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• 9. Low Emissions

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9.1 Our Direction

About 70 per cent of New Zealand's electricity is generated from renewable sources, which is the third highest level in the developed world. This is good for the environment and also means that the expected future cost to our economy of electricity-related greenhouse gas emissions will be lower than for some of our trading partners, who rely much more on fossil fuels to generate electricity.

Nonetheless, if New Zealand continues on its current path, electricity demand is projected to grow at around 1.3 per cent per annum. At this rate of growth, approximately 3,900 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 two percent per annum). Improved energy efficiency throughout the economy will lower the growth in demand, but a significant amount of new capacity is still expected to be needed.

In the absence of any price on emissions, projections suggest that approximately 2,325 MW of additional capacity needed would use fossil fuels. As a result, electricity-related greenhouse gas emissions would increase by approximately 50 per cent by 2030 if we do not change our course.⁴²

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

9.1.1 Reflecting the Cost of Emissions

The government consulted on a wide range of potential policy options to achieve New Zealand climate change objectives and address greenhouse gas emissions, including: direct regulation; information, promotion and voluntary initiatives; government funding of emissions reduction incentives; and narrow taxes and trading mechanisms. The feedback showed broad – although not universal – support for broad-based emissions trading. The government has decided in principle that New Zealand will adopt an ETS as its core price-based measure for mitigating climate change.

9.1.2 Our Renewable Energy Potential

New Zealand has significant renewable energy resources. Table 9.1 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 12,400 GWh more than in 2006.⁴³ Geothermal resources, which provide baseload generation, are able to contribute some 900 MW (at least) of additional capacity. This is equivalent to more than seven years of demand growth by itself.

Sources:

1. New Zealand Energy Data File, Ministry of Economic Development.
2. Drawn from the latest Ministry of Economic Development generation industry analysis (unpublished).

Note: The "economic potentials" included are identified prospective generation projects believed to be capable of development at costs less than 9c/kWh (electricity).

Substantial quantities of renewable capacity are likely to be less than or close to the cost of fossil fuel-based generation in the medium term, assuming an emissions price of $25/tonne of CO₂-equivalent (see Figure 5.7 in Part 1). New plant generation costs can shift, depending on changes in such factors as international demand for equipment, exchange rates, fuel prices, climate change policy and environmental constraints.

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

• the price and quantity of realisable renewable energy resources will vary depending on the outcome of consenting processes under the RMA
• 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 impacts⁴⁴
• many renewable energy resources are remote from major load centres and will require a robust transmission grid
• renewables in the South Island will face higher transmission costs reflecting the distance from major load centres
• the intermittent nature of wind generation makes this form of generation less reliable – the economic cost of monitoring and managing this issue may put an upper limit on wind generation
• other renewable energy resources, such as marine energy, are not listed in Table 9.1. These resources may contribute towards New Zealand's electricity supply in the future, but are at a relatively early stage of development and are not currently economic.

9.1.3 Distributed Generation and Small-scale Generation

Distributed generation 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.⁴⁵ Distributed generation can contribute towards a sustainable energy future by:

• using renewable sources of energy or, in the case of cogeneration, using fossil fuels more efficiently than large-scale forms of electricity generation
• making our electricity supply more diverse and geographically dispersed
• 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 distributed generation only)
• improving the energy efficiency of the electricity system by reducing transmission and distribution energy losses.

For remote communities, distributed generation may also be more cost effective than being connected to distribution networks (see section 8.4.6).

Distributed generation and small-scale generation face challenges that may limit growth in the short to medium term. Some technologies – particularly on the domestic scale – are technologically or commercially immature and cannot compete on cost with conventional forms of electricity supply. There are some market barriers to the use of distributed generation and small-scale generation.

Further investigation is required to determine the reliability and safety implications of widespread uptake of distributed generation and small-scale generation for local distribution networks.

"Smart" or advanced metering in conjunction with household-scale distributed generation is one step towards developing smart networks to manage power demand down to the residential level. Smart meters will enable more accurate time-based valuation of distributed generation exports, and will lower the cost of distributed generation metering for retailers (see section 8.4.5).

The government will seek to address barriers to the uptake of distributed and small-scale generation through the NZEECS.

9.1.4 Direct Use of Indigenous Energy Resources for Heat

Direct use refers to consuming energy to produce heat in a variety of domestic, commercial and industrial applications. In 2005, 208 PJ or approximately 27 per cent of total energy consumption was associated with producing heat energy.⁴⁶ 42 PJ of heat energy in 2005 was provided by electricity, with the remainder being from direct use. Approximately 26 per cent of direct-use energy was from renewables, mostly geothermal and woody biomass. The majority of direct-use energy comprises fossil fuels, mainly coal (23 percent), oil (24 percent) and gas (26 percent).

In the residential sector, burning wood is an important and affordable renewable source of heat in many areas. Dry wood in modern wood burners or wood pellets in pellet burners can be used with low levels of particulate emissions. In areas where there are concerns about air quality, councils have a role to promote good practice for wood moisture levels and any necessary controls for burning appliances.

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.

Switching to direct use of gas for space heating can reduce electricity demand, particularly at peak times. There may be fewer greenhouse gas emissions if gas is used directly to provide heat rather than generating electricity from gas- or coal-fired power stations. However, the comparative costs of gas appliances and their associated installation can be high. The growth of efficient forms of electric heating, such as 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. Recent work by EECA suggests a price on carbon will improve the economics of switching from coal to woody biomass. Collecting and transporting biomass can be costly 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.

9.2 The Progress We've Made

The government has already implemented a number of measures to reduce greenhouse gas emissions in the stationary energy sector.

9.2.1 Enabling Renewables

• In 2004, the RMA was amended to ensure that the benefits from the development and use of renewable energy resources were considered in consenting processes.
• The RMA was amended again in 2005 to provide an improved consenting process to ensure high-quality and timely decision-making. The Resource Management Amendment Act gives more options for the development of NPS and National Environmental Standards that are relevant to major energy and other infrastructure projects.
• The 2005 amendments enabled the Minister for the Environment to make submissions on behalf of the Crown on nationally significant projects. Crown submissions have been made in support of two wind farms: Project Hayes in 2006 and the proposed Mahinerangi Wind Farm in 2007.
• In 2006, EECA established a regional renewable energy assessment programme to help regional and district councils identify renewable energy potential and use this information in their planning processes.
• Environment Waikato, in consultation with stakeholders and with the support of the government, has developed the Waikato Regional Plan to encourage the development of geothermal energy. Other regional and local councils have taken or are planning similar steps.
• The EC and Transpower released a report on the integration of wind power into the grid.
• EECA provides ongoing assistance to renewable energy associations, including the Sustainable Electricity Association of New Zealand, the New Zealand Wind Energy Association, the New Zealand Geothermal Association, the Bio-energy Association and the Aotearoa Wave and Tidal Energy Association.

9.2.2 Encouraging Direct Use

• The government supports bioenergy through the Forestry Industry Development Agenda (FIDA), which recently received additional funding. 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 launched a new solar water heating programme in November 2006, focusing on expanding unit sales, improving quality and reducing prices.
• The Department of Building and Housing is developing guidelines on Building Code compliance for the installation of solar water heating and considering a water heating efficiency standard.

9.2.3 Facilitating Distributed Generation

• Regulations enacted in August 2007 help distributed generators connect to local lines. The regulations provide a standard application process and timeframes, regulated terms and conditions, pricing principles to ensure connection charges are fair and reasonable, and a process for resolving disputes.
• The EC has developed guidelines and model terms and conditions for agreements between electricity retailers and owners of small-scale distributed generation.

9.3 Our Actions

9.3.1 Valuing Low Emissions Energy

The government has decided in-principle that New Zealand will use an emissions trading scheme as its core price-based measure for reducing greenhouse gas emissions (see section 4.4 in Part 1).

9.3.2 Maximising the Contribution of Renewables Electricity

ACTION: The government has set a target for 90 per cent of electricity to be generated from renewable sources by 2025 (based on an average hydrological year).

The impact of a higher proportion of renewable electricity generation has been modelled by the government. This modelling looked at the proportion of renewable electricity generation achieved over the period from 2007 to 2025, with different emissions prices.⁴⁸

Figure 9.1 below assumes a $25/tonne emissions price and shows the additional generation and transmissions costs from 2007 to 2030 to meet various renewable targets, while maintaining security of supply. Most of the additional costs are likely to be incurred after 2020, when existing fossil fuel plants are displaced and eventually retired.

Figure 9.1: Cumulative generation and transmission costs for renewable target levels

Source: Ministry of Economic Development

The additional costs of achieving proportions of renewable generation exceeding 90 per cent (around 95 per cent and above) are large. This is primarily because some renewable generation sources are intermittent, such as wind and hydro that are weather-dependent, so a higher level of renewable generation capacity is required to meet dry year and peak-security constraints.

Modelling results show that 90 per cent of electricity could be generated from renewables in 2025, without imposing additional costs above those incurred under the 2030 target scenario. The chart below shows the expected generation mix for the scenario of achieving 90 per cent renewable electricity generation by 2025.

Figure 9.2: Proportion of electricity generated from renewable sources

Source: Ministry of Economic Development

Achieving the target of generating 90 per cent of electricity by renewable sources by 2025 will require:

• market and regulatory structures to enable investment in a diverse range of renewable generation projects, including small-scale and distributed generation
• a robust transmission grid to support the development of renewable energy resources remote from major load centres
• prudent monitoring and management of security of supply, including minimising the potential detrimental impacts of intermittent forms of renewable generation on system security, as well as recognising the value of fossil fuel generation for supporting security and operational requirements
• investing in and encouraging demand-side management, energy efficiency (see chapter 10) and emerging technologies, such as marine and CCS (see chapter 11).

The government is confident sufficient quantities of renewable generation exist and can be developed without unacceptable or adverse environmental effects. The government also accepts that some economically viable projects should not proceed because of local environmental effects. Actions to give local decision-makers guidance on balancing local and national interests in the development of local renewable resources are discussed in section 9.3.5.

It is difficult to anticipate the impact of major technological developments such as CCS or other significant changes, such as higher international costs of carbon. The results presented here should not be regarded as an authoritative statement of the future but an indication of what is currently economic.

9.3.3 Leadership on the Future Role of Fossil-fired Generation

New gas-fired baseload generation will increase net electricity emissions over its economic life, except to the extent that it displaces existing older, less efficient generation. It will also increase demand for gas, which may make it more likely that New Zealand will need to import LNG in the future. Our electricity prices could then be linked to international oil and gas prices for the first time in our history.

Huntly, which runs on coal, will be needed for some time, especially in dry years. It is arguably less likely that Huntly will be able to lower emissions from using indigenous gas as a substitute for coal if gas demand for new gas-fired power stations increases.

The world is in a state of transition. The government believes that, during this transition, some areas of the energy sector would benefit from clear guidance to ensure we make the necessary changes to reduce our emissions of greenhouse gases.

As a result, the government has stated a clear preference that all new electricity generation be renewable, except to the extent necessary to maintain security of supply. In support of this principle, and providing time for the full introduction of a price on greenhouse gas emissions, the government's view is that there should not be a need for any new baseload fossil fuel generation investment for the next ten years. The government expects all generators, including state-owned enterprises, to take its views into account when considering new generation investments, and the government will advise state-owned enterprises that it expects them to follow this guidance.

Currently there are no powers to regulate or restrict new fossil fuel generation. The government will consider regulatory options to reinforce the government's objectives for limiting new fossil fuel generation. It is important that any new regulations are a flexible and effective means to restrict new fossil fuel generation except where necessary to ensure security of supply.

ACTION: The government is considering regulatory options under the Electricity Act to support the government's objectives for limiting new baseload fossil fuel generation over the next ten years.

9.3.4 Carbon Capture and Storage

The variable nature of renewable electricity generation gives fossil fuels an ongoing role, although their greenhouse gas emissions will need to be addressed.

Coal, mainly in the form of lignite, is New Zealand's most abundant fossil fuel. The government does not favour substantial increases in the use of coal or gas until technologies such as CCS become viable.

ACTION: The government will continue the CCS technical, regulatory and policy work programme to facilitate uptake and coordinate engagement in international partnership.

9.3.5 Environmental Effects and the Resource Management Act

The RMA 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.

All forms of energy generation have some adverse environmental effects. Proposals with unacceptable adverse effects should not proceed, but our commitment to a renewable electricity target requires a substantial increase in renewable capacity overall.

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 could consider these benefits in resource consents, policy and plans.

Many submitters have asked the government to provide national guidance on renewable energy projects. The government is responding by developing a proposed NPS on renewable energy to help decision-makers weigh up the national benefits of renewable energy. Councils have to incorporate a NPS in their regional policy statements and regional and district plans, and must consider it when deciding whether to grant consent applications.

The government intends to develop a NPS on renewable energy that could be in place in 2008. Key stakeholders will be consulted before drafting begins. The NPS could be developed for specific types of renewable generation, such as wind and geothermal, and reviewed later to include marine energy, hydro or biomass.

The government can also take the lead in ensuring that consenting processes are completed in time for sensible energy planning and construction. There is growing interest in the Minister for the Environment's call-in powers under the RMA. Calling in a project and referring it to a Board of Inquiry or directly to the Environment Court can reduce the time involved in granting consent to renewable energy projects, particularly projects that involve more than one local authority or are of national significance. In projects that are called in, appeals can only be made on points of law. A Board of Inquiry or the Environment Court would still hear applications locally and would have regard to the same district and regional council planning rules as would a local authority. The Board of Inquiry or Court must also have regard to the Minister's reasons for calling the matter in.

The Ministry for the Environment is setting up a pool of commissioners to draw from when commissioning Boards of Inquiry to hear called-in renewable energy proposals. It will also provide guidance on the use of the call-in power.

ACTION: The government is developing a NPS on renewable energy in 2008.

9.3.6 Coordination of Transmission and Renewable Generation Investment

Organisations considering investing in generation typically require transmission to be committed first to ensure they can deliver the power from their planned generation to market. Similarly, those funding transmission assets want a commitment from generators. This coordination problem is exacerbated by the substantial difference in lead times for transmission and some generation investments. Investment coordination can be particularly problematic for renewable generation because:

• generation is often remote from existing load centres and major transmission lines
• individual renewable generation plant is typically small relative to the size of the regional demand.

Without a clear policy to facilitate good coordination, there is a risk that some generator developers will be deterred from exploring renewable generation options in regions where there may be insufficient grid capacity.

ACTION: The EC and Transpower are developing planning processes and guidelines to coordinate transmission and renewables investment.

9.4 Into the Future

New Zealand will have greater choice on ways to reduce greenhouse gas emissions in future. Fast-moving international investment in research into emission reductions is expected to increase the range of renewable or low carbon generation technologies.

A developing technology of significant potential for New Zealand is marine power – generating electricity from waves or tidal currents. Some countries are already using marine power devices commercially, with government support. New Zealand has a vast marine energy resource that would have the advantage of being less intermittent than wind.

The government is establishing a marine energy deployment fund to hasten the development of marine power. Further work planned under the NZEECS includes developing a marine energy atlas and helping regional councils with their coastal planning processes.