Consents for three new gas-fired power stations

Hon Marian Hobbs

Minister for the Environment

Parliament Buildings

Wellington

New Zealand

Dear Minister,

Resource consents for three new gas-fired power stations

I am a director of Windflow Technology Ltd, which is working to establish local manufacturing of wind turbines. I am a registered mechanical engineer in New Zealand and California and my vision for the last twenty-four years (more than half of my life) has been to establish wind power as a large-scale player on the New Zealand energy scene. After working overseas in the wind industry for seven years I returned to New Zealand with the experience and a design suitable to establish local manufacturing as the best means to that end. I enclose a copy of our Investment Statement for your information and interest.

I am also a director of the New Zealand Wind Energy Association, and have written to Pete Hodgson (15 February) in support of including of a Mandatory Renewable Energy Target in the National Energy Efficiency and Conservation Strategy. I enclose a copy of that letter for your information

I am writing to urge you to reconsider last week's decision and (acknowledging that the time has passed to call in Otahuhu C) either:

- call in the new Huntly and Taranaki gas-fired projects or,

- issue a National Policy Statement which would cover all three consents and any subsequent ones.

The arguments behind this letter are based on my absolute conviction that we need to apply the "polluter-pays principle" (PPP) if we are to address the problem of climate change. There are various other terms for this:

- "economic instruments" (often presented as a choice between "carbon tax" or "tradable permits with absorption credits" though that is actually a case of "horses for courses" rather than an either-or choice), or

- "ensuring that prices reflect the full costs of supply including environmental costs" (as per the Government's Energy Policy Framework).

But at the end of the day it comes down to the PPP, and the thing required is regulatory action not promises and Uptonesque procrastination.

Having spent seven years overseas in the wind industry I came back to New Zealand ten years ago, convinced (or should I say misled?) that New Zealand's clean, green image and economic rationalism would combine in a natural acceptance of the PPP as the minimal, least-cost principle which simply must be applied to the problem of climate change. I have made the case for the PPP time and again through:

- submissions to the Resource Management Law Reform process (1988-90)

- submissions to climate-change policy development (1990-present) especially WOGOCOP in 1996

- a submission by Solar Action and expert testimony for the Maruia Society to the Taranaki Combined Cycle (TCC) Board of Inquiry in 1994

- two papers published at Solar '98, one of which explains how the tradable absorption obligation (TAO) - applied globally - can create a transition to a sustainable energy, non-greenhouse future.

I enclose these two papers for your information.

However I have become increasingly frustrated as successive ministers for the environment (principally your predecessor) have listened not to the evidence for action, but the special pleading of the business-as-usual brigade. For the proponents of new, renewable energy, this simply translates to "jam tomorrow". For climate change, this translates to greater costs and insecurity imposed on future generations.

Well I am fed up with "jam tomorrow"! I am fed up with a competition which lets gas-fired power free-ride on the climate insecurity of my children and grandchildren, a competition which puts no value on the fact that wind power does not emit CO2 unlike most other civilised nations (even Australia!).

There are many things which need to be done in response to the Kyoto Protocol, and which require further work to be implemented, but in the meantime there is one thing which Government can do under the RMA, which will be entirely consistent with the Kyoto process. But it needs to listen to the wisdom of the report on the only call-in there has been under the RMA, not the special pleading of the business-as-usual brigade for a change!

The TCC Recommendation

In 1994 after extensive hearings the TCC Board of Inquiry accepted the submissions of Solar Action and the Maruia Society. It recommended full mitigation of the output from that station:

page 228 - "The consent holder shall establish a carbon sink sufficient to eventually store in perpetuity the equivalent quantity of carbon emitted from the site over the term of the permit".

This was based entirely on the requirements of the RMA that "adverse effects" (including potential adverse effects) must be avoided, remedied or mitigated. A victory for the PPP!

The Board also took account of the Framework Convention on Climate Change (FCCC), with which its recommendation was consistent, since TCC was a new plant and the argument about backing off an existing station (as opposed to simply meeting demand growth) could not sensibly be applied to that station. (Not that this argument has any merit in the context of either the RMA or the ultimate objective of the FCCC. But the 2000 target of the FCCC - which has since become the 2010 target of the Kyoto Protocol - is a complicating factor. Arguably that target was to stabilise gross emissions but in deference to the intellectual flip-flop which has become a fait accompli since 1992, I will refer to the 2000 target of the FCCC as "stabilise net". On the other hand the ultimate objective of the FCCC is zero or radically reduced net emissions - "zero net" for short). Note that:

- the FCCC has been ratified and is thus legally and morally binding

- the Kyoto Protocol was still 3 years away at the time of the TCC recommendation

- the case for action on climate change has become stronger not weaker since then.

Importantly for the purpose of this letter, the Board also reported:

page 221 "11.27 After careful consideration we have resolved to recommend the issue of a national policy statement on CO2 emissions ...."

The Minister's Decision on TCC

Minister Upton torpedoed the Board's primary recommendation by making the final consent condition only partial mitigation, and defined in such a way as to be inherently woolly to the point of being unenforceable. I won't go into the details here but the principle he was trying to apply was that the consent holder should not be penalised as long as TCC results in a reduction of CO2 emissions from the electricity sector. This sounds reasonable and the discrepancy between the Board's recommendation and Upton's decision seemed nebulous to many at the time (which is why he got away with it). However it is now clear that there is no mitigation occurring, even though CO2 emissions from the electricity sector have been increasing dramatically throughout the 1990's and continue to increase. So the PPP is not being applied, not even partially.

These developments highlight the fundamental flaws in Upton's decision. It was:

- invalid (and probably unprecedented?) from an RMA perspective to make conditions on one project based on what other projects are doing. Enforceability problems inherently arose

- invalid from the perspective of the FCCC's ultimate objective, because like the RMA the FCCC will require full mitigation

- invalid from the perspective of the FCCC's 2000 target, because the consent's base year was not 1990 (perversely this created an industry-wide incentive to maximise emissions the year before TCC was commissioned)

- naive in accepting the argument that the new gas-fired power station was being installed to improve generation efficiency by displacing thermal stations which (in the NZ context) were normally run as intermediate or peaking stations. Such a project would not be economic. TCC's purpose was to run as base-load - meeting demand growth in the long run (and fuelling it by downward pressure on prices thanks to the availability of Maui take-or-pay gas), and displacing thermal and hydro stations in the short-term to generate a return on investment

- useless if not followed up by a national policy statement to ensure that the same condition is applied to all new power stations. As this has not happened, I am sure the TCC lawyers are having a field day with the question of "fair allocation" of the increase in sector emissions to this or that power station ("not ours, guv'nor - oh no, not ours").

Labour needs to sort this!

The mess that has resulted in electricity sector emissions policy is similar to the mess that resulted from the "Bradford reforms". The discrepancy between the TCC Board of Inquiry's recommendation and Upton's disingenuously unenforceable decision needs to be sorted.

If Labour wants to maintain its environmental credibility, it should put its stamp on this matter.

Furthermore the government, as owner of Genesis in the context of the new Huntly consent, and party to the Maui contracts, needs to ensure its commercial interests are not torpedoing its climate change policy (and NZ's clean green image at the same time).

What to do?

The basic economic principle which needs to be internalised (ie monetised) is that the playing-field needs to be levelled environmentally for renewable energy, in particular in respect of CO2 emissions. A level playing-field is one which the competition is between zero-net and zero-net. At the moment the competition is between gas-fired gross emitters and zero-net renewables like wind power.

To remedy this situation there would seem to be a choice between:

- regulating a zero-net versus zero-net competition (using the PPP to level the playing field), or

- regulating some softer target on fossil-fuel projects (eg stabilise net), in which case some other measure in favour of renewables (eg using TransPower pricing policies to enhance the value of embedded renewable projects) would be needed to offset the remaining tilt in the playing field.

However we would argue that both these approaches can and should be taken. If this seems paradoxical, the resolution to the paradox arises from considering the "marginal economics" issue. "Zero-net" for new projects (which can and should be required under the RMA) corresponds to "stabilise-net" if old projects stay on line, and in the long run "zero-net" as old projects are shut down. Thus there is a perfect match between the RMA and the FCCC's initial and ultimate objectives. This is an example of the principle that economic efficiency is maximised if the correct price signals are present "at the margin".

Thus we believe that the RMA should be used to ensure that new projects fully mitigate their CO2 emissions, as recommended for TCC by the Board of Inquiry. To do this we urge you either to:

- call in the new Huntly and Taranaki and subsequent gas-fired projects or,

- issue a National Policy Statement (NPS) which would cover the new Huntly, Taranaki and Otahuhu C projects and any subsequent ones.

Obviously the NPS would be the preferable course of action. It should as a minimum require full mitigation of new stationary sources of CO2, with no exemptions for shutting down old plant. It could also:

- address moving sources of CO2 (eg vehicles) and other GHG's (eg animals) if possible (the TCC Board of Inquiry thought it was - ref. paragraph 11.22 of their report). For example the oil companies could be required to mitigate increased sales since 1990, farmers could be required to plant a few trees if livestock methane emissions increased (these emissions haven't increased and farmers are planting trees anyway for other reasons)

- allow trading of the obligations on stationary sources with other emitters, or purchasing absorption credits within NZ (the pilot trading option)

- include a sunset clause if a comprehensive international trading system is introduced or if New Zealand's net emissions (including only absorption credits which have been procured on a polluter-pays basis) reduce below our FCCC commitments.

Summary

In summary we urge you to revisit the report of the 1994 Board of Inquiry into the Taranaki Combined Cycle station and to adopt its recommendations rather than the flawed decision of your predecessor. A new Board of Inquiry may be advisable if you believe that developments since 1994 need to be taken into account. If so, we would urge you to call in the Genesis proposal for Huntly, which is disingenuously being called an "energy efficiency enhancement" project, and/or the new Taranaki project. Otherwise we would urge you to issue a National Policy Statement as outlined above.

We will continue with our enterprise in any event because (as set out in the Investment Statement) we believe our design will be competitive in five years time without any "environmental adders". However it has been difficult to establish this enterprise in the last ten years when the general perception among prospective investors has been that the government is not doing anything concrete to level the environmental-economic playing field. Last week's announcements did not provide any reassurance on this point and thus made our job harder. Another glut of gas-fired power funded by environmental free-riding at Otahuhu, Huntly and Stratford could set us back significantly. We want to be able to contribute to a renewable electricity future in New Zealand, and not have to turn to the Australian market with consequent losses to the NZ economy.

I would be pleased to discuss the contents of this letter with you, and would like to have the opportunity to meet for that purpose at your earliest convenience, either in Wellington or Christchurch.

Yours sincerely,

with kind regards,

G M Henderson

DIRECTOR

cc by e-mail: Pete Hodgson, Jeanette Fitzsimons, Tim Barnett

Alistair Wilson (NZWEA), Gary Law (EDS)

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