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• Energy Modelling

• Energy Outlook

• Previous Editions

• To 2020

February 2000

A report prepared by the Ministry of Commerce
Energy Modelling and Statistics Unit, Resources and Networks Branch

The complete New Zealand Energy Outlook to 2020 can be accessed online free of charge.

• Table of Contents
• Executive Summary

Table of Contents

Executive Summary

New Zealand's energy sector has experienced a period of significant change and reform over the past decade and is projected to continue to alter significantly over the period to 2020. The composition of energy demand and supply is projected to change as, amongst other factors, the demand for energy grows, the Maui gas field declines, and new technologies for the production, delivery and use of energy become economic.

The scenarios presented in this Outlook are the results of modelling the complex interactions of the New Zealand energy market using the Ministry of Commerce's SADEM energy model. This formal, structured, approach allows a detailed understanding to be gained of how the New Zealand energy sector operates, its dynamics, and how it may change over time. The SADEM model is a partial equilibrium model (confined to the energy sector) which identifies a market clearing price consistent with supply and demand being in balance. The scenarios are not attempts to project what will actually happen in the energy sector; rather, they provide an indication of the range of possible outcomes under a number of different assumptions.

The key assumptions of the baseline scenario¹, which covers the period 1998 to 2020 (March years), are:

• 3% per annum (pa) GDP growth from 2003 (short-term forecasts are used prior to 2003);
• current policy settings;
• oil prices fall from around US$21 per barrel in 2000 to around US$19 per barrel (bbl) in 2002 before rising to US$22/bbl by 2015 and remaining constant thereafter²;
• coal prices rise from around $2.66/GJ in 1998 to $3/GJ in 2010 and are constant thereafter;
• new gas discoveries averaging around 80 PJ pa;
• given this gas discovery rate, wholesale gas prices rising to around $3.5/GJ by 2010 and to $3.9/GJ by 2020;
• gas use by the petrochemicals plants does not continue after existing take-or-pay Maui gas contracts expire: i.e., 2003 for the Motunui tranche, and 2005 for the Waitara Valley and ammonia/urea tranches. However, Methanex's recent gas contract with Contact could extend their operations out to 2006/7;
• a US$/NZ$ exchange rate of US$0.54 to NZ$1.

Consumer Energy by Sector 1970-2020

The baseline scenario projects that consumer energy demand will grow by 1.1% pa between 1998 and 2020 for 3% pa GDP growth. Residential sector consumer energy is projected to grow, on average, at around 2.1% pa between 1998 and 2020, the industrial and commercial sector to decline by 0.3% pa, and the trans-port sector to grow by around 2.0% pa. Over the same period electricity consumption is projected to grow by around 1.8% pa, the consumer energy of coal by 0.7% pa, oil by 1.9% pa, and gas to decline by an average of around 2.6% pa. The decline in gas consumption is the result of the draw-down of the Maui field over the next decade, and the consequent closure of the petrochemicals plants.

Energy Intensity 1970-2020 (Scaled)

New Zealand's energy intensity increased from 4.4 PJ/$100M in 1970 to 5.5 PJ/$100M in 1998. It is projected to decline to 3.8 PJ/$100M in 2020. This is associated with the projected decline in the ratio of energy growth to GDP growth from its average of the past 25 years, 1.3:1, to around an average of 0.37:1 for the outlook period. In part, this decline is the result of the closure of the petrochemicals plants. Excluding the petrochemicals sector, consumer energy demand grows by an average of 1.8% pa between 1998 and 2020, still significantly less than GDP growth.

In the baseline scenario, around 2200 MW of new electricity generating capacity³ is projected to become economic between 2000 and 2020, as demand for electricity exceeds the economic capacity of the current system. This compares with approximately 1100 MW that will have been commissioned in the three years to 2000. The 2200 MW therefore excludes capacity which has been built, but is in the process of being fully commissioned, such as Otahuhu B. The 2200 MW is comprised of 300 MW of gas combined cycle (GCC), 675 MW of new coal, 260 MW of geothermal, 395 MW of hydro and hydro efficiencies, 295 MW of cogeneration, 150 MW of wind, and 125 MW of distillate peaking plant. This economic new capacity is driven not only by electricity demand growth, but also by the assumed mothballing of New Plymouth after 2005.

Projected Economic New Power Station Sequence 1998-2020

The composition of electricity generation is projected to change significantly as a result of this new capacity. When it is economic for Huntly to generate, it is generally coal-fired, as the projected price of coal is below that of gas. Hydro's share of electricity generation is expected to decline from around 65% now (depending on inflows) to around 52% in 2020, gas's share from around 20% to around 15%. Coal's share grows, from around 5% in 1998 to around 14% in 2020. The uncertainty surrounding these particular projections is discussed with reference to issues such as technological change and prices in the main body of the Outlook, while the possible increased potential contribution of traditional and non-traditional renewables is examined in a separate scenario.

Primary Energy Supply of Gas by Use 1995-2020

New Zealand's primary energy supply is projected to grow at 1.3% pa between 1998 and 2020, from around 652 PJ pa to 872 PJ pa. The primary energy supply of geothermal energy is projected to more than double, and that of coal to double. Oil grows strongly at around 1.9% pa, while the primary energy supply of hydro experiences more modest growth. Gas alone experiences a decline in its primary energy supply as Maui draws down and the petrochemicals plants close between 2003 and 2005. Gas consumption for electricity generation declines to 2000 as Huntly switches to coal. However, it then experiences growth to around 2015 as electricity demand grows, the existing GCC plant are run harder, and a new GCC plant is built in 2010. Reticulated gas demand grows steadily throughout the period.

Carbon dioxide emissions are projected to grow, as newly built thermal electricity capacity is used, and as consumer energy demand grows, in particular petroleum products for transport. There is a temporary reduction in emissions with the closure of the petrochemicals plants in 2003 and 2005. However, overall carbon dioxide emissions are projected to grow by around 1.6% pa between 2000 and 2020 (calendar years).

The increases in the wholesale prices of oil, coal, and gas do not transfer into significant changes in delivered energy prices to consumers, with the exception of petroleum products, due to constant, or declining unit costs of transmission, distribution, and retailing.

Projected Electricity Generation Costs and Delivered Prices 1995-2020

Wholesale electricity prices are projected to dip from their 1998⁴ levels in both 1999 and 2000, before beginning to rise as more expensive generation opt-ions are required to satisfy demand growth. The wholesale price of electricity reaches around 6.5 c/kWh in 2020. Declines in unit transmission and distribution costs after 2000 ensure that, de-spite the rise in the wholesale price, delivered electricity prices decline until around 2010. After 2010 delivered electricity prices start to rise, however, the other industrial and commercial sectors price only rises slightly above current levels in 2020. The residential electricity price remains slightly below current levels by 2020.

The baseline scenario provides a reference point from which analysis of the uncertainties and sensitivities surrounding the key assumptions can be made. By analysing some of these factors in alternative scenarios a picture of the range of possible outcomes for the energy sector can be built up.

The main body of the Outlook includes scenarios on alternative economic growth rates, renewable energy, oil prices, new gas discoveries, forestry processing, energy efficiency and carbon dioxide pricing (see page 10 for a fuller description of these scenarios).

The elasticities of the demand models are presented in a separate section. This section also includes a comparison of the projections in this Outlook with those of the February 1997 Outlook.

¹The baseline scenario assumptions are presented in detail on page 9.

²The oil price assumptions and their sources are discussed in more detail on page 32. Two alternative oil price assumptions are described briefly and examined on pages 10 and 45.

³The system capacity as at 31 March 1999 was 8530 MW.

⁴Wholesale electricity prices in this Outlook refer to a mix of contract and spot prices to 2005. After around 2005 the wholesale electricity prices presented in this Outlook are very close to the projected long run marginal cost of generation. The projected dip in the wholesale price of electricity between 1998 and 2000 is consistent with the recent low electricity spot prices. More details on wholesale electricity prices are given on pages 33 and 34.