Key Current Issues for New Zealand Infrastructure
32. New Zealand is a long narrow country with a relatively small and dispersed population. Cost effective and secure infrastructure provision is particularly challenging in New Zealand.
33. The PricewaterhouseCoopers (PwC) audit provides a "snapshot" of the state of current and future infrastructure.5 The audit has highlighted a number of national and local infrastructure concerns. Each of these is subject to existing government work programmes.6 No previously unrecognised issues that might pose a serious barrier to growth and sustainable development have been identified.
34. The main concerns identified are discussed below in terms of the nature of the problem, work programmes to "fix" the problem and residual issues that the Government may need to address.
Electricity
35. PwC identified the need for investment in generation and the transmission grid as the key issues for the electricity sector. Insufficient generation investment manifests as a lack of electricity supply security, which consists of two related parts: (1) dry-period security; and (2) medium and long-term security.
Dry-Period Security: Description
36. Spot market electricity prices can become highly volatile in dry periods. Unpredictable price increases that cannot be adequately managed impact negatively on industrial production.
37. Several weaknesses in the electricity market have contributed to this problem, including insufficient reserve generation, and under-developed demand-side management and "hedge" markets.
38. The Government has taken several steps to address dry-period security needs. The new Electricity Commission is charged with helping ensure security of supply in dry periods, e.g. by contracting for reserve energy, requiring disclosure of information by generators on fuel supplies and plant availability, improving the transparency and liquidity of the electricity hedge market, promoting energy efficiency and promoting demand-side participation in the market.7
Medium and Long-Term Security: Description
39. The Ministry of Economic Development's Energy Outlook and other reports, show that significant new generation is required to address longer-term supply concerns. Meridian Energy's withdrawal from Project Aqua sharpens the focus on this matter.
40. Potential barriers to new generation investment identified by PwC and officials, include:
- Regulatory uncertainty due to:
- the possibility that the newly established Electricity Commission might seek to introduce arrangements that are unattractive to investors;
- the timing and level of a carbon tax;
- Planning and consent issues associated with the Resource Management Act 1991 and land access issues associated with the Conservation Act 1987;
- The earlier than anticipated depletion of the Maui gas field and the cost of alternatives (e.g. coal and/or imported liquefied natural gas (LNG));
- Ownership by state-owned enterprises (SOEs), which gives rise to a perceived risk that entrants may be disadvantaged by inequitable competitive conditions;
- Transmission capacity concerns (discussed below).
41. Actions under way to address medium and long-term supply security include the establishment of the Electricity Commission and proposals to encourage distributed generation and demand-side management. Electricity prices are expected to rise as more costly fuels are used and this will increase the competitiveness of renewables and demand management options.
42. The renegotiation of the Maui contracts to encourage full extraction of existing gas reserves, promotion of access to the Maui pipeline, promotion of sound gas governance and other steps to encourage exploration are intended to improve gas and electricity supply security.
43. The Energy Efficiency Conservation Authority has an ongoing role to encourage, promote and support the uptake of energy efficient initiatives and renewable energy under the National Energy Efficiency and Conservation Strategy.
Electricity Transmission
44. PwC has noted that the electricity transmission grid requires investment to increase capacity to meet demand growth and replace aged assets. Grid constraints also need to be relieved. Barriers to this investment, include:
- Uncertainty as to who should pay for investments and under what pricing methodology. The Electricity Commission will address these issues.
- Access to land, particularly for line upgrades. Transpower argues that the upgrade provisions in the Electricity Act 1992, which were amended in 2001, remain unduly restrictive. The Government has advised Transpower to test the new provisions in court before it will consider further amendments to legislation.
Electricity: What Remains to Be Done?
45. The Electricity Commission has only recently been established, and needs to progress the issues in the forthcoming Government Policy Statement (GPS) and gain the confidence of the industry. MED will monitor the Commission's performance.
46. Sound governance in the gas industry will help promote electricity security. A proposal for a co-regulatory gas governance model is currently under consideration by Government. If this initiative fails to result in sound governance, it may be necessary to expand the role of the Electricity Commission to include gas. Legislation providing for this is currently before Select Committee.
47. Regulatory issues such as the future carbon tax regime should ideally be addressed soon to provide greater certainty for infrastructure providers and users, not least to promote a clearer path for investor decisions in generation using coal and LNG. This is not straight forward, given the current uncertainties internationally on the nature and timing of countries' responses to the Kyoto Protocol, and on commitments beyond 2012 which are yet to be negotiated. Issues relating to the Resource Management Act also need attention (Resource Management Act matters are discussed further below).
Transport
48. The primary transport concern identified by PwC is road congestion in Auckland, which has the potential to limit productivity in Auckland and negatively impact on the environment, health and social-connectedness.8PwC also identified other areas as having "emerging" congestion issues, although these do not present serious growth or sustainability impediments at this stage.
49. Officials have identified the most important factors giving rise to Auckland's congestion problem as:
- Road funding and pricing arrangements have not reconciled increasing demand for road use with new construction;
- Uncoordinated and uncertain regional governance, policy and consents processes; and
- Insufficient development of demand management techniques and passenger transport options.
50. A number of inter-related steps are underway to address Auckland congestion, including:
- The proposed establishment of the Auckland Regional Transport Authority to co-ordinate the region's transport network;
- The Government's announcements in December 2003 that $1.6 billion would be spent on Auckland transport over a 10-year period (in addition to the forecast National Land Transport Programme expenditure);
- A combination of demand management programmes, further expansion of the public transport network and accelerated road construction;
- Councils are to be directed by law to prepare integrated changes to planning documents; and
- Consideration of road pricing options.
51. There are also concerns about deferred maintenance on parts of the rail network (including low levels of asset replacement over the last 8 years). This concern has been rising due to the increasing quantity of freight being carried via rail, and the fact that several growth opportunities for rail have been identified (relating to the coal, forestry and dairy sectors as well as container traffic). These trends indicate the need for further investment in the rail network.
Transport: What Remains to Be Done?
52. New governance, planning and funding arrangements need to be implemented in Auckland. Road pricing and other demand management options warrant active consideration (not just for Auckland) - consideration should also be given to whether these and other lessons from the Auckland experience might have wider application.
53. The implementation of new governance and pricing arrangements for rail under Government ownership will need to be monitored by the Ministry of Transport.
Water Allocation and Quality
54. Two primary issues associated with water infrastructure in New Zealand have been identified by officials and PwC:
- Water allocation; and
- Drinking water quality.
Water Allocation
55. PwC notes that "current approaches to water allocation need to be improved". Some regional councils have not completed plans for water allocation and there is a limited range of tools available for addressing allocation of water between competing users (e.g. irrigation, energy, other industrial users, recreational users, domestic users and environmental sustainability). The resultant uncertainty is a disincentive to invest, and there is currently no framework for reconciling sustainable development objectives.
56. The SDPoA freshwater work programme, jointly led by the Ministry of Agriculture and Forestry (MAF) and the Ministry for the Environment (MfE), has three main work streams:
- water allocation and use;
- water quality - managing land use; and
- water-bodies of national importance.
The SDPoA workstream on water allocation and use work stream is considering council water allocation planning roles and allocation tools.
57. Supplementary work streams are engaged to determine the national interest, optimise outcomes and develop new tools. The water work programme is scheduled over a two-year period, with any changes to water management resulting from the programme being made, at the earliest, in 2005.
58. Issues associated with water allocation between competing water uses in the Waitaki catchment led the Government to introduce the Resource Management (Waitaki Catchment) Amendment Bill, which enables the creation of an over-arching framework for water allocation decisions in the catchment and allows the merits of all of the competing water uses to be considered. The Bill, as reported back to Parliament from the Local Government and Environmental Select Committee, proposes establishing an independent statutory board to develop and approve a water allocation framework, and appointing a panel of commissioners to decide on resource consent applications for water use in the catchment against the new allocation framework.
59. The Bill only applies to the Waitaki catchment. The Government introduced the Bill because the water allocation concerns in the Waitaki catchment were considered urgent and unable to await the outcomes of the SDPoA before resolution.
60. Ministers are considering the sequencing of work on water allocation through decisions made on the Waitaki legislation, a forthcoming review of the RMA (see below), and the SDPoA. The Minister for the Environment is taking the lead in ensuring that overall water allocation issues are progressed.
Drinking Water Quality
61. Ministry of Health data dated July 2003 shows that 9 per cent of the population receive drinking water that is unsatisfactory in terms of quality and/or risk management and would fail to meet the Ministry of Health's Drinking Water Standards (2000).
62. The proposed drinking water standards will require all drinking water suppliers to take all practicable steps to meet the drinking water standards. As a result, some territorial authorities and other suppliers will need to upgrade their systems. This is an issue for many of the smaller councils and a small number of metropolitan suppliers, where surface water sources are subject to minimal treatment.
63. MfE is currently developing a national environmental standard on human drinking water sources. This will complement the proposed Bill to provide better management of human drinking water from "source to tap". The national environmental standard is expected to involve monitoring, grading and reporting of suitability of human drinking water sources, and an assessment of risk of contamination in the catchment.
Water Allocation and Quality: What Remains to Be Done?
64. Recommendations arising from the SDPoA water work relating to water allocation and use, water quality and water-bodies of national importance will need to be addressed.
65. Some territorial authorities believe they will struggle to finance the upgrades required to meet the new drinking water standards. The Ministry of Health is developing policy papers for Cabinet on the most effective options for assisting drinking water suppliers in upgrading facilities. A range of options for assistance will be outlined, and a request for $100 - $200 million over the next 10 years from the Crown may be made.9 The Ministers of Health and Local Government intend to shortly announce details of a work programme on whether the Government should assist drinking water suppliers.
66. Some small communities servicing large tourism activities have a problem financing appropriate drinking water treatment and sewerage infrastructure. A subsidy scheme is to be introduced in the 2004/2005 Budget, and other forms of assistance such as capacity building will be addressed.
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