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• 2005

Each of these areas is addressed below.

It should also be noted that the Ministry leads New Zealand's participation in inter-governmental forums dealing with energy policy, notably the International Energy Agency (see Appendix 3). New Zealand has long-standing international treaty level obligations in some of these areas.

Electricity

Overview

The electricity industry in New Zealand comprises competitive generation and retailing, linked by the national grid and local distribution lines that have strong natural monopoly characteristics. Generation and retailing are dominated by four vertically integrated generator/retailers (Contact, Meridian, Genesis and Mighty River). Other players include Trustpower and Todd Energy.

New Zealand's electricity generation is based mainly on hydro systems, accounting for 61% in the 2004 March year. Gas, geothermal and coal generation accounted for 22%, 6.5% and 7.5% respectively. These shares vary from year to year, depending largely on inflows in hydro catchment areas. Other generation (consisting mainly of renewables such as wind, biogas, industrial waste and wood, as well as co-generation) currently account for only 3% of electricity generation. With more wind turbines recently installed and even more planned, generation from wind is increasing. Detailed information and statistics on electricity and other energy sectors are provided in the Ministry's Energy Data File which is updated and published six monthly.

The electricity sector has unique characteristics that create an ongoing requirement for government oversight:

• Electricity supply is essential for virtually all household, commercial and industrial premises.
• Electricity cannot be stored, so generation and demand have to be matched instantaneously. Electricity flows follow the laws of physics, not contracts. These factors greatly complicate wholesale market institutions, and central system management is required.
• Our electricity system is significantly affected by weather conditions, especially rainfall. Lake storage capacity is limited, making us vulnerable to dry years. Spot prices vary greatly according to rainfall and lake levels. Good risk management by buyers and sellers to manage their exposure to spot prices is essential.
• We cannot import or export electricity, unlike most other OECD countries.
• The electricity system is subject to significant network externalities, in that (a) there are benefits to all parties from being connected to a nation-wide grid, and (b) whatever any large party does affects all other users of the grid in highly complex ways. This makes agreement on transmission investment and pricing difficult.
• We have a very stringy transmission system, resulting in significant transmission constraints and losses. This creates special challenges for retail competition in regions subject to transmission constraints, such as the Bay of Plenty and North Auckland, and for risk management generally.

Electricity Commission

In May 2003, following the electricity industry's failure to establish a fully-integrated self-governance regime, the government decided to establish an Electricity Commission to take responsibility for governance and regulation of the New Zealand electricity industry under the Electricity Act 1992.

The Commission (Chair Roy Hemmingway and five members) commenced operations in September 2003 and took over responsibility for operating the electricity market under the Electricity Governance Rules and Regulations 2003, from 1 March 2004.

Commissioners are appointed by the Minister of Energy for terms of up to three years. There is currently one vacancy as a result of a Commissioner resigning in May to take up full-time employment. In addition, the terms of three Commissioners expire in September 2005 (they were appointed for two years only). The legislation allows them to stay in office until re-appointed or replaced.

The government amended the Electricity Act 1992 to set the following principal objectives for the Electricity Commission:

• ensure that electricity is produced and delivered to all classes of consumers in an efficient, fair, reliable, and environmentally sustainable manner
• promote and facilitate the efficient use of electricity

Government Policy Statement on Electricity Governance

This statement, issued in October 2004, sets out government's objectives and outcomes for the Commission. The government has directed the Commission to give priority to four areas:

• managing security of supply and implementing the reserve energy mechanism
• working with Transpower and grid users to facilitate priority investment in the grid
• promoting efficient use of electricity
• improving hedge market transparency and liquidity and demand-side participation

The government expects early warning from the Commission if it believes there is any material risk that current settings for electricity and for other policy areas are unlikely to produce sufficient investment, particularly in generation and the national grid.

Regulation of Electricity Lines Businesses

The Commerce Amendment Act (No 2) 2001 established a regulatory regime for electricity lines businesses by providing the Commerce Commission with the power to impose targeted price control on companies that breach thresholds to be set by the Commission. The Commission has developed a thresholds regime, which includes a price threshold and a quality threshold. Lines businesses (including Transpower) are now assessed annually against the thresholds. The Commission investigates breaches before any decision on declaring control of the lines business. The Commission is currently finalising a review of information disclosure requirements for lines businesses.

Next Three Years

System Security

Electricity Demand

National electricity demand growth is in the region of 2% to 2.3% per annum. There are clear regional variations about this figure - growth in the upper South Island and the upper North Island is likely to be higher, at around 3% per annum.

Apart from regional aspects such as transmission supply capabilities into high growth areas, small variations in national demand do not present a major security of supply issue in the shorter term but may become more significant over time due to cumulative effects.

Security of Supply

The Electricity Commission has assumed the responsibility for providing the public information on electricity security of supply. This is available through a website and contains details of fuel storage, hydro levels, demand and the minzone. (A minzone is the level of hydro storage that provides the appropriate level of security against contingencies such as an extended dry period.) A simple risk indicator provides a quick visual situation.

Security of supply needs to be considered over a range of time scales and there will be on-going requirements for Ministerial briefings.

Whirinaki

The Crown has continuing ownership of the new Whirinaki Power Station (150 MW), with ownership options to be further reviewed by August 2006.

The power station was commissioned in May 2004 and is available only for providing reserve energy. The Crown and the Commission entered into an agreement in April 2005 to make the power station capacity available to the Commission for continuing provision of reserve energy.

The Crown, as owner, will receive annualised payments for capital invested, as well as payments for operations and maintenance costs, and for fuel. From an ownership perspective, there will be some continuing risks, with a commensurate rate of return on investment.

Short-Term Considerations

The Commission determined in January 2005 that, on information provided by the market participants, additional reserve energy is unlikely to be required for winter 2006.

The Electricity Commission will be able to utilise Whirinaki Power Station during periods of low hydro inflows, and other emergencies. To help manage industry understanding of when Whirinaki may operate, and also as an indicator of supply security, the minzone identifies levels of national hydro storage throughout the year. Hydro lake levels above the zone are expected to be managed by normal market mechanisms; should levels fall below the zone, the Electricity Commission will implement contingency plans (including, in the extreme, conservation measures).

Longer-Term Considerations

Around 800 GWh of new generation is required each year, on average, to match increasing demand. As examples, this could be met by a new 100 MW thermal plant operating at a high load factor (i.e. with a high degree of continuity), or wind farms totalling 220 MW (wind is an intermittent energy source). New generation in addition to this may also be required to replace aging plant.

Recent work by the Electricity Commission suggests that current plans for new generating plant are sufficient to meet needs in 2005, that 2006 will be slightly tighter, and that the new gas-fuelled Huntly e3p station due to be available for 2007 will add significantly to security of supply for two or more years from that date. However, should the draft plans for water allocation from the Waitaki River be accepted, the window of improved security provided by e3p could reduce by around 12 months.

Upper North Island Security

During the summer period particularly, the electricity demand from Auckland and further north can approach current supply limits. For the past five years, an industry grouping has coordinated management of this issue.

Transpower, in its role as system operator, is facilitating the wider Auckland region's response, working closely with the Electricity Commission and participants in the region, including distributors, generators and retailers.

Upper South Island Security

Energy supply and voltage stability concerns for the region have been highlighted by recent lower than average lake levels.

An upgrade of transmission capacity into the region is scheduled for completion by winter 2006. However, Transpower has indicated some recent issues have arisen in negotiating access and easements with landowners.

As with the upper North Island, Transpower is facilitating a cooperative process with stakeholders to enable a coordinated response in order to avoid impacts on customers.

Transmission Upgrades

Transpower is proposing significant grid upgrades including some new transmission lines. The major proposals include new 400 kV lines into Auckland and Christchurch, and an upgrade to the HVDC inter-island link. Transpower's proposals represent the most significant transmission investment in recent decades.

Transpower considers a new line between South Waikato and Auckland is needed by 2010, to meet projected demand growth in the region. The new line could have a significant effect on the environment and on land owners, and the proposal is generating considerable concern from those who could be affected. Easements over land required for the proposed new line would cover a strip about 200 km long and 65 m wide.

The Electricity Commission is currently reviewing Transpower's proposal for a new line into Auckland and is due to reach a final decision around mid-2006. The Commission must consult widely with affected parties and thoroughly investigate options to the proposal, including alternative generation and demand-side options.

In the meantime, Transpower has selected its preferred route for the new line and is negotiating easements with the affected landowners. Such negotiations are under the shadow of compulsory acquisition because Transpower may, as a requiring authority under the Reserve Management Act, request the Minister of Land Information to take land under the Public Works Act. Transpower considers that, given the tight timeline for completing the project, it is likely to make such requests during 2006.

Transpower intends to lodge notices of requirement to designate land under the Resource Management Act for its preferred line route around April 2006. Transpower is working with all of the local authorities involved in an effort to coordinate and integrate the Act processes as much as possible. The Act was recently amended to provide a range of options that could also assist in its processes, including "call in" by the Minister for the Environment. If called in, a Board of Enquiry could determine Transpower's requirements for designation in all of the affected districts.

The Minister has no statutory role in deciding on specific grid upgrade plans, other than approving the grid investment test and grid reliability standards used to determine what investments are needed. The Minister has a formal role in approving the Commission's recommendations on Transpower's pricing methodology and benchmark transmission agreements. The Commission is currently consulting on the transmission pricing methodology and benchmark transmission agreements.

Electricity Prices

Retail electricity prices have been on the increase, both for domestic and industrial customers (see figure below). In real terms, domestic electricity prices have increased 19% since April 1998. These increases directly impact almost every home and may threaten the commercial viability of some industries.

The rising cost of wholesale electricity (partly due to tightening gas supplies and reduced generation reserves) and recently increased line charges¹ (which include increased Transpower charges) has led to the increases. New industry levies have also contributed.

Each quarter, the Minister receives a report based on a survey of domestic electricity prices that covers line and retail prices for each network area. Occasionally, more comprehensive reports on electricity prices are produced. The Ministry monitors wider issues impacting on the electricity markets and reports on these as required.

Electricity Price for 8,000 kWh per Year Domestic Customer (Including GST and Prompt Payment Discount, Real)

Retail Competition

The industry still has some way to go to convince consumers that competition is effective, prices are fair and customer service is satisfactory.

Competition levels have increased in that all network areas now have at least two retailers, with most (93%) having three or more retailers, compared to only 43% five years ago. However, despite this and improved switching processes, the number of customers switching is not increasing and retailer market share appears to remain largely static.

Retailers need to develop better services and options to encourage the uptake of energy efficiency and demand-side participation by providing such services as smart metering, for example.

Electricity (Low Fixed Charge Tariff Option for Domestic Consumers Regulations 2004)

Regulations came into effect on 1 October 2004 to make providing low fixed charge tariff options compulsory, following some resistance to voluntary compliance with a government policy directive in the policy statement on electricity governance.

Exemptions from the regulations in exceptional circumstances are provided for, as long as overall a retailer or distributor is materially compliant. Exemption applications are still being received and processed.

Several issues have been identified that are best addressed by amending the regulations.

Evaluating the Electricity Market

Evaluating the performance of New Zealand's electricity market and its effectiveness against government objectives for the electricity sector is vitally important for forming and developing the public policy debate on the form and shape of the future electricity market.

The Ministry and the Treasury are working together to develop a framework for evaluating the recent electricity market reforms to identify if they are meeting government objectives. The project is expected to be completed by the end of 2005 calendar year.

Ownership Separation of Electricity Lines and Generation and Retailing

The Electricity Industry Reform Act 1998 required full ownership separation between lines and energy. This meant that, with limited exceptions, lines businesses could not own or undertake electricity generation and retailing businesses, and vice versa. The main reasons for the separation were to encourage competition in generation and retailing and to prevent cross-subsidisation of generation and retailing from captive lines customers (lines are natural monopolies).

Recent amendments to the Electricity Industry Reform Act 1998 allowed lines businesses to own generation up to 50 MW or 20% of their peak load (and new renewable generation, such as wind, without restriction) and sell the output from those stations. Owning generation capacity above 5 MW or 2% of peak load is, however, subject to the arm's-length rules. The majority of lines companies have yet to take advantage of these opportunities, often citing difficulty in selling the output of their generation and the arm's-length and corporate separation rules as the barriers preventing their investment in generation.

A discussion paper, outlining a proposal to amend the legislation to allow lines businesses to trade in hedge and spot energy markets up to the nominal capacity of their generating plant, was released in March 2005. Issues raised in the submissions are currently being analysed. A report to the Minister is expected to be submitted before the end of 2005 calendar year.

Jurisdiction for the Targeted Control of Transpower

Transpower is subject to an information disclosure and targeted control regime under Part 4A of the Commerce Act. The Commerce Commission currently administers that regime, but the legislation provides for jurisdiction to be transferred to the Electricity Commission, on the Minister of Energy's recommendation, if that would mean the purposes of the regime would be achieved more efficiently and effectively. The Minister must consult with both commissions and with affected parties before making such a recommendation. A discussion paper on this issue is being prepared.

Distributed Generation Regulations

Regulations are currently being drafted for connecting distributed generation to distribution networks. Distributed generation may include smaller scale power stations, cogeneration schemes and generation schemes associated with homes and businesses. The regulations are intended to achieve investment certainty and clarity about the process and requirements for connecting distributed generation. The detailed requirements for connecting distributed generation above 10 kW are still being discussed with industry.

Electricity Governance Rules and Regulations

A primary purpose of the Commission is to administer the electricity market rules and regulations, most of which are contained in the Electricity Governance Rules 2003. These support the electricity market's operation and replaced a number of industry arrangements relating to the wholesale and retail markets and transmission grid security.

Rule changes are approved by the Minister of Energy on the recommendation of the Electricity Commission, and some 30 rule changes have been made. A number of further rule changes are presently being developed, some of which are expected to be placed before the Minister soon.

Monitoring the Electricity Commission

As Responsible Minister, the Minister of Energy has ownership and purchase responsibilities on behalf of the Crown for the Commission. These responsibilities include establishing an annual Output Agreement with the Commission. The Agreement sets out the outputs the Commission is to provide and establishes the Commission's performance expectations. It enables the Minister to monitor the Commission and hold it to account for its output delivery and performance.

The Government Policy Statement on Electricity Governance requires the Commission to report at least quarterly to the Minister on progress against the government's expectations in the statement (these reports also cover Commission expenditure). The Ministry advises the Minister on these reports.

Institutional Arrangements in the Electricity Sector

A number of government agencies are directly or indirectly involved in the electricity sector (including EECA, Electricity Commission, Climate Change Office, Commerce Commission, Treasury, and the Ministry). Some industry commentators argue that the Electricity Commission has been asked to undertake several potentially conflicting roles.

Recent experience suggests that some refinement of existing roles and responsibilities might simplify arrangements and reduce any risk of confused accountabilities.

Gas

Overview

Gas is critical to the New Zealand economy, providing 24% of total primary energy. About 49% of New Zealand's gas production is used for electricity generation (including co-generation at dairy and other sites). The remainder is sold to other industrial, commercial and residential consumers.

Unlike electricity, the gas industry is dominated by the private sector. The gas sector is currently undergoing transition, with supply from Maui (about 66% of supply in the year ended March 2004) expected to be depleted around or soon after 2010. Production from the smaller Pohokura and Kupe fields is expected to come on stream in 2007. The size of the Cardiff field is still unknown. However, domestic supply for residential and small to medium businesses is not at risk.

Gas policy aims to ensure efficiency by promoting competition where possible (production, wholesaling and retail) and by appropriately regulating natural monopoly transmission and distribution pipelines where necessary. Wholesale market and transport arrangements (such as gas trading and transmission protocols) are being developed through industry groups.

Next Three Years

Gas Exploration Incentives

Existing known gas reserves mean that a supply/demand gap is likely to emerge between 2010 and 2014. New Zealand therefore needs to discover significant new reserves of domestic gas in the next two to three years to meet this shortfall. If new domestic reserves are not found in sufficient quantities, New Zealand will need to be in a position to implement alternative sources of supply.

With the Maui gas field declining and a potential energy supply gap developing, the timely discovery of a new substantial gas field would mean that it was not necessary to ship in more costly gas from overseas or develop new coal-fired plant, which would emit more carbon dioxide than gas-fired electricity generation.

Major New Zealand Gas Fields

• → Larger version of "Major New Zealand Gas Fields" [1444x1530 pixels 168 KB GIF file]
• → Printable version of "Major New Zealand Gas Fields"

In May 2004, Cabinet approved a range of incentives to encourage more exploration. The Ministry's Crown Minerals Group has established an investment strategy, which will be progressively implemented from 2005 onwards. The initiatives include:

• acquiring seismic and other technical data critical to attracting competitive bids for exploration permits
• improved IT systems to make data readily and freely available to explorers
• more frequent competitive tenders for permits in frontier petroleum basins
• targeted marketing to bring larger international exploration companies to New Zealand.

Changes to royalties have been incorporated in the revised Minerals Programme for Petroleum, which has been approved by Cabinet and will come into force on 1 January 2005. Proposed changes to the Income Tax Act 1994 for offshore rig operators were announced in August 2004 and have recently come into effect.

There are encouraging signs that exploration activity is increasing. A number of new petroleum block offers, which will be supported by high-quality seismic data, will proceed in 2005/2006. There will be quarterly updates on progress with the exploration programmes and the associated implications for gas security.

Governance Arrangements

Production from an increased number of gas fields will require more sophisticated pro-competitive governance arrangements. New Zealand's gas sector is governed by a co-regulatory governance arrangement. Co-regulation entails an industry body, which has standing to recommend rules and regulations on a number of gas matters to the Minister of Energy, to be formed and given legislative approval. This is provided for by the Gas Amendment Act 2004, which amended the Gas Act 1992.

The Government Policy Statement on Gas Governance (October 2004) details the government's policy objectives for the gas industry. The Statement invited industry to establish an industry body that meets certain legislative criteria, and sets out a number of areas in which industry arrangements are to be developed. In response, the industry has established the Gas Industry Company (as the industry body for the purposes of the Gas Act).

The Company has implemented a work programme to develop recommendations for gas sector arrangements in the areas of processing, wholesaling, transmission and retailing. Regulations were recently promulgated to enable the levying of industry participants for the cost of operating the Company.

The Minister will be required to consider the Company's proposals for regulations and rules in relation to gas processing, wholesaling, transmission, distribution and retailing.

Industry Regulation

On 30 April 2003, the Minister of Energy requested that the Commerce Commission make recommendations on whether or not supply of gas pipeline (transmission and distribution) services should be controlled under Part 5 of the Commerce Act. The inquiry was initiated because of continuing concerns that gas pipeline businesses may be charging excessive prices and earning excess returns by taking advantage of their monopoly position.

The Commission provided a report and recommendations on 29 November 2004. The Commission recommended that:

1. control under Part 5 of the Commerce Act should be imposed on the gas pipelines of Powerco and Vector
2. a targeted (thresholds) control regime, akin to the Part 4A control regime for electricity line businesses, should be introduced for all gas pipelines

On 27 July 2005, the Minister of Energy announced that the gas pipeline services operated in respect of the gas pipelines owned by Powerco and Vector would be subject to control. The Minister also announced that the government agreed with the Commission's other recommendation that the regulatory constraints for all gas pipelines be strengthened by implementing a targeted (thresholds) control regime.

The Commission has commenced its processes for implementing control by announcing, on 24 August 2005, an interim authorisation of price and quality for Powerco and Vector. This authorisation required that, from 1 October 2005, the prices charged by Powerco and Vector be reduced by 9% and 9.5% respectively. The Commission must now undertake an inquiry on the form of control and issue a final authorisation. It is expected that this will be completed by the end of 2006.

Powerco and Vector have launched judicial review proceedings against the Commerce Commission and the Crown in relation to the decision to impose control under Part 5. A date for hearing this matter is yet to be set.

Non-Discriminatory Access to the Maui Gas Pipeline

With gas production from the Maui field declining, non-Maui gas will need to use the Maui pipeline in the near future. If that does not happen, there may not be enough gas transport capacity north of Taranaki to meet the demand for electricity generation, creating a risk of higher prices and electricity shortages. Implementing an open access regime to the Maui pipeline will enable gas from a number of gas fields, particularly smaller fields in the Taranaki region, to be supplied to market. This will encourage gas fields in the Taranaki basin to be explored and developed that may otherwise have been uneconomic. The government has sought to develop and implement a non-discriminatory open access regime to the Maui pipeline that allows third parties to transport gas through the pipeline.

The government invited Maui Development Limited (a consortium comprising Shell, Todd Energy and OMV) and buyers of Maui gas under the existing Maui Gas Contract to develop, in consultation with industry, a suitable access arrangement that meets certain government policy objectives. Following a period of intensive industry negotiation and interaction with officials, on 18 August the Minister invited the industry to put an access code into effect. Open access to the Maui pipeline came into effect on 1 October.

Alternative Thermal Energy Sources

If sufficient new gas is not discovered, the most obvious possibilities for meeting a shortfall are importing liquified natural gas, importing compressed natural gas and/or the greater use of coal. In addition to these possible energy sources, renewable energy is playing an increasingly important role in New Zealand's energy supply mix.

Contact Energy and Genesis Power are investigating the option of importing liquid natural gas, as a contingency plan should no new significant gas fields be discovered soon. Establishing this trade would require a significant capital investment in infrastructure, and there would need to be a long-term commitment to a substantial volume of imported gas. Estimates of the minimum viable amount range from 50 to 80 petajoules per year. Although this amount would be relatively small by world standards, representing only about 0.2% of the current world trade, it is equivalent to about half of New Zealand's current gas supply.

The processing required for establishing imports of compressed natural gas is technically simpler and less expensive than for liquified natural gas. The greatest challenge for large-scale compressed gas imports lies in the shipping segment of the supply chain. Because it has a lower calorific value per tonne than liquified gas, a larger volume of shipping would be required to import the same amount of gas. There is no established world trade in compressed gas. On the other hand, the compressed natural gas option has advantages compared to liquid natural gas. The scale of imports could be smaller and more flexible. It could be used to bridge a supply gap until other energy sources (such as more renewable energy or more indigenous gas) are available.

Liquid Fuels

Peak Oil and Oil Prices

Following the recent significant increase in oil prices, there has been debate about the timing over which oil supplies will become materially constrained (the peak oil debate). The Ministry monitors expert projections of the world oil supply/demand balance and the likely impact on prices. This will continue, including looking at pessimistic scenarios and the associated policy implications.

The policy in New Zealand's petrol and diesel markets is to rely on competition to ensure prices are minimised and reflect the costs of importing crude oil and refined product. The Ministry closely monitors price trends compared to international benchmark prices, publishing weekly updates on its website and reporting regularly to Ministers.

Oil Stocks

As part of its membership of the International Energy Agency, New Zealand is required to hold, at any one time, emergency reserve oil stocks equivalent to 90 days of market demand. (The Agency deems this to be 90 days of net oil imports.) In 2004, it became apparent that New Zealand no longer complied with this obligation. In July 2005, the government decided that it should tender for oil stocks with costs to be met through a levy on petroleum products, administered by the Ministry.

The Ministry will run a Request for Proposals (RFP) in late 2005 and final tenders during March and April 2006, with the aim of commencing acquisition of stocks in July 2006. Cabinet also invited the Minister of Energy to report back to Cabinet Committee by April 2006 on the outcome of the RFP process and on any significant design decisions which need to be made before the tender process commences.

The Ministry is also developing an emergency response manual to update and strengthen our contingency plans to respond to a disruption in oil supplies and to enable New Zealand to contribute to any collective action by International Energy Agency members.

Fuel Specifications - Manganese

The government sets minimum quality standards for petrol and diesel under the Petroleum Products Specifications Regulations. A major review of these regulations was completed in 2002. Changes to petrol and diesel quality standards are being phased in.

The regulations require permitted manganese levels in petrol to be reviewed by the end of 2006.

Low Sulphur Diesel

Regulated sulphur levels in diesel are being reduced from 1 January 2006 from 500 ppm (parts per million) to 50 ppm. This diesel will be introduced into the distribution system from September 2005. Lower sulphur levels will reduce emissions from diesel vehicles but may cause problems with fuel injection pump seals in some older diesel vehicles. Any problems are likely to occur in the last few months of 2005 as the new fuel comes into the market. The Ministry is leading a publicity campaign to inform diesel vehicle owners of the potential risks, and what to do if they have a problem.

Sulphur Levels Review

The Ministry is currently reviewing the timing for the introduction of lower maximum sulphur levels for both petrol and diesel. A discussion document has been released and submissions received. The current regulations provide indicative levels of 50 ppm for petrol from 2008 and "zero sulphur" (10-15 ppm) diesel from no later than 2009-2010. The regulations also indicate an ultimate requirement for zero sulphur petrol, but don't provide any timing.

Transport Biofuels

Transport biofuels such as biodiesel and ethanol can play an important role in promoting reliable and affordable energy and improving environmental outcomes. This is recognised in the discussion document, Sustainable Energy: Creating a Sustainable Energy System, as well as the New Zealand Transport Strategy, climate change and air quality policies.

Officials have examined options for the government to support the uptake of transport biofuels, particularly in response to a proposal by a company to set up biodiesel production in New Zealand if a mandatory biodiesel target and standard is introduced. Supporting measures that could be used in New Zealand include mandatory biofuels targets, subsidies and other forms of financial incentives. Legislation, to enable biofuels and appropriate quality standards to be developed, would also be required for biofuels uptake.

In December 2004, the Minister of Energy decided that officials should undertake further work on possible mandatory biofuels targets, including engaging with oil companies and biofuels producers. In March 2005, the Minister of Transport took over the lead for this work and in May, officials reported to the Minister on the outcomes of this work, as well as on related matters such as subsidies and other incentives. The Minister of Transport announced in August a commitment in principle to encouraging the uptake of transport biofuels by developing a mandatory sales target.

Fuels Legislation

The Ministry of Energy (Abolition) Act 1989 contains the regulatory making power to prescribe specifications for petroleum products. These powers, however, are generally inadequate for regulating biofuels and other non-petroleum transport fuels. In August 2005, Cabinet agreed that a new Act be developed that enables the quality and form of both petroleum and non-petroleum transport fuels to be regulated. It is also proposed that, subject to the outcome of the biofuels policy investigation (lead by MOT) to be reported in June 2006, this legislation would be used as the mechanism to establish biofuels incentives and/or targets.

This legislation will be progressed by the Ministry of Economic Development, with the report back to Cabinet by June 2006 on the new fuels bill and regulations to include:

• a new framework for regulating transport fuels (biofuels, petroleum fuels and any future fuels)
• mandatory targets and incentives for biofuels
• quality specifications for biofuels and petroleum fuels
• testing of fuels and enforcement

Coal

New Zealand has large coal reserves, although much is of poor quality. About 6000 petajoules of known coal resources in the Waikato region could be available if higher prices made extraction economic. There are also extensive coal resources in Taranaki, the West Coast, Otago and Southland. In the year ended March 2004, about 45% of New Zealand's coal production was exported.

The technology for coal-fired electricity generation is changing rapidly. More sophisticated plants can now almost eliminate most undesirable emissions, other than carbon dioxide. They are also more efficient at converting the energy in coal to electricity. However, all coal burning plants produce relatively high carbon dioxide emissions unless carbon capture and storage (geosequestration) is used. Despite the amount of worldwide research going into carbon capture and storage, it seems unlikely that this will occur in association with commercial coal-fired plants in the next five years.

Solid Energy New Zealand has plans to increase its coal-fired electricity generation capacity by 500 to 1000 MW over the next ten years. If these plans eventuate, they will ameliorate, but not on their own resolve, the post-Maui energy shortfall. There is vocal opposition to increased electricity generation from coal-fired plants.

Climate Change

Overview

New Zealand is a party to the United Nations Framework Convention on Climate Change and has ratified the Kyoto Protocol. Under Kyoto, New Zealand must reduce its greenhouse gas emissions for the first commitment period (2008 to 2012) to the level they were in 1990, or take responsibility for excess emissions.

Outside of Kyoto, New Zealand has bilateral climate change agreements with the United States and Australia that provide for dialogue and practical cooperation on climate change issues.

The government announced its confirmed policy package on climate change in October 2002. Since that time, it has worked to refine details of the policy package and, in some cases, has commenced implementation. The Climate Change Response Act, which enables New Zealand to meet its obligations under Kyoto, was passed by Parliament in 2002.

Climate change policy and implementation is led by the Climate Change Office of the Ministry for the Environment. In general, the Ministry of Economic Development provides secondary advice to this process from an economic competitiveness and growth perspective, with a particular focus on the impacts of climate change policies on energy markets. These areas of secondary advice include:

• designing and implementing (from April 2007) the carbon tax and any future transition to a domestic emissions trading regime
• designing and implementing negotiated greenhouse agreements, which aim to protect the international competitiveness of New Zealand businesses subject to the carbon tax
• developing policies to allow emissions-intensive businesses to adjust to the carbon tax, particularly small and medium enterprises
• negotiating international commitments under the second commitment period of the Kyoto Protocol.

The Ministry also leads some aspects of the climate change work programme, including:

• implementing and operating New Zealand's emission unit registry, as required under the Kyoto Protocol. This role also requires leading some policy decisions that will impact on the registry's design and operation.
• collecting and reporting statistical information on greenhouse gas emissions from the energy sector, as published yearly in Energy Greenhouse Gas Emissions
• projecting future greenhouse gas emissions from the energy sector, as published in New Zealand Energy Outlook and updated intermittently.

A high-level review of New Zealand's climate change objectives and policies is currently underway, to which the Ministry is contributing.

Next Three Years

The government has recently revised its projection of New Zealand's balance of greenhouse gas emission units during the first commitment period of the Kyoto Protocol (2008 to 2012). The most recent projection indicates a likely net deficit in the region of 36 million tonnes of carbon dioxide equivalent (Mt CO2e), a substantial turnaround from the projections calculated in 2003 (surplus of 55 Mt CO2e) and 2004 (surplus of 33 Mt CO2e).

The change from previous projections is due primarily to an increase in projected emissions from the energy sector and industrial processes (an additional 38 Mt CO2e over the 2004 projection) and a decrease in the removals via forest sinks (a decrease of 24 Mt CO2e over the 2004 projection).

A net deficit during that first commitment period would mean, in the absence of any additional cost-effect domestic actions, that New Zealand would have to acquire emission units internationally (either through engaging in overseas emission reduction projects or through purchasing them on the international market) to meet its Kyoto obligations.

Following the projection revision, the government requested a high-level review of current climate change objectives and policies. The review is examining:

• the appropriateness of current climate change policy objectives
• the range of options available for compliance with New Zealand's obligations for CP1 (i.e. whether to reduce emissions in New Zealand or obtain additional units)
• the extent to which the current policy package utilises these options, and whether changes to the policy package would be appropriate
• the position New Zealand should adopt in negotiating commitments beyond the Kyoto Protocol's first commitment period.

Conclusions from the review are due to be reported back to Cabinet by 31 October 2005. This review has the potential to significantly influence the short- to medium-term work programme leading up to the start of the first commitment period in 2008.

Internationally, negotiations on commitments beyond that first period of the Kyoto Protocol are likely to commence in 2006 or 2007.

Other Issues

Resource Management Act Amendments

Aspects of the Resource Management Act can be an undue impediment to economic development because parts of the Act have not been implemented as well as intended. The way the Act operates, therefore, needs to be made more efficient and certain.

The Resource Management and Electricity Legislation Amendment Act became law in mid-2005. It included a number of improvements to provide practical solutions and bring about improved processes to make the Resource Management Act work better. The Act also amends the Electricity Act to improve the decision process for locating high voltage electricity lines across or under roads and level crossings.

The Ministry of Economic Development and the Ministry for the Environment have developed a programme to enable national guidance to be developed on network infrastructure. The work programme aims to result in the following national policy statements and national environmental standards being developed, to the point where they are ready for Cabinet approval for consultation:

• by July 2005: electricity transmission
• by November 2005: electricity generation
• by November 2005: telecommunications facilities
• by March 2006: land transport noise
• by March 2007: storm water runoff from roads
• by March 2007: gas pipelines and facilities.

A June 2005 Cabinet paper from the Ministry for the Environment reported on the overall management of the national guidance work programme. This includes the delay in the public, and subsequent government, consideration of the draft Reference Group report on national guidance for electricity transmission. The June Cabinet paper also recommends a change to the process for developing national guidance on telecommunications facilities. A Cabinet paper is expected in November 2005 on the progress of the national guidance for network infrastructure work programme. It is also expected to review the need for and timing of work on transport noise, storm water runoff and gas pipelines.

Water Programme of Action

The government established the Water Programme of Action in 2003 to ensure that the country's freshwater resources are managed to best support New Zealand's future sustainable development. The programme is part of the government's wider Sustainable Development Programme of Action.

A Water Programme of Action discussion document was released on 9 December 2004. It outlines the different ways in which New Zealanders value and use freshwater and proposes a package of actions to improve water management systems. A series of consultation meetings occurred in February and March 2005, the outcomes of which were released in June 2005. In December 2005, we shall be seeking ministerial guidance on recommendations on the future management of New Zealand's freshwater resources.

Energy Efficiency and Renewables

The National Energy Efficiency and Conservation Strategy has two high-level targets. The energy efficiency target is at least a 20% improvement in economy-wide energy efficiency by 2012. The target for renewable energy is an extra 30 PJ above 2000 levels by 2012, which represents a 22% increase over the next ten years. Energy efficiency policy and purchase advice is led by the Ministry for the Environment. The Energy Efficiency and Conservation Authority (EECA) promotes energy efficiency and delivers energy efficiency programmes.

The Ministry is supporting EECA in the latter's preparation of advice to Ministers on whether the National Energy Efficiency and Conservation Strategy should be reviewed and (potentially) recast.

The Ministry has been involved in making submissions under the Resource Management Act to local authorities on renewable energy proposals. We have provided comment on both consent applications and proposed plan and policy statement changes. The Ministry's submissions articulate key national energy policies and discuss the implications that a proposal has for the ability to achieve the objectives and targets outlined in these policies.

Energy Outlook

Energy Outlook is the Ministry's publication that gives long-term projections of energy supply, demand and prices.

There have been a number of significant changes in the energy industry since the last version of Energy Outlook was published in October 2003. These include the demise of Meridian's Waitaki River Project Aqua, the doubling of world oil prices and the government's increasing focus on sustainable energy.

The Climate Change Office has recently been provided updated projections of total emissions for the Kyoto Protocol Update of Net Position that they prepared for the Minister for the Environment by May 2005. The Office is seeking a further update in late 2005 for the Demonstrable Progress Report they must submit to the United Nations Framework Convention on Climate Change on 1 January 2006.

The Ministry proposes to produce the next full version of Energy Outlook in mid-2006. We are considering changing the title of future publications to Sustainable Energy Futures to better reflect higher-level intentions.

In the meantime, the Ministry is regularly called upon to undertake modelling related to specific issues and continues to reassess modelling capabilities with the prime focus being to support policy initiatives. This is expected to include contributing to review of the National Energy Efficiency and Conservation Strategy.

Bioprospecting

Bioprospecting is examining biological resources (including micro-organisms) for features that may be of value for commercial development. Unlike fishing, it is not an extraction activity. If done sensitively, it leaves only a minimal environmental footprint. Bioprospecting can lead to investment in biotechnology R&D as well as the benefits of greater non-commercial research.

By global standards, New Zealand has an exceptionally high biological diversity in its marine invertebrate fauna (such as shellfish, snails, sea spiders and mites) and a relatively large number of species unique to New Zealand.

New Zealand has an international obligation, under the Convention on Biological Diversity, to develop an Access and Benefit-Sharing Regime applying to its biological resources, although no timeframes have been decided.

¹A 4% nominal increase since February 2004.