Overview
Policy Challenges
The Energy portfolio covers the policy and regulatory frameworks for the electricity, gas, and petroleum markets. It also covers regulatory arrangements for exploring and developing the Crown mineral estate (including oil and gas) and the safety of energy services.
Key goals for the sector are to:
- maintain a reliable and resilient supply of energy at fair and affordable prices
- limit the impact of the sector on the environment, both local and global
Achieving these goals consistently through time is a significant challenge, given:
- rising energy demand (particularly in the transport sector) in line with strong economic growth, notwithstanding increasing government support for enhanced efficiency of energy use
- the Maui gas field, which has underpinned security and price levels in the gas and electricity sectors for many years, is approaching the end of its life
- the impact of climate change policies on the energy sector, which has created some uncertainty for potential investors in new generation, is likely to add to cost (e.g. via a carbon charge) and complicates assessment of any role for coal in future power generation
- progressive tightening of electricity supply security margins, which will likely necessitate major new investment in both generation and transmission in the relatively near future
- the impact of the Resource Management Act, which can cause considerable uncertainty over time, and the costs of obtaining (or not) some forms of resource consent. This complicates energy planning (both for government and for commercial players)
- volatile and rising international oil prices
In the last few years, a number of steps have been taken to improve the performance of the energy sector, including:
- improved governance and regulation arrangements, for both electricity and gas (although these will take time to embed)
- strengthened arrangements around electricity security of supply (coordination by the Electricity Commission and the reserve energy policy)
- enhanced incentives for gas exploration and for renewable sources of energy
- increased support for energy efficiency and renewables
- actions towards restoring New Zealand's oil stocks to the 90-day level required by our membership of the International Energy Agency
The recent changes to the Resource Management Act may also facilitate more timely consenting processes that are more consistently of good quality.
Notwithstanding these actions, significant challenges remain.
Maintaining Security of Electricity Supply
- On current projections, significant new sources of generation will be needed by around 2010. A number of projects (including wind, geothermal, coal and gas) are being progressed by a range of players, but as yet relatively few commitments have been made. The Electricity Commission and the Ministry are closely monitoring the situation and will provide early advice if there is any material risk to future security of supply.
- Transpower's proposed upgrade of the transmission network into Auckland (to avoid projected supply interruptions from 2010) is a controversial project. The Electricity Commission is charged with assessing and approving the project (or some variant). The Ministry is maintaining oversight and coordinating the inter-related processes around the Commission, the Resource Management Act and the Public Works Act. We will also be working with Transpower, the Commission and others to ensure that adequate contingency arrangements are in place to deal with any delay to the project.
- The institutional arrangements covering the various government entities involved in the electricity sector may require some evolution, in the light of experience gained over the past two or so years.
- Some commentators continue to question whether an electricity market can work effectively in delivering security of supply at reasonable prices, and advocate moving to a more centrally-planned model.
Maintaining a Secure Gas Supply
- The decline of the previously dominant Maui gas field means that future supply is likely to come from a larger number of smaller fields, necessitating robust arrangements for market governance and access to essential facilities (such as pipelines). New governance and regulatory arrangements for the gas sector (co-regulation) to enable this transition have been put in place, and will require government to work closely with the industry.
- If exploration for new gas reserves proves unsuccessful over the next three or so years, the owners of existing gas-fired power stations (mainly Contact and Genesis) will face an important decision on how to source future gas supplies. One option is liquified natural gas, which is only likely to be economic on a large scale (relative to the total size of the national gas market). Although this is essentially a decision for market players, a number of policy matters could arise, including:
- the possibility that the companies might approach the government seeking some form of financial underwrite, and do so relatively late in the day
- the resource consent and competition policy issues
- government ownership of Genesis, requiring a shareholder perspective on any possible investment
If no new gas supply is forthcoming, further new sources of electricity generation (to replace the partially stranded gas-fired generators) would be needed.
Maintaining a Secure Petroleum Supply
In the short to medium term, options to reduce the economy's dependence on oil as a fuel for the transport sector are very limited.
New Zealand is in the process of restoring oil stocks to the 90-day level required by our membership of the International Energy Agency. We are also strengthening contingency plans for use should there be material disruptions to oil supply.
Rising Energy Prices
Domestic prices for electricity, gas, coal and oil have all increased significantly in recent years and, at times, become a political/media issue. The underlying driver has been constrained supply, both nationally and internationally. Government policy can help to mitigate pressure on prices (e.g. by further promoting cost-effective energy efficiency and renewables, promoting effective competition, improving the Resource Management Act processes, reducing climate change policy uncertainties and promoting more rapid exploration for petroleum). However, there is some risk of further upward pressure on prices (because of further rises in international oil, gas, coal and carbon prices), and there is a difficult trade-off between price, security and environmental impacts across the energy sector.
Promoting a More Sustainable Energy System
Particular issues requiring ongoing inter-agency collaboration include:
- ensuring that climate change policy meets international and environmental objectives at least economic cost and that impacts on, and interactions with, the energy sector are properly understood
- considering what, if any, steps are required to ensure that New Zealand can transition smoothly to alternative energy sources as and when the ongoing supply of oil becomes constrained, e.g. promoting the availability and uptake of biofuels
- progressing the sustainable water programme of action, including the extent to which government might wish to move in the direction of tradeable water rights
Key inter-relationships that arise in developing policy for sustainable energy are shown diagrammatically below:
Relationships of Key Policies with Sustainable Energy
Role of Government
The government has a number of roles in relation to the energy sector. These include:
- leading the process for moving New Zealand progressively towards a more sustainable energy future
- promoting effective and efficient energy markets for the best long-term interests of users
- ensuring social objectives are met, such as the requirement to provide low fixed charges for electricity and requirements for using energy safely
- ensuring that natural resources such as those in the Crown mineral estate are allocated and used efficiently
The Energy portfolio covers both policy and operational functions:
- policy advice on the regulatory regime for the supply of electricity, gas, and petroleum (including oversight of the enforcement regime for electricity provided by the Electricity Commission and the industry/government co-regulatory model for gas)
- enforcement and service delivery for the Crown mineral estate (including oil and gas) and the safety of energy services
Appropriations under the Vote total $130.1 million in 2005/2006. In addition, there are three multi-year appropriations totalling $47 million for three to five years from 2004/2005. These relate to the Whirinaki reserve generation station, purchase of demand-side management and reserve energy production, and acquiring seismic data in New Zealand's offshore petroleum basins.
Ministry Role
The Ministry's strategic priorities focus on our experience, expertise and resources that have the most impact for sustainable economic development. In summary, these are:
- leadership: leading a whole-of-government approach to economic development
- international linkages: improving international linkages that allow firms to benefit from trade, knowledge transfer and investment
- innovation: fostering entrepreneurship and innovation in New Zealand firms
- regulatory environment: strengthening the growth focus in the regulatory environment for business
- infrastructure: strengthening the quality and reliability of key infrastructure services
The Ministry's support for the Energy portfolio involves all five priorities, but especially that relating to infrastructure.
Sustainable energy, a whole-of-government programme led by the Ministry, also contributes to social, environmental and cultural outcomes as well as sustainable economic development.
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