4. Our Choices
As we make choices about New Zealand's future energy system, we need to weigh up a number of important considerations. In particular, we need to consider what impact our choices will have on energy security and greenhouse gas emissions. We also need to consider whether our choices will impact on the affordability of our energy in the context of future technologies and likely availability of fuel supplies.
4.1 Energy Security
We rely on imported oil for around 50% of our energy needs,14 and we need to be prepared to respond to supply disruptions caused by international events beyond our control. The government is increasing our oil reserves to act as a buffer and to meet our treaty obligations as a member of the International Energy Agency, as well as updating emergency response planning.
Gas has been a major energy source in New Zealand for 30 years. Proven reserves of gas declined sharply in 2001 when the Maui field was found to have considerably less economically recoverable gas left than previously thought. Renewed exploration efforts have found more gas and led to some increases in proven reserves. As for oil, New Zealand is under-explored, and there is a significant chance of discoveries in the future. In the meantime, increases in the use of gas would increase the rate at which our gas reserves run out, which could cause gas (and electricity) prices to increase closer to the cost of imported liquefied natural gas (LNG). The government believes the current regime and incentives for gas exploration are generally appropriate and do not need to be enhanced further.
Although gas is not imported in significant quantities,15 gas pipeline supplies can be interrupted by domestic events. Contingency arrangements and processes are in place to minimise the impact of a national outage. These arrangements are currently being reviewed to ensure they are appropriate to the changing nature of the gas market.
Electricity and oil are the parts of the energy system most important from a security perspective.
4.1.1 Electricity Security
Maintaining the security of electricity supplies is essential. The dominance of hydroelectricity in our energy system has meant that New Zealand enjoys relatively cheap electricity but is at risk of shortages in dry years, given our limited water storage ability. Historically, we have relied on fossil-fuel-based generation to back up hydro when water is short.
The government established the Electricity Commission in 2003 as the regulator and charged it with ensuring that the electricity system is able to cope with up to a 1-in-60 dry year. It is also responsible for the wholesale electricity market rules and for approving transmission investment.
The government has recently reviewed the operation of the electricity market and concluded that the current arrangements are fundamentally sound, although there is room for improvement. The government is advancing a number of initiatives to improve electricity security and competitive pricing. These are discussed in the draft action plan accompanying this strategy.
Some initiatives to improve the security of our electricity system would entail additional costs, for example, paying for additional levels of reserve energy generation to be available for dry years or peak demand. These costs will have to be weighed up against the real and perceived benefits to consumers and the wider community. Improving competition in the market is also important, as it aims to ensure there is ongoing downward pressure to keep prices as low as can be sustained.
4.1.2 Peak Oil
Oil and gas have become central components of the modern way of life, and the world has been using increasing quantities of fossil fuels for decades. "Peak oil" is the phrase used to describe the point when worldwide production of conventional crude oil peaks in volume. After it peaks, production of crude oil is expected to decline.
It is unclear whether conventional oil production will peak in the next decade, or a decade or two later. However, rising prices will spur exploration and make previously uneconomic reservoirs of oil viable to use. Higher prices and other technologies will also prompt the extraction of liquid fossil fuels from sources such as gas, oil-rich shales and lignite. There are immense quantities of these non-conventional sources of oil, although their extraction and use will involve significant greenhouse gas emissions unless carbon capture and storage is available. So, while there will be peak "cheap" oil from conventional sources, the world has plentiful sources of fossil-based oil.
The government believes the more serious and immediate challenge is climate change. The world's atmosphere will heat up dangerously from greenhouse gas emissions caused by the combustion of fossil fuels long before those fuels run out. Fortunately, the actions planned to reduce oil consumption and cut levels of greenhouse gas emissions will also lower our dependence on fossil-based oil. We expect measures already underway - such as the development of a mandatory biofuels sales obligation and measures to improve the fuel efficiency of the vehicle fleet - will help position New Zealand so it can respond to the challenges of peak cheap oil.
4.2 Climate Change
There is a growing sense of urgency that action must be taken to address the serious global challenge of climate change. The government has a key role to play in encouraging the development and uptake of low emission technologies, and in motivating businesses and communities to make the small but important changes that will contribute to reducing our greenhouse gas emissions.
Actions to reduce greenhouse gas emissions have many spin-off benefits. Using energy more efficiently means we pay less for electricity and petrol. Tuning our cars improves air quality and our health. Insulating our homes makes them warmer and keeps us healthier.
New Zealand has the potential to be at the forefront of the development of low emission technologies, especially in agriculture. We will be well placed to take advantage of emerging opportunities if we have set up a climate change policy framework and it is working well.
An important consideration in developing climate change policies is preparing the economy for the future. The existing Kyoto Protocol commitments apply until 2012; the world has yet to decide what global rules will be in place afterwards. Whether we have "Kyoto II" or some other agreement, the world will continue to strive to reduce its greenhouse gas emissions. The New Zealand economy will need to be ready to respond.
The world economy is gradually moving towards devolving the cost of reducing emissions to emitters. In other words, emissions are likely to carry a cost in the future. This will be the case regardless of which method is chosen to reduce emissions, be it via regulation or by market mechanisms like emissions trading (also known as "cap and trade"). While the actions needed to reduce greenhouse gas emissions will come at a price, we should not overstate the cost. It is also important to remember that the predicted costs and risks of inaction are unacceptably high.
Some sectors find it comparatively hard to reduce emissions, which makes it even more important that we reduce greenhouse gas emissions in areas where we can - such as electricity production and use, and transport.
In electricity, this means improving energy efficiency and generating a greater percentage of electricity from renewable sources. It also means keeping up with new technologies for renewable energy and for the carbon capture and storage of greenhouse gas emissions, which would be a prerequisite of increasing the use of coal and lignite.
In transport, we face a real challenge. If we do nothing, New Zealand's Energy Outlook to 2030 projects that emissions from the transport sector will grow by 35% by 2030. A combination of actions will be required to prevent this from happening, including making vehicles more energy efficient, improving public transport and using biofuels and electricity instead of petrol and diesel in our vehicles.
4.3 Pathway to a Low Emissions Future
This strategy gives increased emphasis to the development of renewable sources of electricity because of the need to reduce greenhouse gas emissions.
It is easier and less costly for New Zealand to commit to a low emissions electricity system than almost any other country. This is because of our present high levels of electricity generated from renewable sources and the abundance of as yet untapped energy resources. Reducing electricity demand growth through improved energy efficiency can also support a greater proportional contribution from renewable sources.
The new generation cost curve16 in section 4.4.1 of this strategy illustrates that renewable sources of electricity generation are as cheap as, if not cheaper than, fossil-fuel-based sources.
All forms of electricity generation have some adverse environmental effect. This strategy does not suggest that the adverse local effects of all proposals for renewable energy will be acceptable. The government recognises that there is a balance to be struck. We have already dammed many of our rivers to provide hydroelectricity. We don't want or need to dam them all, nor put wind farms on all our ridgelines. But we do need substantial increases in renewable capacity to transition to a low emissions future.
In the transport sector, a combination of actions will be required to reduce greenhouse gas emissions. These include improving the fuel efficiency of vehicles, achieving greater use of public transport and fuel efficient means of passenger transport and freight, and developing and promoting new, lower emissions fuel sources.
4.3.1 Reducing Energy Sector Emissions
New Zealand can achieve significant reductions in greenhouse gas emissions over the longer term, in more than one way. There are several pathways available.
By way of illustration, the figures on the following pages demonstrate what reductions in greenhouse gas emissions from the energy system may be possible in the future based on the alternative scenarios in the New Zealand Energy Outlook to 2030 report and subsequent work. It is important to note that the analysis and the measures presented here are illustrative only, and depend on assumptions around significant and early expenditure and improvements in energy efficiency, and advances in new vehicle and electricity generation technologies and their uptake.
Figures 4.1 and 4.2 show possible reductions in greenhouse gas emissions from the stationary and transport energy sectors compared to our presently projected emissions pathway.
Improved energy efficiency plays an important role in reducing transport emissions in Figure 4.1. Energy efficiency could be achieved through improving the fuel efficiency of our vehicle fleet, greater availability and use of public transport, and making our towns and cities more amenable to walking and cycling. Fuel-switching away from petroleum products to alternative forms of transport energy such as biofuels or electric vehicles is necessary to make substantial reductions in transport emissions.
Figure 4.1: Illustration of Emissions Reduction Opportunities in Transport Energy
Figure 4.2: Illustration of Emissions Reduction Opportunities in the Electricity Sector
Energy efficiency is also important for reducing emissions from the electricity sector in Figure 4.2. The majority of emissions reductions are achieved by the aggressive implementation of existing and new renewable energy technologies in the electricity and industrial sector and assumes replacement of significant fossil-fuel-based electricity generation by 2015, except as dry-year reserve.
Figure 4.3 below shows the emissions reduction opportunities for the energy sector as a whole. Reducing energy sector gross emissions17 to 1990 levels by 2030 is feasible if strong energy efficiency gains can be secured and one or more promising technology options prove viable, which is likely to be the case.
Figure 4.3: Illustration of Emissions Reduction Opportunities for the Energy Sector18
Under the Carbon Capture and Storage Scenario developed in the Energy Outlook report, a similar picture emerges. Carbon capture and storage technology combined with additional renewable energy generation could provide significant emissions reductions in the electricity and industrial sector. Likewise, under this alternative scenario, electric vehicles substitute for conventional vehicles in the transport sector.
Different combinations of the above alternatives could achieve similar emissions reductions.
Reducing greenhouse gas emissions in the energy sector, in particular increasing the use of alternative transport energy sources, can also reduce our dependence on oil and liquid petroleum fuels, as shown in Figure 4.4.
While the above figures focus on the period up until 2030, there is significant potential for further emissions reductions out to 2050 in line with technology shifts and expected advances in carbon capture and storage.
Figure 4.4: Total Primary Energy Supply by Fuel Type19
4.4 Effect of This Strategy on Prices
4.4.1 Electricity Costs
The following graph estimates the costs of alternative sources of new electricity generation, including capital and fuel. The costs are based on New Zealand's Energy Outlook to 2030, updated with revised information from industry sources.
Figure 4.5: Typical Costs for New Electricity Generation (Updated, November 2006)20
Source: These generation costs have been derived from industry input including:
- Options, Choices, Decisions: Understanding the Options for Making Decisions about New Zealand's Electricity Future, Meridian Energy, October 2006.
- Draft Electricity Generation Database Statement of Opportunities 2006, PB Power, September 2006.
The graph shows that new geothermal, wind and combined-cycle gas turbine (CCGT) generation are all available at around the same price, assuming current gas prices. If gas prices continue to move towards the higher cost of imported LNG, or if the cost of greenhouse gas emissions from fossil-fuel-based generation is included, renewables are likely to be cheaper than gas-fired generation.
It is clear from New Zealand's Energy Outlook to 2030 that using renewable electricity in place of new fossil-fuel-based generation need not make prices higher, provided economic renewable projects can gain consent and are built. However, the relative costs of renewable generation and fossil-fuel-based generation will continue to change as fossil fuel prices and renewable generation capital costs change. In practice, there could be some trade-off between additional renewables and prices, especially if sufficient lower-cost renewable options are unable to be consented or if high levels of intermittent renewables, such as wind, impose additional costs on the system.21
In the near future, fossil-fuel-based generation may not bear all of the cost of its greenhouse gas emissions. In that case, there is an argument for considering support for renewable energy generation to reflect the value of the greenhouse gas emissions that might otherwise be produced by fossil fuel generation.
The government believes that pursuing renewable generation is not only environmentally preferable, but is also likely to keep New Zealand's electricity prices lower in the foreseeable future than if we rely on more fossil-fuel-based generation that will need to bear the cost of its greenhouse gas emissions or the cost of carbon capture and storage.
4.4.2 Transport Fuel Costs
The price of transport fuels moves with the international oil price. Prices are presently relatively high, although they have fallen recently. Longer term, they will continue to fluctuate, which has implications for affordability for consumers of fossil-fuel-based transport fuels. This also has implications for the relative economics of alternative fuels. Oil has two likely renewable substitutes: biofuels and electricity.
Biofuels technology has arrived. It has advanced rapidly in recent years and is being pursued vigorously around the world. Costs are declining quickly, with some already less than the cost of oil (including ethanol from sugar in Brazil and possibly biodiesel from tallow in New Zealand). The cost of ethanol from corn (maize) is dropping in the United States as production technology improves and the energy used in processing drops.
At present, biodiesel from tallow is expected to be similar in price to diesel. It is not expected that the levels of biofuels currently under consideration will materially increase prices at the pump.
The second renewable substitute for oil in transport is electricity, provided it is generated from renewable sources. Plug-in hybrid vehicles are already being produced, and the government expects them to become widely available within a decade. Electricity in New Zealand is cheaper than oil, and electric motors are more efficient than petrol or diesel motors. As a result, the cost to run electric cars is expected to be much lower than conventional fossil fuels.
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