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• H.1 Introduction
• H.2 Energy Sector

H.1 Introduction

This section outlines the methodology used to estimate the economy wide impacts of changes to two major sectors, agriculture and energy. General Equilibrium ("GE") modelling was outside the scope of this analysis, so analysis of this nature was limited to energy production. A major recommendation of the report was the completion of GE modelling might be undertaken to refine the estimates produced in this report.

The analysis of the energy sector was limited to a coarse demand response modelling to electricity prices under both the base case (Without Aqua) and the Project Aqua scenarios.

H.2 Energy Sector

For the purposes of this assessment, water allocation decisions affecting the energy sector are assumed to result from increased allocations (such as those to allow Project Aqua). If this were to occur the long-run marginal cost of electricity is expected to decrease. The analysis provided here is similar to that provided in Covec (2004), however small changes have been assumed in the calculations based on updated information.

Concept Consulting (2004) presents demand information that assumes a specific consumer demand for the both the base case and the scenario with Project Aqua. It was confirmed by Concept Consulting that the information for the base case was not adjusted for the demand elasticity of electricity, however the underlying forecast for the scenario was provided based upon MED (2003) forecasts, so could be expected to incorporate demand elasticity response.

Using information contained in the New Zealand Energy Forecasts (MED, 2003), the generation demand response to price was calculated using a weighted demand elasticity with reference to the different responses of different industries, and the retail price applicable to each industry. It is assumed that these estimates would remain similar over the analysis period. It is assumed that there is no price differential beyond 2020, and that the value of losses (transmission and distribution) were capture in the price-add applied.

Note:
1) "Price-Add" represents the add-on to wholesale generation price required to represent the retail price for each of the sectors.

The short-run response was based on the price impact in the year concerned, while the long-run response was based on the moving-average of price increases over a five year period.

Based on the data above, the Base Case generation sequence was modified to reflect a price adjusted demand estimate. The supply curves were presented in Figure 10 suggest the majority of price savings to consumers will occur over the generation range 40,500 - 44,000GWh. Concept Consulting (2004) assumes that beyond this demand level, the price path will converge and additional price induced benefits will cease.

Figure 10: Supply Curves, Base Case and with Project Aqua

→ Full size version of Figure 10 [10KB GIF file]

The elasticity of demand information suggests that a 1% decrease in price would lead to a 0.26% increase in quantity demanded in the long-run. A decrease in price benefits both consumers (through lower unit costs) as well as producers (through increased consumption). The national costs and benefits exclude the amount that transfers from one party to another, but represent the net impact to the economy. This can be designated by the triangle presented in Figure 11, which is made up partly of gains to consumers, a partly with gains to producers.

Figure 11: Demand Response to Decrease in Price

The calculation of the price impact to the economy requires the calculation of the two triangles. The consumer surplus quantity is calculated by taking half the product of the change in price and the change in quantity demanded. The producer surplus quantity is half the product of the change in price for the scenario with Aqua and the change in quantity demanded. For the later estimate, the average was taken in price change over a three-year period of time.

The results of this calculation are presented in Table 54.

This estimate is considered a lower bound, as it could be expected that the economy is able to increase economic contribution as a result of a decrease in electricity price, increase in the quantity demand for other goods as a result, although this may be restricted by other supply constraints. A general equilibrium modelling exercise was not undertaken for this study, but may provide additional refinement of the results presented above.