Development of a National Energy Strategy: Presentation to the Energy Law Association 26 April 2006

Slide 1: Developing a National Energy Strategy: Agenda

• Context
• Scope, content and process
• The future under business-as-usual
• Issues, options and choices in developing the NES
• Concluding comments

Slide 2: Developing an NES: Context

Slide 3: The Energy Sector Poses Material Challenges in All Countries …

• Energy is essential to modern life and to a modern economy
• Energy sector is characterised by:
  • Environmental externalities
  • Monopolies (e.g. transmission, system operation)
  • Imperfect demand-side participation
• Finite hydrocarbon resource and (?) increasing geopolitical uncertainty
• All countries face the twin and long-term challenges of peak oil and climate change

Slide 4: … and New Zealand Faces Some Specific Energy Challenges

• Small and remote market, mountainous, "stringy": impacts on redundancy/resilience and scope for competition
• Technology-taker (mostly)
• Unusual GHG emissions profile
• Divergent views on the effectiveness of existing policy and regulatory arrangements and of the respective roles for government and for markets

Slide 5: Climate Change, Economic Transformation and the Future of the Energy Sector Are Inter-Linked

• Climate change will drive changes to the structure of economies
• Historically "cheap" energy has influenced current structure of New Zealand's economy
• Economic transformation and climate change both drive us towards higher value-added activities, but building on existing strengths

Slide 6: The Current Energy Policy Framework Is Based on an Evolving Mix of Markets and Regulation

Slide 7: Developing an NES: Scope, Content and Process

Slide 8: Developing an NES: Scope

• Build on the Sustainable Energy Programme of Action
• Encompass core energy sectors
• Integrate with climate change policy, NEECS and fuel-related parts of National Transport Strategy
• Feed into assessment of relative R&D priorities and to evolving international relationships
• Support wider government strategies, e.g. economic transformation

Relationships of Key Policies with Sustainable Energy

Slide 9: Developing an NES: Content

• Direction and goals - medium and long term
  • Specific targets, where appropriate
• Energy scenarios
  • Explore alternative futures and their implications for policy choices
• Policy issues, options and choices
• Action plans

And, developing and communicating all of the above in a compelling and engaging way

Slide 10: Developing an NES: Process

• NES terms of reference currently being finalised
• Officials will be consulting in detail with stakeholders following release of a draft document
  • Whole-of-government process for development of draft and for subsequent stakeholder engagement
• Policy development and engagement processes for NES, NEECS and climate change will be integrated to the extent possible

Slide 11: Developing an NES: Baseline of Business-as-Usual

Slide 12: The Energy Outlook Given Business-as-Usual

• A view of the future under "business-as-usual" (BAU) is a useful input/baseline in developing a NES
• BAU projections are based on:
  • "Mainstream" assumptions about future GDP growth, exchange rates, availability and price of fuels, rate of energy efficiency improvements
  • No carbon charge
  • Assumption that outcomes will reflect underlying supply/demand i.e. that market and institutional arrangements work satisfactorily
• Note: BAU input assumptions are themselves subject to significant uncertainty

Slide 13: Under BAU: Growth in Energy Demand Seems Set to Continue, Particularly in Transport …

Slide 14: … Thermal Fuels Are Likely to Dominate the Supply Mix Over the Coming 25 Years

Slide 15: … Carbon Emissions Will Continue to Increase, Particularly in Transport

Slide 16: … and Recent Significant Price Increases in Electricity, Gas and Oil Are Unlikely to Reverse

Illustrative BAU Consumer Energy Prices

• Current electricity prices appear sufficient to incentivise investment in new generation
• International oil prices remain volatile
• New Zealand gas prices are likely to trend towards imported LNG prices
• Exchange rate volatility is a further source of energy price uncertainty
• Other countries have also experienced significant energy price increases

Slide 17: Energy Outlook under Business-as-Usual, in Summary

• BAU projections show:
  • Higher greenhouse gas emissions
  • Growing dependence on imported oil and, possibly, LNG
  • No price relief
• BAU outcomes are driven by:
  • continued economic growth
  • depleting indigenous gas (and oil)
  • high international fuel prices
• NES has the potential to influence some of these drivers more than others

Slide 18: Developing an NES: Key Issues

Slide 19: Developing an NES: Key Issues

Categories of issue include:

• How is our desired future direction best articulated, in the face of considerable uncertainty?
• Will existing policy, regulatory and delivery arrangements support optimal outcomes given underlying supply/demand?
• How should policy, regulatory and delivery arrangements be changed to amend outcomes that would otherwise result from underlying supply/demand?

Slide 20: Issue: Maximising the Contribution of Energy Efficiency

• Increased energy efficiency supports multiple objectives
• Energy is a scarce resource, like capital, labour, land etc; energy efficiency makes sense where economically beneficial, after accounting for environmental externalities
• Better unlocking the apparent potential for increased efficiency of use is a critical challenge for NEECS/NES/climate change
• Chances of success will be increased with:
  • Collective buy-in to the challenge
  • Improved understanding of blockages to uptake
  • Effective utilisation of the set of intervention tools
  • Effective institutional arrangements
  • Appropriate funding

Slide 21: Issue: Optimising the Contribution of Renewable Electricity

• Main driver for renewable electricity is climate change
• Some renewable technologies are commercially viable already
• Cumulative uncontrollable renewables (wind) will impact on system operation
• Policy issues include:
  • Influencing investment and operational choices until such time as carbon is priced
  • Addressing any undue barriers to renewables
  • Whether and how to support emerging technologies

Indicative New Plant Generation Costs to 2025

Slide 22: Issue: Managing the Transition away from Oil Dependence

• Future oil prices remain uncertain, and will continue to be influenced by geopolitics and natural disasters
• Higher oil prices enhance economics of alternatives, including vehicle technology changes, e.g. hybrids
• In New Zealand, biofuel (particularly biodiesel) from existing by-products may be economic already
• Assessing end-to-end economics of new biofuel crops is tricky
• Longer-term solutions may look very different e.g. hydrogen (plus sequestration)

Slide 23: Issue: Will the Regulated Electricity Market Maintain Stakeholder Confidence in Ongoing Security of Supply?

• Investment in new generation is occurring (although e3P received partial government underwrite, and PRE credits applied for some projects)
• Stakeholder concerns remain, including over price and environmental effects of market-based investments

Slide 24: Issue: What Role for Gas/LNG over the Next Twenty-or-So Years?

Gas Deliverability Profile and Demand

• Indigenous gas supplies are depleting
• Exploration is increasing, but outcome is uncertain
• Existing gas-fired power stations would be partially stranded given a gas shortfall
• LNG (or CNG) is a potential "backstop" source of supply, but raises a range of issues

Slide 25: Issue: Will the Regulated Electricity Market Deliver an "Optimal" Transmission System?

Transmission Investment over Past 15 Years Has Been Very Limited

• Proposed transmission upgrades have proven controversial and are a live issue
• Complex and inter-related economic and environmental issues arise
• Integrating planned transmission with competitive generation is challenging

Slide 26: Concluding Comments

• Development of NES is timely, given ongoing debate over effectiveness of existing policy settings and twin long-term challenges of climate change and peak oil
• Views as to what a NES should contain appear to vary widely
• Enabling effective stakeholder input will be essential to NES development

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