Pete Hodgson Speech: Electricity: growth and sustainability

[Address to the Electricity Engineers' Association of NZ Conference 2003, Christchurch Convention Centre]

Thank you for inviting me to speak today.

You've chosen as your conference theme the idea of "the growth dilemma", asking how we are going to ensure the electricity sector meets New Zealand’s future economic growth in a sustainable manner.

Calling it a dilemma implies a fundamental conflict between growth and sustainability. I'm going to argue, to the contrary, that we can cope with growing demand for electricity while continuing to make progress towards a more sustainable electricity industry.

We can achieve this by advancing on three fronts: increasing investment in renewable sources of energy for electricity generation; increasing the opportunities for demand side participation in the electricity market; and increasing energy efficiency and conservation.

I'll address each of these in turn.

First, renewables.

You'll be aware that I recently announced some new measures to improve long-term electricity supply security. This will involve the new Electricity Commission contracting for reserve generation to run in very dry years.

That plant will be thermal – a fact that has led some to the mistaken conclusion that the government is set on entrenching our reliance on fossil fuels rather than breaking it.

In fact reserve generation will be thermal for good reasons, and securing it will not detract from our progress towards a sustainable system overall.

Reserve generation will not use renewable energy sources because it must be available to run, hard, when it is needed. It must run whether or not rain is falling, the wind is blowing or the sun is shining.

And reserve generation should not run on renewables because, ordinarily, it will not run at all. It simply makes neither economic nor environmental sense to have renewables standing idle. The fuel is free and clean, so renewable-fuelled plant should be used as much as possible to meet daily demand.

The distinction between new generation needed to meet normal demand growth and reserve generation needed for dry years is an important one.

At current electricity demand growth rates, New Zealand needs to build new generating capacity at the rate of around 150 megawatts a year to meet demand and maintain an adequate dry year reserve. This is well within the industry’s capability.

Between 1996 and 1999 more than 1250 megawatts of new capacity came on-stream, an average of around 300 megawatts a year. In early May I released information on electricity industry plans for new generation totalling more than 900 megawatts by Winter 2006.

The bulk of new investment in ordinary generation over the next 20 years is expected to go into renewables, simply because they are increasingly economic. There will be significant new wind, geothermal and hydro generation. Some combined cycle gas plant and co-generation will be part of the mix, but the dominance of renewable energy will ensure continued progress, overall, towards environmental sustainability.

The government is encouraging that shift in a number of ways.

In September 2001, I released New Zealand’s first National Energy Efficiency and Conservation Strategy. Among other things, this includes a national target of an additional 30 petajoules of consumer energy from renewable sources by 2012.

The Strategy commits the Government to a wide range of measures, including the evaluation of renewable energy resources and support for the development of renewable energy supply industries. Information and communication, training, standards and accreditation and market development in conjunction with industry associations are all part of the renewables programme.

The electricity policy changes I announced last month included two important measures that will foster growth in renewables.

Firstly, the opportunities for lines companies to invest in both ordinary and reserve generation will be increased.

In 2001 we amended the Electricity Act to allow lines companies to invest in new renewable generation without limit. That law will be further amended so they can own reserve generation without limit and ordinary generation of up to 25 megawatts or 10 percent of their load.

Secondly, to encourage the development of distributed generation projects – that is, those connected to local lines rather than the national grid – lines charges will be regulated to ensure such generators pay no more than is reasonable for the additional costs that lines companies incur.

Distributed generation often consists of renewable energy projects and can include some quite large ones, like both of this country's existing wind farms.

We are also encouraging renewable energy through the Resource Management Act and climate change policy.

A Resource Management Amendment Act passed last month will come completely into force on the first of August. It is designed to improve the implementation of the RMA, partly through streamlining the resource consent process to reduce costs and delays. These changes will benefit existing and potential generators, along with many other parties.

Further amendments to the RMA are planned, including a change that will allow councils to give greater weight to the value of renewable energy when considering resource consents. The law will give explicit direction on the national importance of renewable energy, and improving energy efficiency will become a key national objective.

By ratifying the Kyoto Protocol, New Zealand has made a legally binding commitment to reduce the greenhouse gas emissions that cause climate change. Developing more renewable generation will help us meet our Kyoto target, to the extent that renewables displace thermal generation in the normal running order.

We have already begun taking advantage of the opportunities the Protocol offers for encouraging new renewables. In the last couple of months we have allocated carbon credits to two wind farm projects, TrustPower's 36 megawatt extension of the Tararua wind farm and a new wind farm of 40 to 80 megawatts proposed by Meridian. Together these will triple or quadruple New Zealand's current wind generation capacity.

These two deals prefigure the climate change Projects mechanism, which will provide emission unit incentives to other projects that reduce greenhouse gas emissions. I expect at least some of these will involve more renewable energy.

A call for proposals in an exploratory tender round for Projects will go out soon. Our intention is that Projects rounds will be held at least annually after that. We have decided, for this coming round, that Projects that would improve New Zealand's electricity supply security will be given priority in processing.

The second front I said we must advance on, towards a sustainable electricity system, is demand side participation in the electricity market.

Of course the supply side is important, but historically it has absorbed the attention of policymakers in this country to the exclusion of the demand side, and that has been our loss. Improving the opportunities and incentives for electricity consumers to manage their demand actively is an essential part of breaking the link between economic growth and growth in energy consumption.

Most large, energy-intensive businesses with some exposure to the spot market are already active managers of their demand, but many medium-sized electricity users – those consuming around five to ten gigawatt-hours a year – do not have the same opportunities and incentives. These are sites such as hospitals, factories, airports, ports, large commercial buildings and universities. A report from EECA late last year identified 400 megawatts of demand reductions that could be available from about 500 medium-sized sites if their ability to manage load was improved.

Regional demand exchanges can help these users save energy and money by providing clear and timely price information, giving them opportunities to reduce or shift load, or switch to embedded generation, when it makes sense to do so. One such exchange is now serving some South Island users, while a second one in Auckland is in the early stages of development. The new Electricity Commission will be responsible for ensuring that regional demand exchanges are available nationwide.

The Government will contribute just over $1 million over the next two years, through EECA, towards the establishment of these exchanges. This will help cover the costs of the necessary software and metering, operating expenses and information for users. The use of demand exchanges will be a significant advance on current energy management practices, so there are some knowledge barriers to overcome.

The expected electricity savings from demand exchanges are expected to be up to 100 gigawatt-hours a year by 2005-06, a useful result from what is currently one of the less responsive consumer sectors.

There are other useful things happening on the demand side, such as the electricity market's real-time pricing trial, but I want to say something about what is happening on what I described as the third front, energy efficiency and conservation.

Again, the driver of Government action is the National Energy Efficiency and Conservation Strategy, which sets the target of a 20 percent improvement in national energy efficiency by 2012.

The Strategy commits us to a wide range of actions across the government, energy supply, industry, building, appliance and transport sectors. I will not recite them all for you, but mention a few recent developments.

EECA's energy audit programme, which identifies opportunities for businesses to use energy more efficiently, is being expanded and will offer more heavily subsidised audits to large electricity consumers using more than 10 gigawatt-hours a year. The users will contribute around 20 percent of the costs and will be committed to acting on the results.

With extra funding of about $1.5 million over the next two years, this programme aims to audit a total consumption of 10,000 gigawatt-hours by the time it is finished – about a quarter of New Zealand’s total electricity use. The expected energy savings reach 250 gigawatt-hours a year in 2005-06.

Other energy efficiency programmes to be expanded recently are the EnergyWise Home Grants scheme, which supports projects that insulate the homes of low-income families, and the Crown Energy Efficiency Loan scheme, which funds energy efficiency improvements in public sector organisations.

Both were increased in this year's Budget, the loan scheme by $1 million and the home grants scheme by a little more than that. As a result the home grants scheme will allocate around $3 million to residential retrofits in the coming year, improving the energy efficiency of more than 4000 homes. The Crown Loan scheme doubles in size and will help us towards the National Energy Efficiency and Conservation Strategy target of a 15 percent improvement in energy efficiency in the public sector by 2006.

These are all small steps. I have not told you today about anything that will produce a great leap forward for renewables or energy efficiency. But I am saying there is a good story to tell about real, incremental steps towards a more sustainable electricity system. We will reach for that by making steady, practical improvements across the economy and society.

If any of you are surprised that I have not spent my time today talking about the new Electricity Commission and dry-year reserve generation, let me say that is because it is not central either to your conference theme or to Government energy policy. Security of supply is very important. Industry governance is important. But the importance of continued progress towards a sustainable energy future is overwhelming.

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