5. Our Direction
To determine the strategic direction for New Zealand's energy system, we have weighed up a number of important considerations. Two major issues are energy security and greenhouse gas emissions. We have also considered the impact our choices will have on energy costs.
5.1 Pathway to a Low Emissions Future
This chapter outlines modelling results from possible low carbon energy scenarios.12 In these scenarios, emissions pricing, the adoption of emerging low carbon technologies, and complementary policy initiatives in the NZES and the NZEECS, drive sustained and substantial reductions in greenhouse gas emissions from the energy sector. The modelling involves estimates of the expected availability and costs of different electricity options, and assumptions about the availability of future technologies (see Box 5.1).
Box 5.1: Global Abatement Cost Curve
In January 2007, the Swedish energy company Vattenfall published a comprehensive survey of all the measures that could be taken around the world to curb climate change and the costs associated with each. A global cost of abatement curve shows there is considerable cost-effective potential for reducing emissions in industrialised countries, particularly in energy efficiency measures with a ‘negative cost', i.e. measures that finance themselves through reduced energy costs. These results reinforce the belief that bold reductions in emissions from the energy sector are feasible and, once a price on emissions is reflected, economic. The results are indicative only for New Zealand as local costs are often lower in New Zealand, and especially for renewable energy sources.
Source: Vattenfall AB.
In finalising the NZES, the government has considered the costs and benefits of the key actions, where possible, to ensure that they generate a net positive gain to New Zealand.13 The government has also considered a series of principles that build on New Zealand's tradition of providing much of our energy from local renewable sources, and our goal of using resources wisely. In this way, the NZES also contributes to wider government objectives to transform the 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.
5.1.1 Reducing Energy Sector Emissions
The figures on the following pages demonstrate the potential for energy-related greenhouse gas emissions reductions and how emissions pricing and other initiatives in this strategy will move us towards carbon neutrality. For these reductions to occur, emissions pricing needs to drive low carbon investment and consumption choices (see Box 5.2 for discussion on the possible future international emissions price). In addition, the actions in the NZES and NZEECS encourage behaviour change, particularly in the transport sector, and position New Zealand to take up opportunities provided by emerging low carbon technologies when they are available, cost effective and applicable to New Zealand.
Box 5.2: The Future International Price of Emissions
Exactly what the international price of greenhouse gas emissions might be in the future is the subject of a large amount of speculation and conjecture. By its very nature, the future price of emissions is a great unknown, due to profound uncertainties about the international regulatory regime, technology developments and global economic growth and income distribution.
The current market price estimate used by the New Zealand Treasury in the government's 2007 financial statements is $US11.90 per tonne CO2 equivalent.
A number of means of estimating longer-term emissions prices have been employed by various bodies. For example, Vattenfall and McKinsey have inferred future emissions prices on the basis of derived global carbon abatement cost curves. Estimates of $US30 per tonne for 2030 were produced.
The Intergovernmental Panel on Climate Change Working Group, in its draft fourth assessment report, estimates the emissions prices associated with various atmospheric greenhouse gas stabilisation scenarios. The stabilisation scenario consistent with a maximum global temperature increase of 2ºC produced a price of $US100 in 2030.
Various modelling simulations and comparative analyses have also been undertaken by universities and think tanks, producing a wide range of estimates. Generally, these techniques have produced estimates with very large standard errors.
The diversity in estimates of future greenhouse gas emissions prices reflects the profound uncertainty of related factors. However, most commentators in this area broadly seem to expect the price of emissions to rise over time.
Source: Ministry for the Environment
Transport
Transport emissions currently represent around half of emissions from the energy sector, and are growing at an unsustainable rate. Bold action is required. The government is committed to building momentum in the adoption and uptake of sustainable transport measures and has taken an in-principle decision to halve domestic transport emissions per capita by 2040.14
A low carbon transport future scenario to 2050 has been established that reflects possible behavioural changes, travel demand management, improvements in vehicle efficiency and uptake of alternative low carbon fuels.15 The challenge is to ensure we are well placed to commence the transition to this low carbon transport future.
There are many initiatives by both local and central government to manage private vehicle travel demand by improving urban design and promoting use of less carbon-intensive modes such as walking, cycling and public transport. We believe that, over time, significant demand reductions compared to business as usual can be achieved by building on current initiatives.
In the low carbon scenario, we have also assumed a significant reduction in the kilometres travelled by large vehicles through diverting freight from road transport to coastal shipping or rail, raising average loads of trucks and improving distribution practices.
The low carbon scenario assumes a 20 per cent improvement in the overall efficiency of the vehicle fleet by 2050, which is based on the technological improvements available from fleet turnover.
Diesel-fuelled cars are, on average, 30 per cent more efficient than their petrol equivalents. We expect half of all internal combustion cars purchased by 2050 to be fuelled by diesel, which will be well suited to use of biodiesel.
In this scenario, the greatest reductions in carbon emissions from transport are the result of increased use of biofuels, electricity and hydrogen. Each fuel source has significant technical challenges, so no one source is a comprehensive solution. For example, electric vehicles are unlikely to be as useful for the heavy fleet.
The Royal Society of New Zealand reports that "New Zealand has enough land to be more than self-sufficient in biofuels". Improvements in production technologies will further improve the viability of second and third generation biofuels and allow a Biofuels Sales Obligation well beyond the current level.16 The low carbon scenario estimates that, by 2020, 25 per cent of liquid fuels used in transport will be derived from renewable sources, and 85 per cent by 2050.
Major vehicle manufacturers17 recently made a commitment to commercially develop electric cars, with reports suggesting that these may be available from as early as 2010. Our scenario assumes electric vehicle sales reach five per cent of market share in 2020, followed by a period of rapid growth that reaches a plateau of 60 per cent by 2040.
Hydrogen-powered vehicles have a similar performance to fossil-fuelled vehicles, and substantial international research is being carried out into addressing the major technological challenges involved in using hydrogen as a transport fuel. The scenario speculates that 25 per cent of New Zealand's light vehicles could be hydrogen powered by 2050.
The implications of the above changes on the composition of the light vehicle fleet are shown in Figure 5.1.
Figure 5.1: Light vehicle fleet composition in 2050 under a low carbon transport future
Source: Ministry of Economic Development
There is great uncertainty about the relative mix of alternative vehicle fuel sources and the extent of efficiency gains in the future, but it is clear that technological advances and increased recognition of the wider impact of transport choices could substantially reduce emissions from the vehicle fleet.
The implications for overall transport energy use are shown in Figure 5.2. Increased vehicle efficiency, changes in demand and uptake of electric vehicles substantially reduces the growth in demand for transport energy. This transition would also move us away from our current reliance on oil.
Figure 5.2: Transport fuel use in 2050 under a low carbon transport future
Source: Ministry of Economic Development
This scenario is compatible with growing demand for transport services assuming a continual improvement in the fuel economy of vehicles. This might be the case if, for example, there were a steady uptake of electric vehicles.
Figure 5.3 shows that a shift away from high carbon fuels to alternative forms of transport energy, such as biofuels or electric vehicles, would cause a substantial reduction in transport emissions.
Figure 5.3: Emissions reduction opportunities in the transport sector
Source: Ministry of Economic Development
Electricity
This strategy sets a target to generate 90 per cent of our electricity from renewable sources by 2025. Figure 5.4 shows the expected impact of an emissions price of $25/tonne of CO2-equivalent, rising beyond 2015 to $50/tonne of CO2-equivalent emissions, as well as expanded energy efficiency measures on electricity generation.18
Figure 5.4: Electricity generation in 2025 under emissions pricing and efficiency measures
Source: Ministry of Economic Development
Improved energy efficiency suppresses growth in electricity demand and can defer the need for additional, potentially fossil fuel, electricity generation, and helps relieve pressure on resources.
Aggressively pursuing existing and new renewable-based electricity generation drives the majority of the emissions reductions in Figure 5.5. This strategy contains measures to ensure the resource consenting process does not unduly hinder investment in renewable generation, while ensuring local impacts are given sufficient consideration.
Figure 5.5 incorporates historical data up to 2006. Actual emissions in 2005 were high due to dry-year effects, with modelled emissions estimates for 2007 onwards based on average hydrology. The flat emissions profile in the medium term reflects the impact of new renewable generation projects already announced.
Based on the assumption that CCS will be available for use in fossil fuel electricity generation and heavy industry from 2020, electricity emissions head towards zero by 2050.
Figure 5.5: Emissions reduction opportunities in the electricity sector
Source: Ministry of Economic Development
Industry
Industry is a large user of fossil fuels and a source of a substantial portion of New Zealand's total energy emissions. There is scope for large reductions in emissions from industrial processes by improving efficiency,19 switching to lower carbon fuel sources (such as from coal to gas or bioenergy) and increasing cogeneration. Over time, emissions pricing will prompt investors to reduce the carbon intensity of industry.
Figure 5.6 shows the potential emissions reduction opportunities for the energy sector as a whole. The actions in this strategy should enable us to take up these opportunities and aim to reduce energy sector gross emissions20 to 1990 levels by 2030.21
Figure 5.6: Emissions reduction opportunities for the energy sector22
Source: Ministry of Economic Development
Under the CCS scenario shown in New Zealand's Energy Outlook to 2030, a similar picture emerges. CCS technology combined with additional renewable energy generation could significantly reduce emissions in the electricity and industrial sectors. Similarly, 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.
5.2 Effect of this Strategy on Prices
5.2.1 Electricity Costs
Figure 5.7 shows the estimated costs of alternative sources of new electricity generation, including capital and fuel. The costs are based on information from the EC.23
The cost curve shows that, in the medium term, renewable sources of electricity generation are cost competitive with fossil fuel-based sources, particularly when the impact of an emissions price is incorporated.
Figure 5.7: Typical costs for new electricity generation (updated August 2007)24
Source: Ministry of Economic Development
The graph shows that new geothermal, wind and combined-cycle gas turbine (CCGT) generation are all available at around the same price, assuming medium-term gas prices of $9/gigajoule and an emissions price of $25/tonne of CO2-equivalent emissions. 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 rises in the longer term towards $50/tonne of CO2-equivalent emissions, renewables are likely to be cheaper than gas-fired generation.
It is clear from recent modelling that using renewable electricity in place of new fossil fuel-based generation need not increase prices beyond the impacts of the emissions trading scheme, provided economic renewable projects 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 renewables cannot obtain resource consent or if high levels of intermittent renewables, such as wind, impose additional costs on the system.25
The government believes pursuing renewable generation is not only environmentally preferable but is likely to keep electricity prices lower 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 CCS .
Over time, a high renewable generation mix means that New Zealand's electricity prices will be less affected by emissions pricing than in other countries that are more reliant on fossil fuel generation (see Figure 5.8 and Table 5.1).
Figure 5.8: Carbon intensity of electricity generation
Source: International Energy Agency
Table 5.1: Estimated Cost Impact on Electricity Prices of Emissions Pricing
| Cost per tonne CO2-equivalent emissions |
$15 |
$25 |
| Increase in retail price (c/kWh) |
1c |
2c |
| Percentage increase |
5% |
10% |
5.2.2 Transport Fuel Costs
The price of transport fuels moves with the international oil price, which will continue to fluctuate. Oil has two likely renewable substitutes: biofuels and electricity.
Biofuels technology is making great advances. Costs are rapidly declining and are, in some cases, already competitive with 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 uses less energy.
At present, biodiesel from tallow is expected to be similar in price to diesel.26 The levels of biofuels currently being considered are not expected to 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 expected to become commercially 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, it is expected to cost much less to run electric cars than those powered by conventional fossil fuels.
Increased use of such low carbon transport fuels limits the overall impact of emissions pricing on petrol and diesel prices.
5.3 Conclusions
The government believes the principles and initiatives set out in this document will lead New Zealand to a sustainable, low emissions energy system for generations to come.
Making the right choices today will enable New Zealand to sustainably power its future.
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