Pan Industry letter to Ministers regarding policy

1st November 2007

Pan Industry letter to Ministers regarding policy to limit new base-load thermal generation

Hon Dr Michael Cullen
Minister of Finance

Hon Trevor Mallard
Minister for State Owned Enterprises

Hon David Parker
Minister of Energy and Minister for Climate Change Issues

Sent by email

Dear Ministers

The undersigned groups, representing many sectors of the New Zealand economy, are very concerned at the announcement by the Minister of Energy Hon David Parker that new base-load thermal generation is to be limited for the next 10 years as part of the New Zealand Energy Strategy (NZES).

We understand that this has been communicated to the electricity supplier State Owned Enterprises (SOEs) via a letter of instruction. Government is also considering a legislative intervention to apply to all potential new investors in generation.

We have major concerns at both the rationale behind this proposal and the way it is being implemented. This letter is intended to raise those concerns with you as SOE shareholding Ministers and as the Minister responsible for the Energy and Climate Change Issues portfolios.

The rationale behind the proposal is flawed. A just released cost-benefit analysis of the proposal from the Ministry of Economic Development fails to reasonably inform the debate. The key trade-off between the higher costs of the proposal including additional transmission investment and security of supply has not been explained. The robustness of the proposal to a scenario where we achieve very high rates of GDP growth and hence higher energy demand forecasts has not been analysed. We should be aspiring to catch up to better performing countries GDP growth rates and any policy that might be a barrier to that goal, such as limiting new base-load thermal generation, should be discounted.

Less tangible, but nevertheless important, will be the chilling effect the proposal will have on petroleum exploration investment in New Zealand. Even the assumed modest rate of new gas discoveries to continue to meet current non-thermal generation gas demand may be at risk.

The adverse effect on attracting investment is likely to be wider than just the petroleum industry. If this proposal proceeds New Zealand will be the only country in the OECD and probably the world to limit new base-load thermal generation. The international capital market may view the proposal as a significant unpredicted and unjustified intervention and hence will increase our sovereign risk.

This proposal is a very heavy-handed approach when the government intends to introduce a price on green house gases which should incentivise otherwise marginally economic renewables over thermal in any event. Even before the final NZES was announced investors in new base-load thermal power stations would have been carefully considering the timing and extent that a price or tax on carbon emissions would apply against the costs of alternative forms of generation. Suggestions that the proposed limit at least clarifies the policy for the next 10 years are not helpful as the practical result will, in our view, be higher electricity costs and greater risks to security of supply.

Overall we are disappointed at having to raise these concerns publicly in reaction to the final NZES announcements. This proposal wasn’t canvassed in the draft NZES. Had it been then we are sure the factors mentioned above would have been sufficient to deter Ministers from deciding to adopt this proposal.

We are also mindful of the risk of a poor precedent by way of political interference that is at odds with the requirements of the State-Owned Enterprises Act 1986. Any changes to a SOEs commercial direction must be made through a change to its Statement of Corporate Intent and not via a letter of instruction. It is our understanding SOEs are bound to act within the law, and have an explicit statutory obligation to operate as a successful business and to be as profitable and efficient as comparable privately owned businesses. In addition SOEs are under a requirement to exhibit social responsibility.

If the government wants to take the radical step of limiting new base-load thermal generation we believe it should be done through a transparent process, that is the parliamentary process, which should be subject to scrutiny and debate about the costs versus the benefits, and the impacts not just on the electricity sector and electricity consumers, but also the petroleum exploration sector and the economy as a whole.

In our view an appropriate response is to allow the market to decide the appropriate diversity of generation sources with government intervening to fix any clear market failures. The uncertainties and risks related to global greenhouse gas effects are an example of such an externality. One of the things that markets do very well is to assess future risk and to create options to manage that uncertainty. Genesis Energy’s proposal to seek consents for a base-load thermal power station at Rodney is an excellent example of keeping open an option for the future. We believe Genesis Energy should continue to pursue that option because of its importance for the future New Zealand supply portfolio and its particular value to increase diversity of electricity supply to Auckland.

While this letter focuses on the proposed limit on new base-load thermal generation and the impact on prices and security of supply, the primary driver for the proposed policy is climate change. The preceding paragraph put forward a view on how a market approach with interventions to fix market failures is preferred. All of the signatories to this letter have publicly expressed concerns about the recent announcements on the New Zealand Emissions Trading Scheme (ETS). While the ETS is a market approach, it is in the details and timing of the ETS that we have serious reservations.

We would welcome the opportunity to brief you directly on our concerns. To progress a meeting or for any correspondence please contact Ralph Matthes of the Major Electricity Users’ Group who is acting as coordinator on this issue.

Yours faithfully

Michael Barnett
Chief Executive
Auckland Chamber of Commerce
Alasdair Thompson
Chief Executive
Employer's & Manufacturers' Association (Northern)

Catherine Beard
Executive Director
Greenhouse Policy Coalition
Ralph Matthes
Executive Director
Major Electricity Users’ Group

Roger Kerr
Executive Director
New Zealand Business Roundtable
John Pfahlert
Executive Officer
Petroleum Exploration & Production Association of New Zealand

Charles Finny
Chief Executive
Wellington Regional Chamber of Commerce
Peter Bodeker
Chief Executive
Wood Processors Association of New Zealand

Copy to SOE electricity suppliers:

Mr Brian Corban, Chair, Genesis Energy Limited
Mr Wayne Boyd, Chair, Meridian Energy Limited
Ms Carole Durbin, Chair, Mighty River Power Limited

ENDS

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