Future Energy Directions Workshop - New Zealand's Energy Outlook to 2030: Base Case

Thanks for the introduction, David.

As David has explained, I am going to review the results of Energy Outlook and some key results in this new edition. At the end of my presentation, Mark Walkington will elaborate a bit more on the transport demand results.

Slide 1: Goals of the Publication

• Has historically been published about every 3 years
• Provides 25-year projection of energy supply, demand, prices, and greenhouse gas emissions
• Goal is to inform the energy policy debate
• Publication is designed to be a starting point for anyone wanting to learn more about the energy choices New Zealand faces

Just last week, MED released the latest version of Energy Outlook, which has historically been published about every three years. I probably don't need to introduce Energy Outlook for people in this room.

However, it is worth pointing out that this time around, Energy Outlook was very much designed to be a jumping-off point for the New Zealand Energy Strategy.

Slide 2: The Base Case Approach

• Energy Outlook includes a number of projections—a 'Base Case', 11 'sensitivity cases' and two 'scenarios'
• Our 'Base Case' projection is the one that is used as a standard of comparison for all the other projections.
• The Base Case assumes 'business as usual'
• It is not a projection of what is going to happen, since many things can be done to improve on this outcome

Energy Outlook includes a number of projections, including a Base Case, 11 sensitivity cases, and two scenarios. The Base Case projection is the one that is used as a standard of comparison for all the other projections.

The Base Case is designed to show the energy challenges New Zealand faces. It therefore assumes 'Business as Usual'—that is, no major changes in policy.

Since there are a number of things that can be done to improve on this outcome, the Base Case does not represent our expectations of what is actually going to happen.

Slide 3: How Did We Get Our Results? SADEM!

The results in Energy Outlook are based on the Supply and Demand Equilibrium Model, or SADEM. SADEM models the supply of each fuel and electricity, and the demands of each consuming sector, and projects the quantities and prices that will equilibrate supply and demand.

SADEM has been used in MED's energy modelling efforts since the early 1990s. However, this time around, the entire structure of the model was reviewed, and a number of enhancements were made. Probably the most significant of these was in the way we model land transport fuel demand. This time, we are using an additional model that represents the composition and turnover of the vehicle fleet.

Slide 4: Base Case Assumptions

• GDP growth follows Treasury assumptions.
• Exchange rates from 2010 onwards assumed to be 0.60 US$/NZ$
• Oil prices assumed to remain at US$60/barrel
• New gas discoveries assumed to average 60 PJ/year starting in 2012
• Price of imported gas (LNG or CNG) is assumed to be a function of the oil price
• Coal is assumed to be priced at NZ$3.50/GJ in 2010 rising to NZ$4.00/GJ by 2015 at the import terminal.
• Energy efficiency improvements are assumed to proceed at historical rates.
• No carbon charge.

The Base Case has to make a number of assumptions about the state of the world. Clearly, all these assumptions are subject to a good deal of uncertainty. We picked assumptions that we believe are middle of the road in our view and those of our stakeholders.

I won't go through the assumptions in detail here—they are fairly standard. But I should mention oil prices, since they are probably our most uncertain and most controversial assumption. We are assumed they remain flat at about US$60/barrel. Because oil prices are volatile and subject to great uncertainty, we also looked at a high oil price case, where oil prices rise to US$120/barrel by 2010, then drop back to US$90/barrel by 2020.

Slide 5: Base Case Primary Energy Supply By Fuel Type: Up 35%

This graph shows the projected Base Case energy supply by fuel type. Primary energy refers to energy sources before they have been turned into forms used by consumers, such as electricity.

35% seems to be very much a key number in our Base Case projections. Overall, the projection shows energy supply growing by 35% between 2005 and 2030.

Oil remains the largest single energy source. Oil use is also projected to increase by 35%, reflecting increased transport demand, especially road transport. The bulk of this oil will be imported, as it is now.

Gas use also increases by about 35%. With 60 PJ/year of new gas discoveries assumed here, there will be a shortfall in gas supply around 2025. This is later than we previously believed, with the change based on recent additions to New Zealand 's gas reserves at the Maui field and elsewhere.

Hydro supply shows little growth, due to the cost of new development, environmental constraints on new development, and competition for water use.

Coal supply grows by about 10%, reflecting more coal use for power generation.

Geothermal supply grows by about 75%. Geothermal energy growth is limited only by the availability of suitable sites.

Wind supply grows by a factor of 10 (1000%), but from a small base.

Slide 6: Base Case Consumer Energy Supply By Fuel Type: Electricity Up 40%

The story for consumer energy (that is, after transformations to electricity) is, of course, much the same. Electricity use grows by about 40%. But oil starts from a bigger base and accounts for the largest absolute growth.

Slide 7: Base Case Electricity Supply By Fuel Type: Wind, Gas, and Geothermal Up

Looking just at electricity, hydro remains the dominant source, but as I noted earlier, hydro supply stays more or less constant.

Wind, gas and geothermal all show significant growth.

Wind is the largest source of growth in electricity supply, both in percentage and absolute terms. Wind grows by a factor of 10, but from a small base.

Slide 8: Base Case Consumer Energy Demand By Sector: Biggest Increase in Transport

Turning to the demand side, national (or domestic) transport is the largest energy demand and the largest source of growth in absolute terms, growing by about 35%. Road transport accounts for 75% of this growth. Because of its importance, Mark Walkington will be talking about it in a bit more detail after this presentation.

Residential demand shows the largest growth in percentage terms, about 60%.

Commercial and light industrial demand grows by about 35%.

International transport is shown on this graph, but in accord with international convention, is not included in any of our other statistics unless otherwise noted. It grows by about 70%, and by 2030 will represent 20% of New Zealand 's transport energy demand.

Slide 9: Base Case Projected Heavy Industry Demand: Dairy Processing Only Major Growth

This figure shows projected heavy industry energy demand. It also summarizes the results of a report that Covec did for us on heavy industry energy demand, which is available on our website.

In our definition, 'heavy industry' includes six industries—petrochemicals, dairy processing, steel, oil refining, forestry, and aluminium.

Dairy processing is the only one of our six heavy industries projected to experience significant growth in energy demand.

Petrochemicals have already experienced a significant decline in the past few years, with the closure of one of Methanex's methanol plants, and the scaling back of operations at the other.

We assume there will be modest expansion in the steel and oil refining industries, where New Zealand producers face a favourable competitive situation.

New Zealand 's aluminium, forestry, and petrochemicals industries face a more difficult competitive environment. We assume their energy demand will remain stable, although the future of these industries will be heavily dependent on developments in the international market for their products and exchange rates.

Slide 10: Base Case Energy Prices By Fuel Type: Modest Increases

This diagram shows projected energy prices. In general, we are not expecting any relief from the prices we are experiencing today, but at the same time, we expect future price increases to be fairly modest.

Diesel prices, like petrol prices, will largely follow world oil prices, which have risen sharply over the past two years. By assumption, oil prices in U.S. dollars remain flat to 2030, but exchange rate declines cause the New Zealand wholesale prices to increase by about 30% by 2010. Consumer prices are likely to increase by smaller amounts because of the fixed nature of some refining costs, retail mark-ups, and taxes.

Wholesale gas prices, which have also risen significantly in the past few years, will double again by 2020, reflecting tight domestic supply. However, the wholesale cost of gas currently accounts for only about 25% of the residential price, so increases in residential gas prices are likely to be substantially smaller.

By assumption, coal prices increase only slightly, reflecting relatively abundant worldwide supply.

Wholesale electricity prices increase by about 35% by 2030, with retail electricity prices increasing by about 20%.

Slide 11: Base Case CO₂ Equivalent Emissions By Fuel Type: Up 30%

Greenhouse gas emissions grow by about 30% between 2005 and 2030, slightly less than the growth in primary energy supply.

Emissions from oil grow by about 35%.  Given oil's dominance as a fuel, this means oil also accounts for the largest emissions growth in absolute terms.

Slide 12: Sensitivity Cases: Brief Overview - 1

• High and Low GDP Growth – Makes everything go up or down
• Broad-Based Carbon Charge – Small impact, mostly on electricity generation
• Improved Vehicle Technology Standards – What will people who want to buy old cars do?
• High Oil Price – Small impact on transport and gas generation (but didn't look at economic impacts)
• Low Gas Discoveries Without Imports – Gas Prices Up 300%, coal emissions up
• High Gas Discoveries – Small impact on gas use

As I mentioned earlier, we also looked at 11 sensitivity cases, which varied the assumptions in the Base Case.

The High and Low GDP growth cases made energy demand higher or lower—no surprises there.

The carbon charge case assumed a $15/tonne broad-based carbon charge. Although the government is not proceeding with this proposal, it is still interesting since it shows the impact of any kind of system that puts a price on carbon, such as emissions trading. This carbon charge had a small impact on consumer prices and an even smaller impact on consumer demand. The only significant impact was a small shift away from fossil-fuel fired generation toward renewables.

In the improved vehicle technology standards case we looked at regulations which would prohibit the import of inefficient used vehicles. They key question here is how the consumers who would have bought these inefficient used vehicles will respond. If they instead buy more efficient vehicles, this policy will improve energy efficiency. If they instead keep their old vehicles, which are probably more inefficient than the vehicles we would be keeping out, then we actually make energy efficiency worse. We assumed a 50/50 split, and the net impact was essentially no impact on overall energy efficiency.

High oil prices would reduce oil demand only slightly, since drivers don't respond very strongly to price increases. Higher oil prices have an indirect effect of raising the price of gas, since imported gas prices in the Pacific are generally tied to oil prices. Therefore, higher oil prices lead to a shift away from gas in power generation toward coal. The net result was that by 2030, higher oil prices resulted in no reduction in greenhouse gas emissions. However, I should not that this case did not examine the larger economic impacts of higher oil prices, which would probably be quite depressing for the economy generally.

Our low gas discoveries case assumed no new gas discoveries, along with a policy of not allowing gas imports. This produced one of our most dramatic results—a nearly 300% increase in the price of wholesale gas by 2015.

Our high gas discoveries case, on the other hand, had only a small impact on gas use.

Slide 13: Sensitivity Cases: Brief Overview - 2

• Renewable Electricity – Can be done, but wholesale prices up 30-50% compared to base case
• Additional Renewables – Can be done, and prices not up much at all
• Improved Energy Efficiency – Good all around, if it can be done
• Direct Use of Gas for Home Heating – Trumped by Heat Pumps

Our renewable electricity case assumed that coal-fired generation ceased by 2014 and that there was no new gas-fired generation. We found that renewable generation can indeed fill the gap, but caused wholesale electricity prices to rise by 30-50% compared to the base case. Our renewable options were identified for us by East Harbour Management consultants in a paper that is available for download on our website. They classified renewable options as 'high', 'medium' or 'low' confidence, depending primarily on how likely they were to obtain resource consents. In this case, we assumed that only the high confidence renewables would be available.

In our additional renewables case, we added the 'medium' confidence renewables as well. Here we found that the prices hardly went up at all. This suggests an interesting trade-off between the global environmental impacts of greenhouse gas emissions and the local environmental impacts that primarily drive the resource consent process.

Our improved energy efficiency case assumed a 25% reduction in energy demand compared to the Base Case by 2030. The results showed that energy efficiency was good all around—it lowers prices, lowers greenhouse gas emissions, and reduces dependency on imported fuels. The big question is, of course, how can we do it?

Our final case examined a policy of encouraging direct use of gas for home heating. The theory here is that by using gas for heating, rather than electricity, we can avoid the conversion losses involved in producing electricity from gas. The theory is correct. However, heat pumps are up to 5 times more efficient than conventional electric heaters, since they just move the heat around rather than produce it. This means that a heat pump running on electricity generated from gas is actually more efficient than burning gas directly. So a better policy is probably to promote heat pumps.

Slide 14: 2030 Results Summary: Causes for Concern

• Reliability and Resilience – Oil use up 35%
• Environment – Greenhouse gas emissions up 35%
• Prices – Wholesale electricity prices up 35%
• Sensitivity Cases – Did not suggest obvious answers other than energy efficiency

Overall, the Base Case raises cause for concern about New Zealand's energy future. Looking at the three goals that have been established for the New Zealand Energy Strategy, we see that by 2030, we will be worse off in each one under our 'business as usual' assumptions.

The sensitivity cases didn't suggest any obvious 'silver bullet' solutions with the possible exception of energy efficiency. There the question is not whether it is a good thing—it unquestionably is—the question is how to do it?

All this left us wondering what we should do, and started us thinking more creatively about possible solutions. I'll be back after our first discussion to talk about two of those—one based on new renewable energy technology and the other based on fossil fuels with carbon capture and storage.

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