line networks rather than the national grid, or connects to the grid through local lines. New Zealand's existing distributed generation includes industrial co-generation, local hydro schemes, wind farms, landfill gas generation, small geothermal power plants, small diesel and gas generators and solar power.
… With Significant Advantages
More distributed generation would improve the overall security of the electricity system by diversifying supply. It should also spread generation capability more evenly around New Zealand, reducing reliance on transmitting large amounts of electricity over long distances. Smaller generation plants built close to where power is needed may be the most timely and cost-effective way of meeting consumers' needs.
Costs can also be reduced by distributed generation. Generation close to use can reduce transmission losses and may defer the need for new investment in transmission and distribution networks. Small distributed generation projects also offer opportunities for new entrants to the electricity generation business, increasing competition and efficiency in the supply of power. Distributed co-generation, which provides cheap process heat along with electricity, can reduce the overall cost of the energy mix. The potential environmental benefits of distributed generation include better overall efficiency in the electricity system, reducing greenhouse gas emissions per unit of power consumed. Much new distributed generation is likely to use clean renewable energy sources.
…Requiring More Flexible Transmission and Distribution Systems
Increasing distributed generation requires electricity transmission and distribution systems to accommodate more new and diverse sources of power. This includes intermittent sources, from renewables such as wind and solar, and from small generators who only sell power when they have a surplus or prices are high.
Difficulties in getting agreement to connect with local line networks have been cited in a number of cases by energy companies as a barrier to the progress of distributed generation projects. Most lines companies do not have standard terms and conditions for connecting distributed generation, so every project needs an individually negotiated deal. The government views this as an unnecessary barrier and is regulating the terms and conditions for connection of distributed generation, to ensure generators pay no more than is reasonable. In addition, the Electricity Commission has a general responsibility for encouraging opportunities for distributed generation, and when evaluating proposed national grid upgrades it must ensure that alternatives including distributed generation are considered.
In the long term the development of an electricity system with multiple suppliers feeding surpluses into local networks will bring a significant transformation in the way those networks are managed. The national grid is likely to remain the backbone of the electricity system, but more complex regional energy webs will develop.
Some Energy Prices Are Beginning to Rise …
Most energy prices in New Zealand have been reasonably stable over the past decade, but gas prices and electricity prices are currently rising for many consumers. The gradual removal of cross-subsidies from commercial to household electricity consumers means electricity prices for household consumers have been rising steadily in real (inflation-adjusted) terms and the price for commercial users has been declining. Industrial energy prices have been relatively stable in real terms for 20 years. Transport fuel prices are volatile: although rising lately, they have been considerably higher in real terms in the past.
Figure 25: New Zealand Transport Fuels Prices (Real) 1980-2004
Source: New Zealand Energy Data File, Ministry of Economic Development, July 2004: real March year 2004 prices.
Figure 26: New Zealand Electricity and Non-Transport Fuels Prices (Real) 1980-2004
Source: New Zealand Energy Data File, Ministry of Economic Development, July 2004: real March year 2004 prices.
In the longer term, peaking global oil production is likely to bring a significant increase in oil product prices, as discussed earlier. The costs of new electricity generation and new gas fields or LNG, along with the addition of environmental costs into fossil fuel prices and continuing demand for energy, are likely to put continuing upward pressure on prices. Competitive energy markets will be an important source of counterbalancing downward pressure, along with improvements in energy efficiency and the development of new energy technologies and sources.
… Remaining Competitive by International Standards
New Zealand's energy prices remain competitive with those in other developed countries. International price comparisons must be made with caution, however, given differences in national taxes and levies, fuel grades and exchange rates. Delays in the provision of price data can also mean prices are understated for some countries.
Figure 27: Electricity Prices for Selected Countries
→ Full size version of Figure 27 available [16KB GIF]
Source: Energy Prices and Taxes Quarterly Statistics, Second Quarter 2004, International Energy Agency. Prices are latest available in each case.
Figure 28: Gas Prices for Selected Countries
→ Full size version of Figure 28 available [16KB GIF]
Source: Energy Prices and Taxes Quarterly Statistics, Second Quarter 2004, International Energy Agency. Prices are latest available in each case.
Figure 29: Regular Petrol Prices for Selected Countries
→ Full size version of Figure 29 available [12KB GIF]
Source: Energy Prices and Taxes Quarterly Statistics, International Energy Agency: prices are for second quarter 2004.
… But Still Posing a Challenge
Although starting from a low base, New Zealand's rising energy prices are still a significant issue for some energy users - particularly energy-intensive businesses and low-income households.
Amongst industries, energy accounts for more than 20 percent of the input costs for aluminium and steel refining, oil refining, methanol and ammonia-urea (fertiliser) production and airlines. It accounts for 10 to 15 percent of inputs for pulp and paper production, the petrol trade, coal and other mining, wholesale trade, water supply, education and scientific research.
Energy price increases affect these industries to varying degrees, depending on their exposure to international competition. Industries in the more competitive global markets risk losing sales to competitors from other countries if energy price rises force them to raise product prices. Their possible responses to rising energy prices include development of alternative or on-site energy, such as industrial co-generation; increasing energy efficiency and conservation; moving to a less energy-intensive product mix; or pursuit of cheaper energy in other countries.
Household spending on energy in New Zealand is a relatively small part of the total cost of living. The average spending of a New Zealand household on domestic energy - mostly electricity and heating - is 5 percent of total weekly spending in the lowest income households and less than 2 percent in the highest income households. All households with vehicles spend more on them - mostly on fuel - than on energy in the home.
Figure 30: Energy Related Household Expenditure in New Zealand
→ Full size version of Figure 30 available [30KB GIF]
Source: Household Economic Survey June Year 2001, Statistics New Zealand.
Although relatively low as a proportion of total household spending, energy can comprise a significantly higher share of household income. For low-income households with multiple occupants, spending on electricity (the main source of energy within the home) can approach 10 percent of annual income. Spending on energy in winter, when consumption peaks, can be higher still as a proportion of weekly or monthly income.
Household fuel poverty is defined in Britain as the need to spend more than 10 per cent of annual household income on all fuel use to heat the home to an adequate standard of warmth. In New Zealand there has been no equivalent attempt to define fuel poverty appropriately, reflecting our milder climate and differences in housing stock and consumer behaviour, and assess it at a national level. However, poorly insulated and inadequately heated homes are known to create health problems for a significant group of low-income households. There is also evidence of householders, particularly the elderly, keeping their use of energy for home heating down to inadequate levels to restrain spending.
Individual and household hardship caused by living costs is predominantly dealt with through income support policies rather than energy policy. An exception is the government's policy requiring electricity retailers to offer a low fixed charge tariff option to small electricity users. This was introduced in response to rising fixed charges, which limit the ability of small consumers to control the size of their power bill and save money by saving energy. Targeting government funding for home energy efficiency retrofits at low-income households also enables them to reduce heating costs, or achieve more comfortable and healthier homes without increasing costs.
Policies designed to promote efficient, transparent and competitive energy markets are also important in encouraging fair pricing and downward competitive pressure on prices. These include measures such as the requirements for improved customer switching protocols in the electricity industry, development of an electricity hedge price index and steps towards the development of a forward market for electricity.
Ways Forward …
The following is an indication of the range of possible further measures that could be taken to promote reliable and affordable energy in New Zealand, building on action taken so far or following the lead of other countries. Measures to promote energy efficiency, innovation and environmentally responsible energy can also contribute, directly or indirectly, to reliable and affordable supply.
… To Achieve More Reliable Transport Energy
Options for improving the transport energy supply security are limited in the short to medium term, but New Zealand will benefit from continuing its involvement in the IEA's oil security arrangements and meeting its associated responsibilities to maintain reserve oil stocks. Contingency planning for possible supply disruptions will help minimise the impact of any shocks. Alternative fuel development could be a "no regrets" policy for New Zealand for the long term. Biofuels, notably ethanol and biodiesel, may have the strongest long-term prospects. Their development is likely to require government support, however, following the examples of countries such as Germany, the United States and Brazil. Increased use of electricity for transport has less clear promise, but may be worth investigating. International efforts to develop hydrogen fuel cells as a transport energy technology will have to be watched closely, with continuing government support for New Zealand research in this area.
Cleaner and low-carbon fuels can reduce the environmental and health costs of transport energy use.
… A More Secure Natural Gas Supply
The government is increasing investment in research into the prospectivity of New Zealand's potential oil and gas producing regions, reducing royalties for petroleum exploration until 2009 and removing a taxation barrier to exploration investment. It will monitor closely the effectiveness of these measures and continue to work with the gas industry to develop a more efficient gas market, making use of backstop regulatory powers if necessary. It will also monitor progress on industry consideration of LNG importation to see whether any issues arise requiring government action.
… More Reliable Electricity
The government will continue to address barriers to investment in new electricity generation as they emerge, particularly for generation from renewable energy sources and distributed generation. Proposals for further change to the RMA, including an improved framework for water allocation, will be important in this regard. The terms and conditions for connection of distributed generation to distribution networks will be regulated, but there may be a need for more promotion by government of the benefits of distributed generation and more championing of successful examples. The Electricity Commission will promote more investment in electricity demand management where that is a cost-effective way of maintaining supply security. The Commission will continue to evaluate the case for acquiring new reserve energy options, including demand side measures, to cover the risk of supply disruption arising from very dry periods in hydro catchments. Upgrading of the national grid will proceed over the next decade, with the Electricity Commission to approve investments and determine a pricing methodology. In the longer term, the costs of climate change and rising price of carbon will mean generation from renewable energy sources becomes increasingly necessary for reliable and affordable supply.
… Fair and Efficient Prices
Efficient, transparent and competitive energy markets will continue to be the key means for securing fair and efficient energy prices, with competition providing essential downward pressure on costs and prices. Income support policies will continue to be the principal means of dealing with individual and household hardship caused by living costs, including energy costs, and these policies will continue to be adjusted as necessary. The development of a more liquid and transparent forward market for electricity, in which hedge contracts for future supply can be traded, will provide better price information for large consumers and clearer long-term price signals to guide investment in new generation.
Our reliance on fossil fuels for many energy services has significant environmental costs.
Taking Better Care of the Environment
Energy Services Have Environmental Costs
Our use of energy to provide services such as heat, light and transport has an impact on our environment. Energy services are a vital part of economic activity and our quality of life: a strong transport sector, for example, is essential to New Zealand's economic and social development. Electricity has become indispensable to modern life. Industrial energy use produces wealth, growth and jobs. But for all these purposes we currently rely heavily on energy from fossil fuels, which have significant environmental costs.
Transport Runs On Oil …
Transport in New Zealand runs almost entirely on oil. In 2003 transport generated 45 percent of energy sector emissions of carbon dioxide, a major greenhouse gas. Most of these emissions - 88 percent - are from petrol and diesel use for road transport. Transport sector emissions are growing strongly, at an average rate of just over 4 percent a year.
Vehicle exhaust emissions are also a significant contributor to local air pollution. In many urban areas, including regional centres, air quality regularly falls below New Zealand ambient air quality guidelines and international standards. Local air pollution from motor vehicles causes or aggravates human health problems including asthma, bronchitis and heart disease. Recent research has estimated that about 400 premature deaths occur each year as a result of motor vehicle emissions.
Growth in transport energy use is closely linked with economic growth. As New Zealanders prosper, they travel more - and in general this is part of an improved quality of life. The challenge is not to curb people's mobility, but to find more sustainable energy sources for transport and other ways of meeting people's travel needs.
… But Environmental Costs Can Be Reduced by Smarter Travel Choices
Some energy-intensive travel does not serve its purpose well, but is forced by a lack of alternatives. This includes a significant number of car trips. People often prefer to avoid car travel, but still use cars because they are affordable and alternatives are not necessarily more convenient.
International comparisons suggest that energy use in transport is closely linked to urban design. As cities sprawl, commuting times and distances increase. In the United States and Canada the amount of energy used for transport is almost three times as high per person as in other OECD countries, which generally have less dispersed cities and higher use of public transport.
Fuel-intensive travel can be reduced by shifting to less energy-intensive transport modes, changing destination choices, combining trips, or travelling less. Making these choices easier could help improve environmental quality and reduce urban congestion. EECA estimates that increasing use of public transport, cycling and walking, along with improving load factors in commercial transport, could save 17 percent of current transport fuel use.
The New Zealand Transport Strategy adopted by the government in 2002 recognises all modes of transport and takes a sustainable development approach. It requires transport policy to include consideration of public transport objectives, supporting alternatives to travel and providing infrastructure for walking and cycling.
Investment in public transport infrastructure and operational costs comes from both central government and from local government rates. In 2001 the government introduced patronage funding for public transport and passenger numbers increased substantially throughout New Zealand - by 23 percent over the following year in Christchurch, for example. The government has also re-purchased and will upgrade the national rail track network and stations in Auckland. Well operated and patronised rail has significantly higher fuel efficiency and lower environmental impacts than road transport. Freight transport by rail or coastal shipping is generally more energy efficient for bulk freight carried over longer distances. The government has initiated a Surface Transport Costs and Charges Study that will enable an investigation of pricing policies that could efficiently increase rail's share of the movement of people and goods. Road pricing offers potential gains in reduced congestion and environmental impacts, although it may have adverse social impacts. The government has commissioned a study to examine the desirability and feasibility of introducing it in Auckland.
Through its travel behaviour change programme EECA works with regional and local government to help people develop school, business and community travel plans. EECA has also produced a website-based Rideshare software package to put car drivers and potential passengers in touch by e-mail, and internet-based downloadable resources for communities to establish walking school buses.
… Cleaner and Low-Carbon Fuels
Cleaner and low-carbon fuels can reduce the environmental and health costs of transport energy use if they are renewable or have lower emissions. As discussed earlier, moving from oil to alternative fuels for transport can also increase supply security, while renewable fuels may be more affordable than oil in the long term.
LPG produces lower carbon dioxide emissions and much lower non-greenhouse gas emissions than petrol and diesel. However, in practice, emissions from LPG engines are generally not as low as they could be, as almost all are converted petrol engines. The proposed emissions charge would increase the price of LPG less than other fossil fuels, given its lower emissions, and LPG is already subject to a more favourable excise duty regime than petrol and diesel. The New Zealand Police make wide use of LPG vehicles.
CNG also has lower emissions than petrol and diesel, but it shows no sign of recovering popularity.
Figure 31: Carbon Dioxide Emission Factors for Transport Fuels
Source: New Zealand Greenhouse Gas Emissions 1990-2003, Ministry of Economic Development, June 2004.
Liquid biofuels produced from renewable biological products are little used in New Zealand, but offer a source of transport energy with neutral greenhouse gas emissions. Burning renewable biofuels produces greenhouse gases, but these emissions have a neutral effect on the atmosphere as they are balanced by absorption of carbon dioxide by the re-growth of the crops used to produce them. In the National Energy Efficiency and Conservation Strategy the government has set an indicative target for renewable transport fuels of 2 petajoules a year by 2012 - equivalent to about 1 percent of current transport energy use. Use of both biodiesel and ethanol could meet this target.
Ethanol, or ethyl alcohol, can be blended with petrol. It has a long history internationally, with the major users being Brazil, which allows a 22 percent blend, and the United States, which allows 10 percent. A 10 percent ethanol blend is generally suitable for modern vehicles without modification or any significant difference in performance. Net carbon dioxide emissions from a vehicle using a 10 percent blend are estimated to be up to 8 percent lower than with petrol. The government has updated fuel specifications to allow the use of a 10 percent ethanol-petrol blend in New Zealand and EECA is working with oil companies to facilitate introduction of the fuel to the market. Sales are expected to begin in early 2005, at the same price as ordinary petrol.
Current ethanol production in New Zealand from whey is enough to replace about one sixth of all petrol consumption with a 10 percent blend. Production could be substantially increased by using other industrial by-products and wastes that contain sugar and starch.
Biodiesel can be produced from animal or vegetable fats and oils. It can be used as a direct replacement for conventional diesel in unmodified vehicles, but is more commonly used in blends. Various forms of biodiesel are in common use in Europe and the United States, in blends of 5 to 30 percent or as a pure fuel. Feedstocks include rapeseed oil, soy oil and, in smaller quantities, used cooking oil. New Zealand's production of tallow, a clarified animal fat, combined with supplies of used cooking oil, could be used to produce enough biodiesel to replace New Zealand's current conventional diesel consumption with a 6 percent blend. This would require no engine modifications and produce no significant change in vehicle performance. The additional cost at the pump has been estimated at between zero and 1.2 cents a litre for a 5 percent blend.
Current production of biodiesel from tallow in New Zealand is very small, on an experimental or project basis. The government is developing fuel standards for biodiesel and investigating policy options for promoting its use.
… And More Efficient, Cleaner Vehicles
Cars - including taxis, vans and other light vehicles - use almost 90 percent of passenger transport energy. The fuel economy of vehicles has improved steadily over the past century. Internal combustion engines have become more efficient and vehicle design has helped with better aerodynamics, drive train efficiency and the use of lighter materials. But conventional engines remain less than 30 percent efficient, on average and the overall efficiency of oil use for transport can be as low as 2 percent.
Figure 32: Conversion of Fuel Energy into Forward Motion in a Motor Vehicle
→ Full size version of Figure 32 available [33KB GIF]
Source: Energy Efficiency and Conservation Authority
The recent trend in most western countries has been for improvements in vehicle efficiency to be offset by consumer preferences for bigger and more powerful vehicles, including sport utility vehicles (SUVs). Where overall fleet fuel efficiency is measured it is generally staying relatively static.
The New Zealand vehicle fleet has been transformed by the removal of vehicle tariffs in 1998. Imports of used vehicles, mostly from Japan, have expanded rapidly and now make up about 70 percent of vehicles entering the vehicle fleet each year. The average age of used imports is 7 years and the car fleet's average age is almost 12 years. Fuel consumption information on imported vehicles will be collected in the future to determine how the overall efficiency of the vehicle fleet is changing.
Because New Zealand has no vehicle manufacturing industry and very limited vehicle research and development capacity, developing a more efficient and low-emission vehicle fleet will require effective measures to encourage uptake of new vehicle technologies from elsewhere. Low emission, efficient small petrol and diesel cars are available internationally. New Zealand imports few of these, but this could change with fuel price increases and policy measures such as the government's programme to provide light vehicle purchasers with information on fuel consumption.
Hybrid vehicle technologies, combining internal combustion and electric motors, also offer significant gains, with fuel efficiency approaching twice that of many conventional engines. The technology is available now in cars and buses, including New Zealand-built LPG hybrid buses made in Canterbury. The main limits on uptake of hybrid vehicles are their price and the difficulty that manufacturers are having in meeting high demand internationally, which has led to waiting times for new vehicles.
Seventy to 80 percent of new car purchases are corporate and government purchases. EECA produces an Econodrive guide to vehicle choice for fleet managers and is trialling a software package which enables managers to track fuel use. It also offers a subsidised FleetCheck audit service, which assesses the efficiency of fleet management and defines an action plan for improvement.
The government has introduced New Zealand's first vehicle emission controls, which are being phased in between January 2004 and 2006. These controls will ensure that all vehicles entering New Zealand are manufactured to recognised international emissions standards from the United States, Europe, Japan or Australia. Vehicle emissions will also be screened as part of regular Warrant of Fitness or Certificate of Fitness checks. More stringent requirements will phase in from 2007 to 2008.
Electricity Generation Is Predominantly Renewable …
New Zealand's electricity generation uses a high proportion of renewable energy by global standards, with 60 to 70 percent of annual electricity production usually coming from hydroelectric generation. Only 20 to 30 percent comes from thermal generation using fossil fuels. Because most of New Zealand's thermal generation uses natural gas, which is cleaner burning than coal, greenhouse gas and other emissions per unit of electricity production are low by world standards.
Figure 33: New Zealand Electricity Generation by Source, March Year 2004
Source: New Zealand Energy Data File, Ministry of Economic Development, July 2004.
… Generation from Fossil Fuels Will Continue for Some Time
Hydro generation capability varies with inflows from rainfall and snowmelt. Hydro managers use storage lakes to smooth out some of the variability in inflows, but New Zealand's total hydro storage is limited. To maintain secure supply, the electricity system therefore needs non-hydro generation that can run when needed. This need has largely been met by thermal generation using gas, coal or oil, which can increase output when required and when water is short.
Over time the need for non-hydro generation can increasingly be met by other new renewable generation capacity. But this is a long-term transition: current thermal generation capacity is more than 2500 megawatts, while total non-hydro renewable capacity totals about 400 megawatts. Total hydro capacity is also insufficient to meet current demand and thermal generation is an important part of baseload capacity.
There are limits, with current technologies, in the extent to which generation from renewable sources can replace generation from thermal fuels. Geothermal energy is the most comparable, as it is not weather-dependent. Wind generation is intermittent, producing full power on average about half the time. It can therefore take about 200 megawatts of wind generation to match the output of 100 megawatts of thermal generation. There are also technical limits to how much intermittent generation electricity networks can manage. Industrial co-generation using woody biomass will generally run according to industrial production needs rather than the needs of the electricity system.
For these reasons - and the long economic life of thermal generation plant - thermal generation is likely to remain a significant part of the electricity system for several decades. In that time, technological changes may determine its longer-term future. Technologies for capturing and storing carbon dioxide from fossil fuels, for example, could largely remove one of the main environmental barriers to their continued use for electricity generation. Conversely, advances in technologies for storing electricity or generating it from renewable energy at the point of use might reduce the need for thermal fuel use.
… With a Changing Balance of Fuels and Emissions
Gas combined cycle electricity generation is currently cheaper to build than most other available technologies. Initial capital costs are low per megawatt of installed capacity compared to renewable alternatives and coal. Running costs are higher than for generation using free renewable energy, but the standard commercial practice of applying a discount to the longer-term costs and benefits of investments tends to emphasise the attractiveness of gas plant.
Electricity industry planning for new capacity in recent years has included several options for a new gas plant, and Genesis Energy recently decided to proceed with the 385 megawatt e3p gas plant at Huntly, due to begin operation in late 2006. Ministry of Economic Development analysis suggests that a significant amount of generation capacity using renewable energy may be more economic after e3p than the next major increment of thermal capacity. However, proposals for new coal generation that could be commissioned around the end of this decade continue to be advanced through the resource consent process by energy companies.
New Zealand's largest thermal generation plant, the 1000 megawatt Huntly power station, can run on gas or coal. With declining gas supplies and rising gas prices, Huntly switched from gas to coal in 2003.
This change, combined with unusually dry periods requiring increased thermal generation, has produced a surge in greenhouse gas emissions from electricity generation. These emissions are expected to decline again once the Huntly e3p plant begins producing electricity, displacing some less efficient thermal generation. New thermal plant using coal could produce a further increase in emissions in the longer term.
Figure 34: Carbon Dioxide Emissions from Electricity Generation in New Zealand 1990-2025
Source: New Zealand Energy Outlook to 2025, Ministry of Economic Development, October 2003 (assumes new coal-fired generation commissioned after 2020).
Diesel generation may be used more in future to provide reserve energy for peaks in demand during dry hydro periods. The government has constructed such a plant in Hawke's Bay for this purpose and the Electricity Commission may secure more such capacity from energy companies. The resulting increase in greenhouse gas and other emissions is likely to be insignificant, as reserve energy plants will generally be used seldom and for short periods.
Government policy measures to encourage gas exploration reflect in part the environmental advantages of gas over other fossil fuels for electricity generation, given its lower greenhouse gas and other emissions.
Figure 35: Carbon Dioxide Emission Factors of Thermal Electricity Generation by Fuel
Source: New Zealand Energy Greenhouse Gas Emissions 1990-2003, Ministry of Economic Development, June 2004. Generation efficiency of 50 percent is assumed for distributed gas and 35 percent for diesel and coal.
Nuclear power can be used to produce electricity without greenhouse gas emissions or airborne pollutants, but is unlikely to be adopted in New Zealand due to public concern about the risks associated with its operation and waste management. The cost is also high compared to other available options.
… Renewables Are Likely to Grow More Strongly
New Zealand still has substantial untapped renewable energy resources for electricity production (Figure 36). Generation from renewables is growing more rapidly than fossil fuel generation and is likely to make up an increasing share of capacity over the next two decades, according to Ministry of Economic Development analysis.
Figure 36: Availability of Renewable Resources for Electricity Generation in New Zealand by 2025
Sources: New Zealand Energy Data File, Ministry of Economic Development, July 2004; Availabilities and Cost of Renewable Sources of Energy For Generating Electricity and Heat, East Harbour Management Services, September 2002.
Figure 37: Projected Economic New Power Station Sequence for New Zealand 2005-2025
→ Full size version of Figure 37 available [18KB GIF]
Source: New Zealand Energy Outlook to 2025, Ministry of Economic Development, October 2003.
The assumptions behind these projections (Figure 37) include moderate economic growth, modest new gas discoveries, improving energy efficiency and the introduction of a emissions charge from 2007-2008. Alternative scenarios assuming no new gas discoveries, higher economic growth, or low energy efficiency generally project more coal generation from existing plant and new coal generation becoming economic after 2020, with the overall share of generation from renewables remaining steady or increasing.
The government's policy preference for renewable generation is reflected in a number of measures to facilitate its growth. The National Energy Efficiency and Conservation Strategy includes a growth target for renewable energy of an extra 30 petajoules by 2012. EECA is publishing guidelines for local authorities dealing with renewable electricity generation projects such as wind farms, and is working with renewable energy industry associations to develop action plans for advancing their industries in New Zealand. The RMA has been amended to require the benefits of renewable energy and energy efficiency to be considered in regional and district plan development and in the resource consent process. The climate change Projects to Reduce Emissions programme provides Kyoto Protocol carbon credits for cleaner energy projects and this has already accelerated the development of wind generation in particular. The proposed climate change Forest Industry Framework Agreement between the government and the forest industry would commit public and industry funding to a bio-energy programme to increase use of woody biomass as an energy source in wood processing. The proposed emissions charge would make renewable generation more cost-competitive with fossil fuel generation.
… With Some New Challenges in Managing Environmental Impacts
All electricity generation technologies have environmental impacts, including technologies using renewable energy sources. Increasing use of renewables will bring overall environmental benefits, but also new challenges in managing environmental effects.
While the scope for new hydro developments on the scale of those built in the past is limited, expansion by means of smaller projects will still involve modifications to waterways and disruption to their ecosystems. Geothermal energy use can be associated with land subsidence and involves the extraction of toxic and corrosive fluids. Wind farms in some regions have attracted strong public support, but can also be perceived as a visual intrusion and possible source of noise.
The environmental effects of new renewable energy developments are managed primarily through the RMA, which has been amended to give more weight to the benefits of renewable energy and energy efficiency. Local authorities frequently express a wish for more practical guidance from central government on decision-making relating to energy development and the government is responding to this with its latest proposals for resource management reform, including development of national policy statements and standards on infrastructure. The Local Government Act requires local authorities to take a sustainable development approach to their activities and some have responded by adopting regional energy strategies.
Increasing the efficiency of electricity use helps reduce the environmental impacts of electricity production and use. More efficient power consumption delays the need for new generation capacity to meet a given rate of growth in demand and minimises the impacts of existing plant, such as greenhouse gas emissions.
Industry Uses a Mixture of Fuels …
New Zealand industry makes direct use of a mixture of fuels to generate high and low temperature process heat. Altogether this accounts for about 20 percent of New Zealand's total energy consumption. Electricity is also used for process heat, but to a relatively small extent - about 5 petajoules a year, compared to about 103 petajoules from direct fuel use.
Figure 38: Energy Use by Fuel for Industrial Process Heat in New Zealand, Electricity Excluded, March Year 2002
Source: Energy Efficiency and Conservation Authority
Figure 39: Energy Use by Sector for Industrial Process Heat in New Zealand, Electricity Excluded, March Year 2002
Source: Energy Efficiency and Conservation Authority
Most of the energy for the wood processing and pulp and paper industries comes from renewable sources. The wood processing industry makes extensive use of waste woody biomass. The pulp and paper industry makes significant use of liquid waste streams and geothermal energy. The metals, dairy, meat and food processing, concrete and glass industries are heavily dependent on coal and natural gas. The industries making extensive use of process heat generally comprise a small number of plants using large amounts of energy. The 17 percent of total process heat energy used in basic metal industries, for example, is all used at New Zealand Steel's Glenbrook plant.
Greenhouse gas emissions from manufacturing have generally grown steadily, with an average increase of 2 percent a year between 1990 and 2003.
… And Could Use More Coal
With tight gas supplies and rising prices, large industrial users such as steel, wood and dairy processing may switch from gas to coal to secure reliable energy supply at a more stable price. Smaller industrial gas users, such as glasshouse operators, may also switch. Increased industry investment in co-generation, which uses the same energy source for both process heat and electricity generation, could also involve increased coal consumption. This would increase greenhouse gas and other emissions from the industries concerned and possibly foreclose investment in renewable energy options. At the same time, increased co-generation would improve electricity supply security.
… But Also More Bio-Energy and Gas
The use of woody biomass in the wood processing industry is expected to grow, and would be facilitated by the proposed Forest Industry Framework Agreement between the forestry industry and the government. This agreement would commit public and industry funding to initiatives potentially including a knowledge centre, machinery development, demonstration projects and feasibility studies. Biomass energy developments have also been supported by the climate change Projects to Reduce Emissions programme. This includes support for energy users switching from gas to biomass rather than to coal.
Natural gas remains a viable and practical fuel for many industrial purposes and the National Energy Efficiency and Conservation Strategy continues to promote direct use of gas. Direct use of gas is more energy efficient and produces lower emissions than use of other fossil fuels, or use of electricity generated with gas.
Increasing concerns about the effects of discharging liquid organic waste into the environment may improve the economics of bio-energy options in industries, such as pulp and paper and food processing that produce such waste in quantity. The government's New Zealand Waste Strategy establishes a policy framework for waste reduction that encourages measures to recover value, including energy, from the waste stream.
Industrial plants using large amounts of energy have strong incentives to improve energy efficiency and conservation, to cut their energy costs. Some new technologies that would be beneficial will only be adopted, however, when existing plant reaches the end of its economic life.
New Zealand industry uses a mixture of fuels for process heat, accounting for about 20 percent of total energy consumption.
Ways Forward …
The following is an indication of the range of possible further measures that could be taken to promote better environmental outcomes from energy production and use in New Zealand, building on action taken so far or following the lead of other countries. Measures to promote energy efficiency, innovation, and reliable and affordable energy can also contribute, directly or indirectly, to better environmental outcomes.
… Towards More Environmentally Responsible Transport
Greater use of public transport could be encouraged, where it will be efficient, with more public funding and further investment in infrastructure such as busways and railway stations. Other countries are increasingly using road pricing and higher parking charges to shift passengers from private vehicles to public transport. Pricing policies that could efficiently increase rail's share of passenger and freight transport will be investigated on the basis of information from a forthcoming study on surface transport costs and charges. Increased government support and guidance for the development of travel demand management strategies for urban areas could improve the travel choices available to people. More support for telecommuting initiatives in workplaces, particularly in rural areas, could help reduce travel demand.
The government could do more to encourage use of cleaner and low carbon fuels for transport. This could include more support for the use of LPG and ultra low sulphur diesel in the short term. In the longer term increased use of liquid biofuels, particularly ethanol and biodiesel, could be led by government adopting a more ambitious target for biofuel use than the current indicative target of two petajoules a year by 2012. Supporting measures could include public information and voluntary agreements with industry for biofuel use in sensitive environments, given their low toxicity and biodegradability; increased funding for biofuel research and development; and mandatory biofuel sales targets for oil companies. Some countries also provide advantages for alternative-fuel vehicles such as access to bus lanes or exemption from congestion charges.
The government could lead uptake of more efficient vehicles by adopting fuel efficiency targets for vehicle imports. This could be underpinned by public information, mandatory fuel consumption labelling of vehicles, government "green vehicle" purchasing, trade training for hybrid vehicle servicing, differential registration fees based on vehicle efficiency, bounty payments for scrapping old vehicles and funding support for working trials of new technology such as hybrid buses. More stringent vehicle emission standards can also bring fuel efficiency benefits, as cleaner vehicles generally use less fuel. Developments in hydrogen vehicles could be tracked through a government technology watch programme, with early action as necessary to ensure rapid uptake of commercially viable hydrogen vehicles.
… Electricity Generation
To accelerate progress towards cleaner electricity generation the government could provide more specific guidance for local authorities on best practice in dealing with proposals for renewable energy development. Regional and district plans could be specifically required to encourage development of renewable energy resources, perhaps including through the setting of regional targets for renewable energy, as required in the United Kingdom. Planning authorities could be encouraged to use their powers to require new developments to use on-site renewable energy for a percentage of their energy needs. Government could fund more mapping of renewable energy resources, such as wind and solar intensity and use the information to encourage development of renewables in areas of high potential. Public investment in research into renewable energy technologies in which New Zealand has strengths could be increased and an international sustainable energy watch could monitor and disseminate information on developments with potential value in New Zealand conditions. Continuation of the climate change Projects to Reduce Emissions programme would maintain incentives for low or zero emission energy projects.
… And Industry
To support cleaner industrial energy the government could provide stronger incentives for development of on-site renewable energy, such as arrangements for investment risk sharing or direct support through grants or loans. Local government planning requirements for new developments to include a certain proportion of on-site renewable energy production, as above, could also assist. More stringent air and water quality standards could encourage greater use of renewable and lower-emission fuels and increased extraction of energy from liquid organic waste. Continuation of the climate change Projects to Reduce Emissions programme would maintain incentives for new clean industrial energy projects, or improvements to industrial processes that reduce emissions.
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