Trevor Mallard Speech: Securing New Zealand's future energy supply

Speech to the 7th Annual New Zealand Power Summit, Crowne Plaza, Auckland.

Thank you for inviting me to participate in the Seventh Annual New Zealand Power Summit. I’m delighted to be here.

I’ll preface my remarks by reminding everyone that the government no longer carries out centralised energy planning in the traditional sense. The government is, however, actively involved in determining the appropriate energy framework that best provides for energy security and efficient energy prices.

The government has not, however, stepped away from its responsibilities. The emphasis has simply changed to focus on guiding a very complex industry to achieve our objectives for New Zealand’s energy future.

In the case of future security of energy supply, the issue really distils down to two basic requirements – the adequacy of the electricity and gas infrastructure, and the availability of fuel. If we fail in either of these respects, we will not have met the expectations of all New Zealanders that we provide them with a future energy supply that is secure, affordable and contributes positively to our environment.

This government has taken initiatives to enhance security of supply, such as – empowering the Electricity Commission to secure reserve energy; providing support for the Huntly e3p electricity generation project; encouraging and facilitating distributed generation; implementing measures to encourage gas exploration; and moving to comply with IEA oil storage obligations.

It is heartening to see that industry has also taken initiatives to enhance security of supply, which include participation in the National Gas Outage Contingency Plan and studies on the use of liquefied natural gas.

Let’s look now at some of these initiatives.

The government requires the Electricity Commission to secure enough reserve energy within the electricity system to reduce the risk of shortfalls during very low hydro inflows. It can, for instance, contract with electricity producers and users for reserve generation capacity and/or demand management.

The commission’s target is to ensure that our electricity needs can be met, without emergency power savings campaigns, in any hydro storage situation up to a 1-in-60 dry year event. As an initial “buffer”, the government last year commissioned the 155 megawatt Whirinaki plant in Hawke's Bay to provide some of the necessary reserve energy.

The commission has now done considerable work on reserve electricity issues, and recently confirmed that there should be sufficient generation to meet demand in 2005 and 2006, even in the 1-in-60 dry year scenario.

While hydro generation can produce cheap power, we are exposed to risks of shortages during very dry periods because of water storage limitations. Hydro generation must therefore be backed up by other generation that can run when water is short. This balance is a challenge as long as hydro dominates.

It’s fair to say that generation investment to date has generally been timely, but uncertainty about future gas supply and the fuel cost implications of climate change policies has played a part in delaying some decisions.

Nevertheless, I am encouraged by the willingness of our largest generation companies to embrace a mixture of technologies in recognition that this is the way of the future. I fully support their continuing to looking at all the issues and investing in long-term R&D of new processes and technologies.

New generation technologies are also displaying economies of scale and smaller plants are becoming increasingly more economic. These are an increasing trend, involving development proposals for small co-generation plants, small wind farms and small or micro-hydro projects.

Greater use of this distributed generation will improve overall security by diversifying supply. In time, this will spread generation capability more evenly around the country, reducing reliance on transmitting large quantities of power over long distances.

Generation close to users may also reduce transmission losses and defer the need for new investment in transmission and distribution networks. Nevertheless, a robust and secure grid is necessary for the effective and secure operation of the electricity system.

Distributed generation can also offer opportunities for new entrants, which in turn will increase competition, efficiency and reliability of supply.

The government is presently drafting regulations covering the connection of distributed generation that will apply to all local network companies. This will facilitate connection on reasonable terms and conditions.

These regulations will apply to households wishing to export surplus generation, as well as to larger scale projects such as wind farms.

We must, however, face the fact that we will continue to need a robust and reliable grid to move power from major stations to the points of greatest electricity consumption. The capacity of the grid must therefore grow with production and demand in order to maintain the security of supply that consumers demand.

Very little has been spent on upgrading the grid in recent times and we must “bite the bullet” on the need for serious upgrading.

Implicit in an integrated and reliable national power system is a transmission network designed to cope with increasing future demand.

In terms of the pressure that Auckland will be under in the future, there are some prospects for additional electricity generation in the region, such as expansions of the existing generation stations at Southdown (Mighty River Power), Otahuhu (Contact), Marsden Point (Mighty River Power), and a range of wind generation opportunities. At this stage no firm commitments have been made to any of these prospects.

And of course, improved energy efficiency or energy conservation measures could also help reduce demand.

While I can't comment on the Transpower grid upgrade proposal, I can say that our government is committed to striking the right balance between our desire for a clean, healthy environment and our commitment to a sustainable energy system that will meet the demands of households, industry, and economic growth.

It’s not for me to stand here and predict outcomes. Realism must, however, prevail. Our economy cannot survive, let alone flourish, without access to an adequate and reliable electricity system.

I’ll turn now to the other “leg of the double” – reliability of future fuel supplies.

Maui gas, previously available in large quantities and at cheap prices, has played a very significant role in our economy over the past thirty years. But Maui gas is nearly gone, and so too are low prices which have stifled meaningful exploration for replacement gas.

We have sought to address the decline in Maui gas through a set of initiatives designed to make gas exploration more attractive. These include:

Reducing royalties to encourage exploration and development of gas.

Relaxing the tax regime relating to upstream exploration by oil rigs and seismic vessels in order to make it more attractive for explorers. Providing funding for the acquisition of geophysical seismic data and the promotion of New Zealand to overseas petroleum investors.

Facilitating renegotiation of the Maui Gas Contract, which has clearly defined the remaining reserves under contract and removed the Maui price overhang.

Inviting Maui Development Limited parties and users to develop an access regime for the Maui pipeline, which will enable gas from smaller fields to be transported to the markets.

It’s exciting to see the level of drilling activity that is occurring presently, with a number of new wells being planned for the 12 months. Let’s hope that some of these are successful.

The security of our oil supply, as the dominant fuel of our transport fleet, is also important to us. Recently it was discovered that our oil stocks had fallen to the point where we no longer complied with the International Energy Agency’s 90-day oil security of supply obligation. We were about 20 days below this requirement.

We are determined to address this situation, and have commissioned a report on various options that could be taken to redress the shortfall. This includes additional storage capacity options. I intend to recommend a preferred option to Cabinet shortly.

In summary, for a reliable energy supply we need to ensure that – total generation keeps up with demand;

a robust and reliable grid is maintained to move power from major stations to centres of high consumption; and

we build our confidence in the availability of the various fuels upon which our energy system depends.

Thank you.

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