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• New Zealand Energy Strategy

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• NZEECS Annual Report 2008/09
• Appendix: NZEECS Annual Report
• NZES Development Publications

4.1 Our Present Direction

About 70% of New Zealand's electricity is generated from renewable sources, which is the third highest level in the developed world. New Zealand should be proud of the low emissions intensity of its electricity generation, which is good for the environment and also means that the cost to our economy of electricity-related greenhouse gas emissions will be far lower than for most countries.

Nonetheless, we recognise there is much more we can do. If New Zealand continues on its current path, electricity demand is projected to grow at around 1.3% per annum. At this rate of growth, approximately 3,200 MW of new capacity will be required to meet demand growth between 2005 and 2030. It is worth noting that this projected growth is significantly lower than recent historic levels of growth (around 2%). While future improvements in efficiency may lead to lower demand growth than presently expected, a significant amount of new capacity is still expected to be needed.

Projections suggest that, under current policy settings, approximately 1,200 MW of the new capacity will use fossil fuels. Electricity-related greenhouse gas emissions are forecast to grow by about 40% by 2030 if we do not change our course. We should not - and will not - allow that to happen.

There is no explicit economic value or market for greenhouse gas emissions in New Zealand at present. As a result, the relative costs of different generation options do not reflect the costs of emissions. Low emissions energy supply from renewable energy sources and other low emissions technologies tends to be undervalued.

Given the environmental and economic imperative for the world to reduce greenhouse gas emissions, and the expectation that emissions will carry an economic cost to our economy, it is vital that New Zealand alters its growing emissions path. New Zealand is also a trading nation and, unless we prepare for such costs now, our companies risk becoming uncompetitive in the future.

Measures we take to reduce greenhouse emissions are aligned with the government's wider economic transformation objectives to ensure our economy remains competitive into the future. New Zealand is well positioned to make the most of niche opportunities to show leadership in the development and deployment of low emissions technologies, using them at home and exporting our experience.

Climate change actions often bring other tangible benefits. Reducing the emissions intensity of our energy supply and improving the efficiency of our energy use - whether it is stationary energy or transport energy - can improve air quality and health, lower heating and transport fuel bills, and make homes and workplaces warmer.

The challenge set by this strategy is to reduce energy-related greenhouse gas emissions, while maintaining security of Supply at competitive prices.

4.2 The Progress We've Made

The government has already announced a number of practical, everyday measures to reduce greenhouse gas emissions in the stationary energy sector.

4.2.1 Renewables

• In 2004, the RMA was amended to ensure that the benefits from the development and use of renewable energy resources are considered in the consenting process.
• The RMA was amended again in 2005 to provide an improved consenting process to ensure high-quality and timely decision-making. The Amendment Act makes it easier to develop National Policy Statements and National Environmental Standards that are relevant to major energy and other infrastructure projects.
• In 2006, EECA established a regional renewable energy assessment programme to help regional and district councils to identify renewable energy potential in their regions and integrate this information into their planning and strategy processes.
• The Waikato Regional Plan has been completed. It supports the development and exploration of geothermal energy in that region.
• In 2006, the Ministry of Research, Science and Technology developed an energy research roadmap, which identifies the core research capabilities for using our local energy resources.
• The EC and Transpower released a report on the integration of wind power into the grid.

4.2.2 Direct Use

• The government supports the uptake of bioenergy through the Forest Industry Development Agenda (FIDA). This programme focuses on increasing the use of wood waste and forest residues within the wood-processing sector. Measures include raising awareness through a knowledge centre, demonstration projects and feasibility studies.
• EECA has recently consulted on a new approach to increase the uptake of solar water heating.
• It also administers a finance assistance programme to help home-owners adopt solar water heating, and has developed measures to improve industry product and service quality.

4.2.3 Distributed Generation

• In 2006, the Ministry of Economic Development released a discussion paper and draft regulations for the connection of distributed generation to local lines networks. These documents include discussion on a process for obtaining approval to connect, regulated terms that will apply in the absence of contractually agreed terms, and pricing principles to ensure connection charges are fair and reasonable.
• The EC has developed guidelines and model terms and conditions for agreements between electricity retailers and owners of small-scale distributed generation.
• The Parliamentary Commissioner for the Environment has recently released a report on wind and is also finalising a forthcoming report on small scale generation. Both of these reports will be taken into account in the final strategy.

4.3 Our Choices

The NZES provides direction for the transition to a lower emissions energy future. It also remains flexible to incorporate new information and respond quickly to advances in technology.

4.3.1 Valuing Low Emissions Energy

As part of the NZES, the government is considering introducing transitional measures to encourage investment in low emissions stationary energy supplies to meet additional demand over the next decade. Such measures would aim to avoid future emissions intensive investments that would increase greenhouse gas emissions. This is especially important in the non-transport energy sector because of the long lives of most investments, such as power stations. These measures constitute part of the energy sector's near-term contribution to responding to climate change.

A discussion paper, Transitional Measures: Options to Move towards Low Carbon Electricity and Stationary Energy Supply and to Facilitate a Transition to Greenhouse Gas Pricing in the Future, is available for public consultation.²⁶ The paper considers a range of measures that could be applied to stationary energy (electricity and potentially industrial heat) and implemented in the near term while still consistent with a future mix of longer-term policies. Climate change policy objectives and measures for post-2012 are being discussed in a separate document, Discussion paper on measures to reduce greenhouse gas emissions in New Zealand post-2012.²⁷

A wide range of policy options are available to encourage low emissions energy supply and make the transition to a cost on greenhouse gas emissions. Measures could be mandatory or voluntary, and rely on market (price-based) signals to steer investment decisions, or on regulations to directly encourage renewables or discourage certain types of activity or technology. Measures considered in the Transitional Measures discussion paper include:

• emissions trading;
• carbon charges (narrow based);
• renewable obligations;
• incentives/subsidies;
• projects;
• direct regulatory options;
• voluntary measures.

The options could be applied only to new generation capacity, or to specific forms of energy - such as fossil fuels or renewables.

The government considers that major electricity generators should show leadership by placing greater emphasis on the environmental effects and greenhouse gas emissions associated with their commercial activities through adopting triple bottom line reporting. Such reports should include an inventory of greenhouse gas emissions.

4.3.2 Our Renewables Potential

Much of New Zealand's electricity is supplied by renewable energy, mainly in the form of hydro and geothermal. Other renewable energy sources, such as wind, are increasing, but still meet only a small proportion of electricity demand.

New Zealand has significant renewable energy resources. Table 4.1 provides estimates of the potential electricity generation available from renewable sources by 2030, based on current technology and resource information. If electricity demand grows at projected rates, demand in 2030 will be approximately 14,000 GWh more than in 2005.²⁸ The electricity available from renewable sources can easily meet this additional demand.

Figure 4.1 shows the estimated relative costs of fossil fuel and renewable electricity generation for new capacity. These costs and quantities have been updated compared with those in New Zealand's Energy Outlook to 2030 (2006). These are derived from more specific input from a number of major industry participants and current consultation processes being undertaken by the Electricity Commission.

The estimates show there are substantial quantities of renewable capacity available that are likely to be less than or close to the cost of fossil-fuel-based generation, without including allowance for the cost of greenhouse gas emissions. However, small changes in cost could have a large impact on future investment decisions. New plant generation costs may also shift from time to time, depending on changes in international demand, exchange rates, fuel prices, climate change policy and environmental constraints.

Figure 4.1: Typical Costs for New Electricity Generation (Updated, November 2006)³⁰

When considering the potential contribution of renewable generation to a sustainable energy future, the following factors should be taken into account:

• The price and quantity of realisable renewable energy resources will vary depending on which renewable projects are consented.
• Economies of scale and the current market and regulatory environment tend to favour larger grid-connected renewable generation rather than distributed generation, with correspondingly more concentrated local environmental impacts.³¹
• Many renewable energy resources are remote from major load centres and will require a robust transmission grid.
• Renewables in the South Island will face the costs of the HVDC Cook Strait Cable.
• The intermittent nature of wind generation lessens grid reliability, which will require prudent monitoring and management as the proportion of wind generation in our electricity system grows. In the long term, the economic cost of these issues may put an upper limit on wind generation.
• Other renewable energy resources, such as marine energy, are not listed in Table 4.1. These resources may contribute towards New Zealand's electricity supply in the future, but are at an early stage of development and are not currently economic. They will be considered further in Chapter 6, which considers emerging technologies.

4.3.3 Distributed Generation

Most electricity generation in New Zealand is from large power stations connected to the transmission system, which in turn connects to local distribution networks.

Distributed generation (DG) refers to a broad range of technologies that generate electricity close to the point where it is to be used, or supply electricity to other consumers through a local network at a distribution rather than a transmission voltage. DG includes smaller-scale generation (including wind, landfill gas, biomass and small hydro), cogeneration or combined heat and power plants, small stand-alone diesel generators, and domestic or small commercial photovoltaic solar generation.

DG can contribute towards a sustainable energy future by:

• reducing greenhouse gas emissions by using renewable sources of energy or, in the case of cogeneration, using fossil fuels more efficiently than large-scale forms of electricity generation;
• providing a more diverse and geographically dispersed electricity supply portfolio;
• making local networks more reliable and resilient, and potentially deferring future network investment by providing either voltage support or load during periods of peak demand (in the case of some DG only);
• improving the energy efficiency of the electricity system by reducing transmission and distribution energy losses.

DG may also augment the primary means of supply for remote rural communities. It may be more cost-effective for such communities than being connected to distribution networks.

DG faces a number of challenges that may limit growth in the short to medium term. Some DG technologies - particularly domestic-scale DG - are technologically or commercially immature and cannot yet compete with conventional forms of electricity supply in terms of relative costs. There remain some regulatory and market barriers to DG, and further investigation is required to determine the reliability and safety implications of widespread DG uptake for local distribution networks.

"Smart metering" in conjunction with household-scale DG is one step towards the development of smart networks that manage power demand down to the residential level. Smart meters have the potential to facilitate load control, enable more accurate time-based valuation of DG exports, and lower the cost of DG metering for retailers. Innovative smart metering installed as part of household-scale DG systems can help DG technology capitalise on its potential.

Small-scale generation may face undue barriers to entry because the costs of entry are high (e.g. requirements for participants in the wholesale market).

4.3.4 Direct Use (Heat and Power)

Direct use refers to the consumption of energy for the production of heat in a variety of domestic, commercial and industrial applications. In 2004, 172 PJ or 33% of total consumer energy was employed in direct use applications.³² Approximately one-third of direct use energy was from renewables, mostly geothermal and woody biomass. The majority of direct use energy comprises fossil fuels, mainly coal and gas.

The direct use of fossil fuels offers significant benefits to some sectors of the economy, such as the dairy processing, forestry and wood-processing industries, and is likely to continue for some time.

An increase in the direct use of gas may provide both security of supply and climate change benefits. Switching to direct use for space heating can reduce electricity demand, particularly at peak times, reducing pressure on the electricity system. There may be fewer greenhouse gas emissions if gas is used directly to provide heat than if electricity is generated from gas or coal-fired power stations. However, a range of factors can temper this apparent climate change benefit. The comparative costs of gas appliances and their associated installation can be high. The growth of efficient forms of electric heating, such as space heating and water heating heat pumps, may offset some of the potential gains from switching to gas.

The industrial sector has opportunities to substitute biomass and geothermal energy for some of its direct use, fossil fuel consumption, but much depends on location. Collecting and transporting biomass can be uneconomic beyond a certain distance from the source, while only a few locations have suitable sources of geothermal energy. Some industrial sites may be able to cost-effectively use biomass by co-firing it with coal in existing heat plants.

Renewable energy has the potential to supply low-temperature heat for many residential and commercial applications. This includes solar hot water heating, efficient wood burners and, possibly in the future, ground source heat pumps.

4.3.5 Carbon Capture and Storage

The variable and intermittent nature of renewable electricity generation gives fossil fuels an ongoing role in providing firm electricity generation and flexible back-up when required, although their greenhouse emissions will need to be addressed. The use of domestic gas and coal reserves in the electricity generation mix, before and after 2012, provides security and diversity of supply benefits.

As the 1994 decision on the Taranaki Combined Cycle Power Station consent application found, while increases in gas-fired generation can have a short-term effect of reducing coal-related greenhouse gas emissions, more emissions are produced in the longer term in so far as gas replaces renewable sources of generation.

The government does not favour substantial increases in the use of coal or gas until technologies such as carbon capture and storage (CCS) can provide low emissions supplies of energy from existing and new fossil-fuel generation.

Coal (mainly in the form of lignite) is New Zealand's most abundant fossil fuel. Finding cost-effective and environmentally responsible ways to use coal will be a prerequisite to it playing a substantial ongoing role in New Zealand's energy supply.

The global push for ways to use fossil fuels, while taking account of climate change, will see continued improvements in lower emissions technology. CCS will be particularly important if New Zealand is to use its substantial lignite resources.

4.3.6 Environmental Effects and the RMA

The Resource Management Act (RMA) 1991 promotes the sustainable management of natural and physical resources. The management of electricity and heat generation under the RMA seeks to avoid, remedy and mitigate the associated environmental effects. Developing consent applications for electricity and heat generation requires investigative work that incurs a cost and can cause commercial uncertainty.

In 2004, the RMA was amended to include section 7 (j), which states that, in exercising the functions and powers under the Act, all persons shall have regard to the benefits to be derived from the use and development of renewable energy. Recent Environment Court decisions have provided further guidance on how decision-makers might allow for these benefits in resource consent and policy- and plan-making processes.

All forms of power generation have some adverse environmental effect. This strategy gives increased emphasis to the development of renewable sources of energy because of the need to reduce greenhouse gas emissions. This does not mean that the adverse local effects of all proposals for renewable energy will be acceptable. There is a balance to be struck, and there will be some proposals that are unacceptable. 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 overall.

It is the role of councils and the Environment Court to decide which projects should be consented in accordance with the principles of the RMA. The RMA can strike a balance between local environmental effects and energy objectives. The government will support this process by actively providing consent authorities with the information that government departments and agencies have about the various trade-offs involved. Over the longer term, the role of national guidance under the RMA for renewable energy could be further considered.

The government can also take the lead in ensuring that consenting processes are started and finished in time for sensible energy planning and construction. Consideration is being given to a consolidated consenting process for wind and geothermal projects that would enable a pool of projects to be considered on a consistent basis. While such a mechanism would not guarantee the outcome for any individual project, on balance, it is likely to increase the quantity of consented sites and establish de facto benchmarks for environmental performance.

Action: Consider a consolidated consenting process for wind and/or geothermal generation projects. Further consider the merits of national guidance under the RMA for renewable energy. In the near term, ensure that RMA decision-makers are provided with information held by central government on the energy sector implications, environmental effects and trade-offs associated with renewable energy projects.

4.4 Into the Future

New Zealand will have greater choice in how it can reduce its greenhouse gas emissions over the longer term. International investment in emissions reductions research is accelerating and is expected to increase the range of economic technology options available. Future technology developments are likely to enhance the range of economically available renewable or low carbon generation technologies for New Zealand.

A developing technology of significant potential for New Zealand is marine power - the generation of electricity from waves or tidal currents. Prototypes of various types have been developed overseas. New Zealand has a vast marine energy resource if it can be tapped, and wave and tidal energy has the advantage of being less intermittent than wind. The government considers it useful to bring forward the development of marine power in New Zealand, starting with small-scale deployment near islands that currently rely upon expensive, diesel-fuelled electricity generation.

More discussion on measures to increase innovation and technology uptake in the energy sector are discussed in Chapter 6.