Energy and Resources Policy in New Zealand: Where’s the Plan?

Power and Electricity World New Zealand 2010. Opening speech by Labour's energy spoekesman Charles Chauvel.

Introduction

I want to begin with thanks to the organisers of this conference for the opportunity to speak here today. I won’t labour the point, since I am glad to have taken his place – and hope that may that be an indicator of things to come after the next election. But it is a shame that you don’t have the Minister here this year. This is because after only 15 months in office, there are many questions that could usefully have been addressed by him today about whether National has any sort of coherent plan for this vital sector of the New Zealand economy. Here are 4 for starters.

Lack of a plan – the evidence # 1: unanswered questions

What will the revised Energy Strategy say?

First, what is the status of the Minister’s undertaking – given, ironically, when he spoke at this very Conference last year – to make further announcements “in the coming weeks” as to National’s update of the New Zealand Energy Strategy? Many of you will recall Gerry Brownlee’s criticism that the Strategy over-emphasises sustainability, and under-emphasises security of supply. 51 weeks later, “the coming weeks” seem to be stretching out a bit as we all ponder the key question of what Energy Strategy 2.0 might look like. Let’s hope, if only because of the enormous and often-minimised potential for demand-side efficiencies, that a similar fate does not befall the New Zealand Energy Efficiency and Conservation Strategy, also currently under review by the Minister.

Why is security of supply deteriorating under National?

Mention of National’s ostensible concern for security of supply uber alles prompts the second question. The latest draft Electricity Commission Annual Security Assessment - on which consultation closed only a fortnight or so ago, indicates a significant revision downwards of the previous year’s assessment. This is said to be due to a mix of factors – retirement of existing capacity, the timing of commitment of new generation, uncertainty as to thermal fuel supply after 2010, the ability of wind to contribute at peak times, and the unavailability of slow-start generation capacity at those times. Security of supply must obviously be measured by more than just the Winter Capacity Margin (WCM). But given Gerry Brownlee’s completely unjustified winter 2008 scaremongering about security of supply, how is it, on National’s watch, that these factors are being allowed to combine to cause the WCM to fall below the Security Threshold for the first time in 2012?

Fact elasticity

A third question might be why the Minister is so prone to distorting the record. Only last week in Parliament, for example, he was painting a picture of increased oil production on his watch. A quick perusal of the facts – set out last month in his own department’s Energy Quarterly, shows the reality of the situation. Our recent domestic crude oil supply production peaked at 36.1 PJ in December 2007, a year before Labour left office, then declined steadily to a low of 25.5PJ in March last year, recovering to only 33.7PJ last September. This elasticity with the facts is of a muchness with many of his policy announcements - ranging from seismic data acquisition through to the home insulation package – which are simply recycled initiatives of the last Labour-led Government.

Electricity Reform Bill: Will it make the problems worse?

A fourth question would relate to his insistence - despite Treasury and much industry analysis – that asset swaps in the state-owned generation sector will improve the performance of the electricity market. I appreciate that there is not a consensus on this issue. But I am concerned at the potential for compromise to the Waitaki system by allowing one supplier to restrict water to the other catchments downstream, creating a lose-lose situation for consumers by putting security of supply at risk and increasing prices. To these concerns, the Minister has replied that the issue has been ‘extensively canvassed.’ But on this point, he is being elastic with the facts, again. The Government’s own Regulatory Impact Statement on the Bill that would empower the swaps says that ‘a more comprehensive review of the risks associated with proposed options’ should have been included. Parliament has the legislation before it. MPs might have found it informative to have heard a public exchange between the Minister and those present today on whether the Bill is likely to have the exact opposite effect to what was intended: increasing prices to consumers and limiting security of supply. As it is, we will just have to manage.

Lack of a plan – the evidence #2: repeal and rollback

If these and other unanswered questions seem to point to a lack of rigour in the direction of energy policy, so does the headlong rush to discard much of what Labour achieved in office in this area. Worse is the failure to replace those initiatives with anything meaningful. I’m going to mention three significant instances.

Repeal of Renewables Preference

First to go was the renewables preference legislation, which put a statutory hold on building any new baseload thermal power stations until 2018, absent any obvious threat to security of supply. This was in pursuit of the Energy Strategy’s goal of 90% baseload renewable generation by 2025. I’m aware that many of you would have preferred a market price mechanism to legislation. But given last year’s weakening of the Emissions Trading Scheme, to which I will refer again later, you don’t really even have that. Combined with the lack of support in last year’s budget or in this year’s Prime Ministerial statement for renewable energy, it is clear that there is no simply vision as to how to maintain and maximize our massive existing 70% advantage in the renewable electricity space.

Repeal of Biofuels Obligation

It’s not only renewable energy that has suffered under National. The repeal of the obligation to add a small amount of biofuel at the pump has been a significant setback to the development of a domestic biofuels industry. When the Government repealed the obligation, an international company pulled out of building a 60 million litre bio-diesel plant in the Bay of Plenty – infrastructure that would have been good for our energy sector, the economy, and the environment. When he realized just what a hit local biofuel producers took after the repeal of the obligation, Gerry Brownlee decided to make available $36m worth of scarce public funds for grants for the sector. The lack of success of this alternative policy is indicated by the 1% uptake to date of those grants.

Major Weakening of the Emissions Trading Scheme

An ETS is intended to use the market to limit greenhouse gas emissions across time over the sectors of the economy to which it is targeted. Different sectors receive a specified level of carbon credits, which allow each of them limited rights to continue to pollute for a limited time. Credits may be traded, and the desired effect is that industries reduce pollution over time because in most cases it should be cheaper to do this than to have to buy increasingly scarce credits. Labour’s scheme applied to all sectors, and would have credited 90 per cent of emissions based on the 2005 averages for each sector, and then phased that out by 8 per cent each year, down to zero. Emitters that sought to pollute over and above the levels set by the ETS could purchase a limited number of additional credits. Revenue from such purchases would have gone towards funding the measures necessary over and above those made economic by the market to transition to a low carbon economy, and to ensure that the manner of that transition was just. Labour’s scheme had a fixed allocation of credits, meaning that once these were purchased and spent, emitters would pay. All of our allocations were based on the 2005 average, setting a benchmark from which to measure the reduction in emissions over time.

National, the Maori Party and Peter Dunne last year softened the phase-out for free ETS credits to a rate of 1.3 per cent per year, rather than the original 8 per cent. The Minister of Agriculture told Federated Farmers that this would allow free allocations of credits to continue for 90 years into the future. Allocations will be secret, and involve enormous transfers of wealth from taxpayers to emitters. If the scheme as amended last year is not changed, Government debt will increase by 2030 by an estimated 15 to 17 per cent of GDP. These changes – and the need to make them in haste and under urgency - were said at the time to be based on the need for harmonisation with Australia, where political conditions make it apparent that there can be no certainty as to when, or even whether, an emissions trading scheme will be legislated for. They send a virtually non-existent price signal, and the lack of provision for any meaningful complementary measures means that our existing ETS is pointless as an environmental protection mechanism.

Lack of a plan – the evidence # 3: the vision vacuum

Late last month, 8 of our leading businesspeople wrote to all MPs urging investment in the opportunities that New Zealand could realize in clean technology. Lloyd Morrison, Rob Fenwick, Stephen Tindall, Jeremy Moon, Rob Fyfe, Philip Mills, Geoff Ross, and George Fistonich mention the potential of investing in this area to create and attract major new businesses to New Zealand, and to add significant value to our current ones. They speak of adding brand value, and reducing the risk of significant and possibly irreparable brand damage to our exports and tourism. They write of reducing long term risks to escalating foreign oil and other costs. Yet in his statement to Parliament last week, the Prime Minister made no mention of the potential for New Zealand in cleantech investment. This vision vacuum represents an enormous threat to the New Zealand economy.

So what would Labour do?

No-one expects a detailed series of manifesto commitments from the opposition just under two years out from the due date of a general election, and even if they did, the requirement for a major political party to consult with its wider membership and with key stakeholders means that a party spokesperson would offer them at his peril. But in energy policy, I will restate a number of important commitments.

A New and Comprehensive Energy Strategy, Providing for Security, Affordability and Sustainability

First, we will be clear from the outset about over-arching policy. New Zealanders will not, as they are having to do now, endure a year or two of reviews. An incoming Labour-led Government will provide certainty as to the regulatory environment in energy for investors and consumers. We will as a matter of priority reissue a detailed New Zealand Energy Strategy. This document will consolidate and extend the goals of the existing strategy and the related documents published under the last Government. It will specify that domestic energy security is of cardinal importance, to be achieved bearing in mind the twin imperatives of affordability to consumers; and the need to fully maximise our renewable advantage. This includes avoiding dependency on imported gas. Our electricity prices have never been linked to those of foreign fossil fuels. It is a linkage we should continue to avoid.

Sustainability

As far as the renewable advantage is concerned, we expect that it will be feasible to agree and set out a way forward over a period of years by which most if not all baseload generation currently derived from fossil fuel sources will be replaced by geothermal load. Significant wind turbine development will continue - and the potential of marine, tidal, biomass, small-scale hydro and other clean sources of energy will be encouraged, as our leading businesspeople urge. The Emissions Trading Scheme will be recalibrated to send a meaningful price signal in favour of renewables and to enable funding of complementary and transitional measures, including significant research and development capability to support renewables and to reduce our particular emissions profile. Transport emissions will reduce drastically through a mix of encouraging the use of biofuels, moving heavy freight back onto rail and coastal shipping, reinvesting in user-friendly public transport, and adopting electric vehicle technology as early as economically possible.

Energy Efficiency and Conservation

Proper use will be made of energy efficiency and conservation, both for health reasons and for the potential to minimise new generation, transmission and lines investment. A smart metering standard will be set, and it will be a requirement that such metering empower the domestic consumer to make use of favourable tariffs when commercial and industrial usage is lower, particularly as the use of electric vehicles becomes more widespread. Perverse incentives to energy conservation will be eliminated where possible, and otherwise minimised. Although the grid will continue to be strengthened, since that will make for the optimal nationwide deployment of renewable energy wherever it is generated, incentives will exist for consumers to generate their own electricity, including for resale to the grid, where that is feasible.

Affordability

Phil Goff has already undertaken that when he is Prime Minister, the runaway power price increases for domestic and smaller commercial consumers that were created under National’s electricity reforms in the late 1990s will end. The bulk of these increases when they occur are now attributed by generators to the need for further investment in generation capacity. Some 75% of existing and medium-term projected generation capacity is state-owned. So one way to look to achieve electricity price stability is to be realistic with the state-owned generators as to dividend policy, much in the same way that Transpower has recently been permitted to reinvest notional profits in grid upgrade work. We will, however, be clear that realism over dividend policy is not a licence for the inefficient use of public funds on any level.

Competition vs Regulation

We are aware of the need to get the balance right between competition and regulation in each part of the electricity sector, and on an overall basis. At the generation level, the benefits of haphazard competition for a limited number of sites in a long, thin, sparsely populated country seem mixed. At retail level, real competition is still not a reality for many consumers. Effective monopolies at transmissions and lines levels require careful thought about how to get the best out of the entities that operate them.

Resources in context

Finally, a word about resources policy. Warren Freer reminded me in June last year - at the 40th anniversary of the discovery of the Maui gas field - that Labour has a proud record of ensuring that our natural resources are exploited in the overall national interest, having regard to our sovereignty and to our environmental integrity. Future Labour-led Governments will continue this legacy. What we will not do is permit exploration or mining in the Conservation Estate. Nor will we operate resources policy in isolation from other key concerns.

For Labour, for example, the prospect of the discovery of significant reserves of oil or gas in the Southern Basin is potentially much more than just an opportunity to extract more things to be shipped offshore and burned, so as to reduce our balance of payments deficit. If it does transpire that 30 years’ worth of existing domestic oil consumption is discovered beneath our territorial waters, wouldn’t it make sense to take a long, hard look at what we should do in our national interest with that resource? Very arguably, instead of going down the export substitution route, we might ensure that we had onshore refining capacity for that oil. Then, we might use the window that the depletion of the reserves would give us to plan for energy independence, based on the renewables technologies (especially in transport) that are almost certain to have come on stream by the depletion date.

Conclusion

Thank you for inviting me here to speak today. I hope to return in subsequent years to discuss and develop these ideas in more detail with you.

ENDS

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