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• 3. From Vision to Action

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This strategy sets out the government's vision for the New Zealand energy system. It is supported by a range of other policies, strategies and initiatives that enhance New Zealand's long-term sustainability and competitiveness.

A number of mechanisms are available to achieve the government's vision, including pricing, regulation, policies and decision-making principles. As a consultation draft, this document outlines a number of possible measures and actions, some of which may represent alternative means of achieving the objectives of the strategy.

To improve our energy system, the government intends to focus on six thematic areas. These are outlined in the following pages, along with actions proposed under each thematic area.

3.1 Progress Made

Initiatives already under way that contribute to the government's vision include:

1. Establishment of the Electricity Commission to promote energy security to a 1-in-60 dry year standard, and electricity efficiency and conservation;
2. 2004 amendment to the Resource Management Act (RMA) to ensure greater emphasis on the benefits of renewable energy and energy efficiency;
3. 2005 amendment to the RMA to improve processes for decision-making on issues of national importance, including energy planning;
4. Revisions to the Government Policy Statement to the Electricity Commission to ensure a more robust transmission grid;
5. A nine-fold increase in central government funding for public transport over the last seven years;⁹
6. Development of a mandatory sales obligation for biofuels;
7. Consideration of a regulated sales-weighted fuel economy standard for new and second-hand vehicles and mandatory point of sale labelling to improve the fuel efficiency of vehicles on New Zealand roads;
8. The 2005 Minerals Programme for Petroleum, which facilitates petroleum exploration in New Zealand;
9. Development during 2006 of the Energy research roadmap to support the science capabilities New Zealand will need for a sustainable energy future;
10. Retrofit of 22,000 poorly-insulated homes over the last seven years to improve their energy efficiency;
11. The 2006 consultation¹⁰ on new measures aimed at improving the energy efficiency of New Zealand homes and commercial buildings through better insulation, solar water heating, more efficient lighting and other technologies.

3.2 Strategic Leadership

Regulatory stability is important in ensuring a well-functioning energy system. One way that the government can improve investor confidence and reduce uncertainties is to clearly signal the strategic direction it has set for the energy sector, and back this up with sound policies to achieve it.

Clear elaboration of preferences in energy policy and planning will best ensure that participants in the energy system respond to and support the strategic direction set by government in the lowest cost way.

The government is developing policies to meet the energy challenges facing New Zealand and the world. In doing so, the government has agreed a number of guiding principles.

These are that energy policies will:

• protect security of supply
• promote energy efficiency measures
• promote low emissions energy sources

These principles build on our tradition of providing much of our energy from local renewable sources and our goal to use the resources we have wisely. They also fit with wider government objectives to transform the New Zealand economy to best respond to the challenges and opportunities of the future, to protect our environment for future generations, and to reinforce the values New Zealanders share.

A number of other principles will guide decisions taken as this strategy is finalised:

1. Investment should occur in energy efficiency measures where this is cheaper than the long-term costs of building extra generation capacity, including environmental costs.
2. For the foreseeable future, it is preferable that all new electricity generation be renewable, except to the extent necessary to maintain security of supply.¹¹
3. The government proposes a number of principles that it considers could guide the choice of short-term policies to limit greenhouse gas emissions from electricity generation and industrial heat and power.
   • Measures should be compatible with, and enable a transition to, longer-term policy options where the cost of greenhouse gas emissions is reflected in the relative cost of the fuels that produce greenhouse gas emissions.
   • Investors in new generation should face a price signal that reflects the value of greenhouse gas emissions avoided for renewables relative to fossil fuels, either immediately or over a transitional period.
   • Owners of existing fossil fuel generation should follow a transitional path to facing the full cost on greenhouse gas emissions.
   • On electricity prices, the effect of any transitional measures on electricity prices should be gradual.

Based on the above principles, the government is attracted to measures that would support the early development of emissions trading in the electricity sector.

For transport, the government's key focus is on reducing greenhouse gas emissions by using alternative renewable fuels, significantly increasing vehicle efficiency and using more efficient modes of transport. The introduction of biofuels will increase the diversity of transport fuels. In the medium term, electric vehicles will also help reduce emissions while making New Zealand more resilient to international oil price uncertainty and risks of supply disruptions.

3.3 Security of Supply

Maintaining security of energy supply at competitive prices is essential for a modern economy. This is an ongoing task involving government, producers and users of energy.

Our energy system needs to provide robust levels of security, while recognising that some risks or circumstances are too costly to insure against. Security has two key dimensions - reliability and resilience. Reliability means users are able to access the energy services they require, when they require them. Resilience is the ability of the system to cope with shocks and change. Diversity of energy sources, energy efficiency and demand-side management can help ensure both reliability and resilience.

3.3.1 Electricity

Timely investment in generation supports security of electricity supply. Strong grid and lines arrangements are particularly important for security and diversity of supply. A system that is robust to events such as droughts and unexpected plant failures will support resilience of supply. A competitive market operating within a stable regulatory environment and reduced uncertainty over fuel supplies will support competitive prices. Consideration needs to be given to both supply and demand-side alternatives to maintain security.

3.3.2 Transport

New Zealand's vulnerability to oil supply disruptions will be minimised through our oil reserves and the capacity for coordinated action through our membership of the International Energy Agency. Biofuels and, in future, electricity also offer a means to contribute to energy security in the transport sector.

Oil and products derived from oil will remain an important source of transport energy for New Zealand and the world for many years. New Zealand's proven oil reserves are small and do not meet our needs, although our prospective basins are largely under-explored. If more local oil is found, it would offset some of our oil imports, which cost $4.4 billion per annum.¹² It would also bring investment, jobs and export earnings into the economy. However, any oil discoveries should not stop us adopting the transport measures proposed in this strategy.

3.3.3 Energy Diversity

New Zealand has large reserves of lignite (a low-grade coal) that represent important long-term energy supplies, which could be used to generate electricity, produce substitute liquid fuels for transport, or make fertiliser and other chemicals. Current estimates indicate lignite is likely to be a more expensive fuel source for electricity production than renewables, especially if the expected future cost of greenhouse gas emissions is included. New Zealand is unlikely to make widespread use of its lignite reserves until carbon capture and storage¹³ technology is proven and economically viable.

New Zealand's high-grade coal reserves are likely to be more valuable for smelting metals than for electricity production. For these reasons, coal is unlikely to be a substantial source of new electricity generation in the foreseeable future.

Nuclear design has substantially improved the safety standards of nuclear fission. Although modular plants may make smaller-scale nuclear power less expensive, it is still currently more expensive than other options. Serious concerns remain about the consequences of accidents or terrorist attacks, the disposal of radioactive waste and the use of nuclear materials in weapons. For these reasons, the government remains opposed to the development of nuclear power.

3.4 Using Energy More Efficiently

Compared to other countries, we are less efficient in our use of energy. This is not a good thing, but does mean we have readily achievable opportunities to use energy more efficiently.

Using energy more efficiently will reduce energy costs, including the need to provide more costly electricity generation capacity. It will reduce greenhouse gas emissions and bring numerous spin-off benefits to households, businesses and communities. Improving home insulation, for example, makes homes warmer, which has been found to improve health. If we fail to use electricity more efficiently, it will be harder for us to maintain our high proportion of renewable sources of electricity and reduce emissions-intensive generation.

New Zealand will benefit if all participants in the energy system invest in energy efficiency where that would result in energy savings that are cheaper than the long-term cost of extra energy capacity. The government considers that this cost should include the cost of environmental externalities. In finalising the actions under the NZES, the appropriate discount rate applied to the economic cost-benefit analysis of government actions will be 5% real rather than the 10% currently used.

In the transport sector, technological advances offer exciting prospects both for alternative fuels and for using fuels more efficiently. Some modes of transport are also more energy efficient than others. As an example, coastal shipping services can be more efficient than land transport.

The following energy efficiency measures are described in more detail in the replacement National Energy Efficiency and Conservation Strategy (NEECS), which is being developed in conjunction with this strategy.

3.5 Promoting Renewable Energy

3.5.1 Electricity

New Zealand is in the fortunate position of being able to produce large amounts of low emissions electricity from renewable sources such as geothermal, wind and hydro. Our renewable energy sources are plentiful and cheap by world standards. In the future, wave and tidal electricity generation are also expected to become economically viable.

It is in New Zealand's longer-term economic and environmental interests to meet increases in demand through an economic mix of renewable energy sources that will meet our security objectives. Where fossil fuel is needed, priority should be given to using the lowest emissions fuel available.

While electricity produced from renewable sources has low or no greenhouse gas emissions, it can, however, have a larger visible effect on the local environment than fossil fuel electricity generation plants. As an example, wind farms are perceived by some as having a higher impact on the local environment than a gas-fired thermal plant.

There is likely to be enough geothermal, wind and hydro energy to meet New Zealand's electricity demand for the next 10-20 years while still meeting appropriate environmental standards. If marine generation or solar photovoltaic generation become economically viable within that period, New Zealand would be able to utilise predominantly renewable electricity sources for even longer.

3.5.2 Transport

It is in New Zealand's wider interests to reduce our transport emissions and our dependence on imported oil. Achieving this is likely to require, among other actions, a combination of biofuels and the use of electricity for vehicles.

Biofuels are substitutes for petrol and diesel and are made from crops or animal by-products. As technology improves, we expect future biofuels to be made from other sources such as trees or even weeds, algae and waste gases. Biofuel crops release no more emissions when used than they absorb and store as they grow.

New Zealand's climate and agricultural history suggest we will be able to grow biofuels at internationally competitive prices. The government believes biofuels will be an important part of New Zealand's energy mix, especially for transport. There is benefit in encouraging the development of biofuels in New Zealand immediately, and in undertaking further assessment on the implications of higher levels for pricing and land use. There may also be opportunities to work with our neighbours in the Pacific to develop biofuels. For example, there is potential to make use of sugar, coconut oil and palm oil grown in the Pacific Islands to produce biofuels that can be blended with fossil-fuel-based diesel or petrol here in New Zealand.

New Zealand already makes good use of biomass for direct heating in homes and in some industries such as wood processing. As with other energy sources, using biomass efficiently has economic and environmental benefits. The environmental benefits of biomass include no net greenhouse gas emissions and, with modern clean-burning technology, lower harmful exhaust emissions that can damage health.

3.6 Greenhouse Gas Emissions

It is vital for New Zealand to reduce its growing levels of greenhouse gas emissions. This is important because of the global environmental damage caused by emissions and the likelihood that emissions will carry an economic cost to the country in the future.

Measures to reduce greenhouse gas emissions make good sense. Using resources more wisely and conserving energy will make our economy more efficient and improve New Zealand's international competitiveness.

In order to reduce greenhouse gas emissions, it makes sense to start with the options that are easiest to achieve and cost the least. We are likely to need a combination of voluntary, price-based and regulatory measures, some targeted towards individual sectors of the economy and some for the economy as a whole.

3.7 Facilitating Sustainable Technologies

Energy generation, emissions capture and storage, and transport technology are all developing rapidly and have an important part to play in moving New Zealand towards a sustainable low emissions energy system. Much of this technology will be developed overseas, but some will be developed in New Zealand.

New Zealand should ensure it is able to start using new technologies as soon as they become proven and economically viable. We should, for example, monitor local and international developments closely and make advance preparations for using new technology - such as developing the consent framework for wave or tidal generators.

There is also a case for preparing the way for future technology, where this is not too expensive. For example, vehicles entering the fleet for the first time could be required to have the capability to run on biofuels, ready for the time when biofuels become widely available.

The government can also look at ways to build New Zealand's research expertise. This could involve more collaboration between existing research organisations, and preparing for New Zealand's future research needs.