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I N T E R N AT I O N A L E N E R G Y A G E N C Y

Energy Policies of IEA Countries

New Zealand 2001 Review

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19/03/01

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I N T E R N AT I O N A L E N E R G Y A G E N C Y

Energy Policies of IEA Countries

New Zealand 2001 Review

INTERNATIONAL ENERGY AGENCY 9, rue de la Fédération, 75739 Paris, cedex 15, France

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme.

Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed:

It carries out a comprehensive programme of energy cooperation among twenty-five* of the OECD’s thirty Member countries. The basic aims of the IEA are:

• To achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy;

• To maintain and improve systems for coping with oil supply disruptions; • To promote rational energy policies in a global context through co-operative relations with nonmember countries, industry and international organisations; • To operate a permanent information system on the international oil market; • To improve the world’s energy supply and demand structure by developing alternative energy sources and increasing the efficiency of energy use; • To assist in the integration of environmental and energy policies.

* IEA Member countries: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, the United States. The European Commission also takes part in the work of the IEA.

• To contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and • To contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), the Republic of Korea (12th December 1996) and Slovakia (28th September 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention).

© OECD/IEA, 2001 Applications for permission to reproduce or translate all or part of this publication should be made to: Head of Publications Service, OECD 2, rue André-Pascal, 75775 Paris cedex 16, France.

TABLE OF CONTENTS

1

SUMMARY AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . .

7

2

CONDUCT OF THE REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

3

GENERAL ENERGY POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

4

ENERGY AND THE ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

5

ENERGY EFFICIENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

6

ELECTRICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63

7

OIL, GAS AND COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85

8

ENERGY RESEARCH AND DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . .

109

A

ANNEX: ENERGY BALANCES AND KEY STATISTICAL DATA . . . . . . . . .

117

B

ANNEX: INTERNATIONAL ENERGY AGENCY “SHARED GOALS” . . .

121

C

ANNEX: GLOSSARY AND LIST OF ABBREVIATIONS . . . . . . . . . . . . . . .

123

3

Tables and Figures TABLES 1. 2. 3. 4. 5.

Changes in Generation Capacity since 1992 . . . . . . . . . . . . . . . . . . . . . . . Market Share – Generation and Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Zealand’s Petroleum Reserves as at 1 July 1999 . . . . . . . . . . . . . . . . Oil Consumption in 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hard Coal Exports, 1978 to 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73 74 88 90 104

FIGURES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.

Map of New Zealand – Key Energy Sources . . . . . . . . . . . . . . . . . . . . . . . . Fuel Prices, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Production by Fuel, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primary Energy Supply, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Primary Energy Supply in IEA Countries, 1999 . . . . . . . . . . . . . . . . . Total Final Consumption by Fuel, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . . Total Final Consumption by Sector, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . Final Consumption by Sector and by Fuel, 1973-2020 . . . . . . . . . . . . . . . Carbon Dioxide Emissions by Fuel, 1973-1998 . . . . . . . . . . . . . . . . . . . . . Carbon Dioxide Emissions by Sector, 1973-1998 . . . . . . . . . . . . . . . . . . . Energy-related Carbon Dioxide Emissions per GDP (PPP) in New Zealand and in Other Selected IEA Countries, 1973-2010 . . . . . . . . . . . . . . . . . . . Per Capita Energy Use in New Zealand, 1980-1995 . . . . . . . . . . . . . . . . Energy Use per Capita by Major End-Use . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Intensity in New Zealand and in Other Selected IEA Countries, 1973-2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Intensity by Sector in New Zealand and in Other Selected IEA Countries, 1973-2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity Consumption by Sector, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . Electricity Generation by Fuel, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial Electricity Prices in IEA Countries, 1999 . . . . . . . . . . . . . . . . . . . Domestic Electricity Prices in IEA Countries, 1999 . . . . . . . . . . . . . . . . . . . Electricity Prices in New Zealand and in Other Selected IEA Countries, 1980-1999, Industry Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity Prices in New Zealand and in Other Selected IEA Countries, 1980-1999, Household Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oil Ownership Flows in New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Final Consumption of Oil by Sector, 1973-2020 . . . . . . . . . . . . . . . . . . . . OECD Gasoline Prices and Taxes, 3rd Quarter 2000 . . . . . . . . . . . . . . . . . OECD Automotive Diesel Prices and Taxes, 3rd Quarter 2000 . . . . . . . . . Natural Gas Ownership Flows in New Zealand . . . . . . . . . . . . . . . . . . . . . Maui Contracted Gas Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Natural Gas Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Natural Gas Consumption, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

6 23 24 25 25 27 27 28 35 36 37 45 46 46 47 65 65 75 75 76 76 86 90 92 93 95 96 97 98

30. Gas Prices in New Zealand and in Other Selected IEA Countries, 1980-1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31. Gas Prices in IEA Countries, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32. Coal Ownership Flows in New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33. Coal Consumption by Sector, 1973-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34. Energy Research and Development Public Budget (excluding Nuclear) vs GDP in IEA Countries, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100 101 103 105 111

Note This report was approved for publication in February 2001. Several developments subsequently should be taken into account when reading the report. These include the following. The US position on the Kyoto Protocol which was announced in March is an important consideration for all IEA Member countries in developing energyenvironment policy. The draft National Energy Efficiency and Conservation Strategy was published, as planned, in April 2001. At the time of the review (October 2000), little was known by the review team of the likely contents of the strategy, so the report offers suggestions for consideration that were known by the government at the time the strategy was being formulated. On 15 March 2001, the government announced an enquiry into the gas industry. The terms of reference for the enquiry are consistent with the views expressed in this report which recommends an investigation of the benefits of regulatory reform in the gas industry notwithstanding the small size of the insustry.

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Figure 1 New Zealand – Key Energy Sources

Marsden Point Oil Refinery

AUSTRALIA

Imports

Auckland

NEW ZEALAND

Thermal Power

Huntly Coal Hamilton

Geothermal Power

Petrochemicals

Tasman

North Island Hydro Power

Offshore Gas and Condensate

Onshore Oil and Gas

Sea

Wellington

West Coast Coal Christchurch

Pacific South Island Hydro Power

Ocean

Southland Coal and Lignite

0

Source: Ministry of Economic Development, New Zealand.

6

Km 100

200

1 SUMMARY AND RECOMMENDATIONS SUMMARY New Zealand faces challenges in several major areas of energy policy. Energy policy has been innovative and strongly market-oriented: New Zealand has shown leadership. To date, energy policy has been developed as part of a wider economic development strategy, with a particular focus on regulatory reform. These reforms have possibly contributed to the recent marked improvement in New Zealand’s economic performance, which appears likely to be sustained at a steady rate of economic growth of about 3 per cent per year. Energy policy is now placing more emphasis on energy efficiency and environmental objectives that are primarily the responsibility of the Ministry for the Environment and the Energy Efficiency and Conservation Authority. It will be important to ensure that energy policy continues to achieve economic efficiency objectives as well as environmental objectives,and that the agencies involved continue to work towards common goals. Energy security objectives might be given more attention, in light of both the importance of gas depletion in the energy outlook and the experience of the Auckland power failure in 1998.

Energy-environment policies have made rapid progress. A timetable for ratification of the Kyoto Protocol has been set and there is now an urgent need to agree on a cost-effective package of policies and measures; but crucial decisions may not be possible before the ratification deadline because of the need for international agreement on emissions trading and credits for sinks.

By undertaking to ratify the Kyoto Protocol by mid-2002 New Zealand has taken a significant step ahead of many other IEA countries. New Zealand is the only OECD country to make such a commitment outside the European Union, where individual countries have a degree of protection from adverse impacts as all members must ratify together. New Zealand has a commitment to achieve 1990 level emissions by 20082012. Total greenhouse gas emissions are currently estimated to rise to 9 per cent above 1990 levels by 2008-2012 unless new policies and measures are introduced. In 1999,carbon dioxide emissions,primarily from the energy and transport sectors, were 19 per cent higher than in 1990. Growth in carbon dioxide emissions is primarily from transport and thermal electricity generation. Emissions of methane from agriculture are also important and must be taken into account in developing a cost-effective package of response measures based on emissions from all sectors and all gases. In electricity generation, the share of hydro and gas are currently projected to decline, and the share of coal could rise, even if new gas discoveries are made and 7

additional gas is made available for power generation by closing the existing petrochemical plants. The outcome of gas exploration and development will be a crucial influence on the outlook for the energy sector. The immediate focus of energy-environment policy is on information,advisory and some regulatory energy efficiency measures. These additional measures, agreed over the last year, are almost certainly insufficient to have a major impact, particularly on transport. Further measures are expected to come from the implementation of the National Energy Efficiency and Conservation Strategy and from targeted measures to address carbon dioxide emissions from transport. Further options under consideration include a carbon charge, binding negotiated agreements with industry, and domestic and international trading in emissions permits. International emissions trading and credits for carbon sinks are both crucial to New Zealand’s future approach to emissions reductions. Ratification will be subject to the establishment of a credible set of policies and measures, and full implementation is not expected before the Kyoto Protocol comes into force. Before ratifying the Kyoto Protocol New Zealand should ensure that it has fully analysed the impacts and quantified the costs and benefits of its actions. Work is under way to define the credits attributable to sinks and the scope for emissions trading, where more information is needed. Energy sector emissions are important, and should be addressed, but attention should also be given to emissions from transport and agriculture. The transport sector is responsible for 34 per cent of total carbon dioxide emissions and is the main source of growth in carbon dioxide emissions. Methane and nitrous oxide emissions from agriculture are currently the largest source of greenhouse gas emissions in New Zealand. Electricity generation offers little scope for action because of the already high proportion of generation from hydro and geothermal sources. The share of gas-fired power generation is growing and the share of coal-fired power may also grow if significant new gas reserves are not found. Fundamental change would be required in the transport sector, and possibly in electricity generation, if the Kyoto target is to be achieved by domestic measures alone. Emissions trading and credits for sinks will be crucial,and may possibly be sufficient, to achieve New Zealand’s target. Nonetheless, the government is not expected to rely exclusively on credits from New Zealand’s substantial carbon sinks, and domestic policies and measures are also being applied and further developed. Clearly there is a continuing need to quantify the contribution of each instrument and its cost-effectiveness in deciding the mix of policies and measures to use.

Energy efficiency is a priority for policy development as an early response to the Kyoto commitment.

Energy consumption per capita and per unit of GDP is low because of New Zealand’s mild climate, the relatively low level of GDP per capita, the low share of manufacturing in GDP, and relatively short travel distances. Government “businessas-usual” scenarios to 2020 suggest that the growth rate of energy consumption will 8

average 1.1 per cent assuming GDP growth is 3 per cent per year. These forecasts assume significant changes from the historical trend over the coming 20 years. Stronger measures need to be put in place to improve efficiency if they are to make a substantial contribution to reducing greenhouse gas emissions. A recent IEA study of energy efficiency in New Zealand 1 shows that there is a need to improve the information base to assist in designing cost-effective measures and to monitor progress. The IEA’s report suggests: ■ There is potential for further improvements in domestic space heating, water heating and electrical appliances. Use of space heating is at a low level by international standards. Particular attention should be directed to avoiding a close correlation between growth in GDP and space heating. ■ Per capita energy use for travel is high because of the large number of cars, but is offset by relatively short driving distances and fuel economy. The transport sector is by far the most important area to address because of its contribution to carbon dioxide emissions compared with the energy sector. ■ New Zealand’s manufacturing structure has become more energy-intensive and efficiency of energy use is low. ■ Performance in the commercial and services sector is already good, probably because of the mild climate. The Energy Efficiency and Conservation Act 2000, the establishment of the Energy Efficiency and Conservation Authority (EECA) as a Crown entity, and the requirement to produce a National Energy Efficiency and Conservation Strategy by October 2001 are important developments since the last review. The Minister for Energy is responsible for the strategy which is being developed by EECA and the Ministry for the Environment with wide public and stakeholder input. There will be a process of formal consultation on a draft strategy to be notified by April 2001. The IEA’s report suggests some points that might be taken into account in developing the strategy.

Electricity liberalisation policy has been successful in reducing wholesale prices and in improving efficiency in the sector. Further reforms are designed to strengthen industry self-governance and to bring the benefits of market reform to the retail market. Regulation remains an issue. Care will be required to avoid distortions that may arise from simultaneously seeking to achieve economic, environmental and social goals in the sector. The electricity supply industry in New Zealand is based on large-scale hydro. Also important are gas, geothermal, and coal. 1. “Energy Use and Efficiency in New Zealand in an International Perspective: Comparison of Trends through 1995”, International Energy Agency and the Lawrence Berkeley National Laboratory (1999, unpublished).

9

New Zealand has demonstrated that electricity market liberalisation can be successful in a small country. Since the last review, transmission and distribution have been successfully separated from generation and retailing. The previously dominant generator, Electricity Corporation of New Zealand, has been split into four new state-owned enterprises, one of which (Contact Energy) was subsequently sold. Government shareholdings in generation and retailing remain high, and the government owns Transpower, the transmission network owner and system operator. Further reforms announced in October 2000 are expected to lead to more robust industry self-governance under legislation expected in 2001. The reforms address the failure of previous reforms to reduce retail prices for domestic consumers, and weaknesses in information disclosure as a tool for industry regulation. The reforms have been developed in a manner typical of New Zealand: the government has established broad guidelines for the industry to develop and implement. The guidelines continue the light-handed regulatory regime already established, but they also propose some firm goals that may carry cost. These include offering consumers a tariff with fixed charges limited to 10 per cent of the typical consumer bill, encouraging renewables, and keeping changes in rural tariffs in line with urban tariffs. The government proposes to regulate the monopoly parts of the sector (transmission and distribution) by requiring the Commerce Commission to target under-performing companies and to impose price controls in these cases. Other IEA countries place these activities under the price control of an industry-specific regulator. Critical to acceptance and effectiveness of the new regime will be the implementation of independent monitoring and enforcement. Disposal of the government interest in the electricity sector could be beneficial for the further development of competition.

Gas discoveries are particularly needed to replace depleting supplies from the Maui field. Convergence of the gas and electricity markets may call for market reforms in the gas sector consistent with those in the electricity sector. At present, gas prices are limited by competition with electricity. The small size of the gas sector is not thought to justify possibly costly regulation.

The gas market in New Zealand is small relative to the electricity market, but gas is growing in importance for power generation. Convergence of the electricity and gas markets may give rise to some difficulties, such as reduced inter-fuel competition and cross-subsidisation. This could particularly be the case where single companies have interests in both sectors. Consistency of the gas and electricity regimes will be increasingly important as the markets become more closely integrated. Although the Maui gas field is expected to decline significantly from around 2005, some encouraging discoveries have been made, although these are not as large as 10

Maui. There is a high rate of exploration. Exploration companies are confident that gas supply will be maintained at levels sufficient to meet present demand and future growth. Industry sources have suggested that procedures for issuing petroleum leases could be improved, although they also commend the flexibility of the current system. It would be desirable to review procedures in the context of the wider review of the Minerals Programme for Petroleum required by 2005. Industry proposals for encouraging exploration in remote and hostile offshore areas might also be considered.

Coal may grow in importance for power generation. It is a competitive export industry; government participation in the industry is no longer justified.

New Zealand is a small coal producer and exports 41 per cent of its production. Should new gas supplies not come on stream to replace Maui production, coal could be the least-cost alternative for power generation depending on the competitiveness of new renewables. The government-owned Solid Energy of New Zealand Ltd (formerly Coal Corporation of New Zealand) is the main producer. Earlier attempts to sell the government’s interest in the industry were postponed pending improvements in market conditions. Unlike the electricity sector, there would appear to be no public interest considerations involved in the sale of this asset.

Renewables already play a major role in meeting energy demand. Hydro and geothermal are the basis of electricity production. Further encouragement of renewables should be compatible with energy market reforms.

Renewable energy already accounts for about one-third of total primary energy supply, primarily from hydro and geothermal electricity production, but also from wood. Some proposals were announced in the government’s recent Power Package to complement low-key renewable energy industry facilitation and information provision to consumers. Renewables are nevertheless expected to play a greater part in helping New Zealand reduce greenhouse gas emissions. The National Energy Efficiency and Conservation Strategy is expected to propose further measures to encourage greater uptake of renewable energy. Priority should be given to developing a more commercial focus in the industry, and to developing means for closer integration into electricity markets. A forthcoming “green” pricing initiative is expected to test consumer interest in small-scale renewable energy at a small premium on current prices. 11

Energy research and development efforts could be enhanced by a more focused organisation of government research and development generally.

The government makes a substantial contribution to research and development generally, but energy-related activities are spread across a number of programmes and undertaken in many institutions. The present structure of research and development may impede its full potential contribution to achieving the government’s objectives for the energy sector. There may be a need to increase funding for energy research and development, possibly by transferring funds from areas that now have a lower priority in the present government’s objectives. The time frame for meeting the Kyoto target is relatively short. Consideration might be given to setting energy research and development priorities for the preand post-commitment periods. For the pre-commitment period, in particular, efforts should be made to encourage the take-up of the results of energy research and development.

RECOMMENDATIONS The Government of New Zealand should:

General Energy Policy ■ Ensure effective mechanisms are in place to closely co-ordinate the work of the Ministry of Economic Development, the Ministry for the Environment, and the Energy Efficiency and Conservation Authority, to balance economic, environmental and social goals. Achieving this balance will be challenging because of the determined thrust the government has made into several areas simultaneously: regulatory reform, energy efficiency and ratification of the Kyoto Protocol. Measures might include: • Using an energy scenario agreed by all areas of government involved in energy policy and programme design as a reference point in presenting policy options to the government; • Preparing an annual energy report to encourage departments to work towards a proper balance of economic and environmental policies. ■ Update outlook assumptions in light of recent encouraging gas discoveries and establish a new baseline scenario based on more positive assumptions on gas production. ■ Review policies on security of energy supply generally, noting in particular the impact of depleting oil and gas reserves, and the management of supply security in the energy network industries. 12

Environment ■ Agree on a cost-effective package of policies and measures based on the full range of technically feasible options to achieve New Zealand’s target for greenhouse gas emissions; the package should be agreed with stakeholders and announced before ratifying the Kyoto Protocol. ■ Quantify the contribution to be made by each group of policies and measures (such as for energy efficiency, domestic emissions trading, a carbon charge, negotiated greenhouse agreements, international emissions trading including credits for sinks, and investment in renewable energy). ■ Ensure that methane emissions from agriculture and carbon dioxide emissions from transport are addressed, as well as emissions from the energy sector. ■ Evaluate and announce the impact on the energy sector of the proposed package of climate policies and measures, in particular the impact on international competitiveness; clearly identify policies and measures which require international agreement, such as emissions trading and credits for sinks. ■ Contribute to the international development of a policy on allocating and trading credits for sinks; develop a domestic policy on these issues that addresses the treatment of windfall gains.

End-use Efficiency ■ Support data collection on energy end-use by funding and regulation. ■ As far as possible, quantify the greenhouse gas emissions benefits and associated costs of the components of the National Energy Efficiency and Conservation Strategy. ■ Take particular note of the requirements of the Energy Efficiency and Conservation Act 2000 to establish only targets that are measurable, reasonable and practicable; take into consideration the findings of the IEA’s study on energy efficiency in New Zealand; ensure adequate means to enforce compliance with the strategy. ■ Ensure that the National Energy Efficiency and Conservation Strategy is based on cost-effectiveness and is integrated into existing and proposed policies on competitive energy markets. ■ Give priority in the National Energy Efficiency and Conservation Strategy to improving efficiency of energy use in transport, domestic space heating, water heating and electrical appliances. Energy use in manufacturing should be 13

addressed only after data deficiencies are corrected and the underlying causes of relatively low energy efficiency are better understood. ■ Determine the nominal (test) fuel economy of cars purchased new, and of cars purchased used, to see how the two groups compare; develop policies to encourage purchase of more efficient cars from either group.

Electricity ■ Specify in legislation that the overarching goal of electricity market reform is the creation of the conditions for full and free competition wherever possible. ■ Ensure clarity and co-ordination in the respective roles of the Electricity Governance Board and the Commerce Commission with respect to: • Industry self-governance, including regular consultation between the Minister of Energy and the chairman and members of the Electricity Governance Board to monitor the performance of self-governance; • Promoting competition in the market; • Regulating natural monopoly areas (transmission and distribution); • Achieving energy efficiency and environmental goals at least cost; • Ensuring accountability and transparency through regular public reporting, including by the Commerce Commission on its interpretation of its statutory duties and intended activities in the electricity sector. ■ Ensure that the Commerce Commission has the authority and capacity for evaluating performance and regulating prices of transmission and distribution to support the intention of intervention should self-regulation fail. • Consider the need for establishing an energy group within the Commerce Commission in view of the specialised and on-going task the Commission is likely to face. ■ Monitor performance of the transmission and distribution companies; establish incentives for continuing improvement in transmission and distribution prices and services to electricity consumers. ■ Ensure that consumer representatives participate in the development of final proposals for self-governance of the electricity sector; ensure that domestic, commercial and industrial consumer interests are fully represented on the Electricity Governance Board. ■ Define social goals contained in the Power Package and consider options for achieving these goals with a view to removing any distorting impact on the electricity market of the policy on rural tariffs and arbitrary limits on fixed charges; promote the evolution of cost-reflective pricing for all consumers. 14

■ Consider privatising remaining government interests in the electricity sector to improve credibility and transparency in the market, as well as efficient operation. ■ Monitor measures to allow switching between suppliers in the retail market; ensure genuine customer choice.

Renewables ■ Consider how small-scale renewable sources of energy can efficiently participate in the competitive electricity market. ■ Encourage small-scale renewable energy generators to address problems of reliability and to improve overall operational efficiency through innovations in industry organisation and management.

Oil and Gas ■ Review policy and invite industry submission on the regime necessary to encourage exploration in the Great South Basin and in other remote areas, and on further improving administration of petroleum exploration generally. ■ Investigate the benefits of regulatory reform in the gas market and publish a paper on possible options for reform; in particular, review the implications of the close relationship between the gas and electricity sectors.

Coal ■ Review the rationale for government shareholding in the coal industry; reconsider the postponement of the privatisation of the Coal Corporation of New Zealand Ltd (Solid Energy) in view of recent improvements in international coal prices, but also the generally flat outlook for growth in coal prices expected in the long term.

Research and Development ■ Review the structure of government research and development in light of government priorities for the energy sector; enhance co-ordination of existing energy research and development in supporting the government’s National Energy Efficiency and Conservation Strategy and climate change policy programme. ■ Continue to assess the government’s overall research and development priorities in light of policy goals with a view to reallocating available funds to increase funding for energy research and development. 15

■ Further develop effective mechanisms for monitoring and assessing the performance of government-funded energy research and development to improve energy efficiency and to meet the Kyoto target. ■ Further improve the conditions for commercial application of the results of energy research and development activities; consider, at the outset, alliances of industry/government/universities to develop the knowledge base and technologies of strategic importance.

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2 CONDUCT OF THE REVIEW

REVIEW TEAM The 2001 International Energy Agency (IEA) in-depth review of the energy policies of New Zealand was undertaken by a team of energy policy specialists drawn from the Member countries of the IEA, which visited New Zealand 9 – 13 October 2000 for discussions with government officials, energy suppliers and energy consumers. Information provided during the visit has been supplemented by published sources and IEA statistical analysis of data provided by the New Zealand Ministry of Economic Development. Members of the team were: Taisto Turunen Ministry of Trade and Industry Finland Doug Cooke Department of Industry, Science and Resources Australia Hamid Mohamed Natural Resources Canada Canada Shigetaka Seki Head, Country Studies Division International Energy Agency John Cameron Desk Officer – New Zealand, Country Studies Division International Energy Agency John Cameron managed the review and drafted the report. Monica Petit and Bertrand Sadin prepared the figures. The team held discussions with the following: BP Oil NZ Ltd Consumers Institute of New Zealand Commerce Commission Contact Energy Electricity Networks Association Energy Efficiency and Conservation Authority 17

Energy Federation of New Zealand Foundation for Research, Science and Technology Gas Association of New Zealand Hon. Pete Hodgson, Minister of Energy Major Electricity Users Group M-Co (electricity market administrator) Ministry for the Environment Ministry of Economic Development Ministry of Research, Science and Technology Ministry of Transport Mobil Oil NZ Ltd Natural Gas Corporation NZ Refining Company Ltd Petroleum Exploration Association of New Zealand Shell NZ Ltd Transpower (electricity grid operator) The Treasury The assistance and co-operation of all participants in the review are gratefully acknowledged.

REVIEW CRITERIA The Shared Goals of the IEA,which were adopted by IEA Ministers at their 4 June 1993 meeting, held in Paris, provide the evaluation criteria for in-depth reviews conducted by the Agency. The Shared Goals are set out in Annex B.

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3 GENERAL ENERGY POLICY BACKGROUND New Zealand (in Maori, Aotearoa) comprises two large islands — North Island and South Island — and numerous smaller islands. The area of New Zealand is 270 534 sq km. Associated with New Zealand are Ross Dependency in Antarctica, Niue,Tokelau, and the Cook Islands in the Pacific Ocean. New Zealand is a generally mountainous country with several large regions of plains. New Zealand lies within the temperate zone. The climate is generally mild; seasonal differences are not great. Rainfall is generally moderate to abundant. The population is about 3.8 million (1998 estimate). About 83 per cent of New Zealanders are of European descent and about 9 per cent are Maori. Nearly threequarters of the population, including most Maori, live in North Island. About 85 per cent of the people live in urban areas. About half the population lives in the four largest cities of Auckland (the largest city),Wellington (the capital), Christchurch and Hamilton. New Zealand’s economy has been one of the lower achievers in the OECD. High exposure to international markets is an important influence. From 1992 to 1998, New Zealand experienced relatively rapid economic expansion. The Asia crisis and a severe drought contributed to a contraction of output in 1998. After a strong rebound in growth during 1999, a more gradual recovery now appears under way. Economic growth is expected to stabilise at about 3 per cent in 2002. Crop farming, dairy farming, and the raising of sheep dominate the economy. Forest products are also important. Mineral deposits, including coal, are found throughout the main islands. Natural gas fields are on North Island and off its south-western coast. Exports continue to be dominated by wool, meat and dairy products. The United Kingdom, the United States, Japan and Australia are important trade customers. New Zealand is the largest exporter of dairy products in the world and is second only to Australia in the export of wool. The principal manufactures are meat and dairy products, paper and paper products, chemicals, metal products, machinery, clothing, lumber,electrical machinery,refined petroleum,and printed materials. Manufacturing output has increased steadily, but New Zealand does not have much heavy industry. Auckland is the principal manufacturing centre. New Zealand is nominally governed by a governor-general appointed by the British sovereign. There is an unicameral Parliament, the House of Representatives, with 120 members, elected for three-year terms. The principal government decisionmaking body in New Zealand is the cabinet, which consists of the prime minister and the ministers in charge of portfolios. The two main political parties are the Labour Party and the National Party. Other parties represented in Parliament are the Alliance (a coalition of mainly left-wing parties), New Zealand First (a centrist party), ACT (a right-wing party), and the Green Party. At the last general election, held on 19

27 November 1999, a centre-left minority coalition government was formed from the Labour and Alliance parties. Despite being two seats short of a Parliamentary majority, the new government has a guarantee of support from the Green Party.

GENERAL ENERGY POLICY Objectives New Zealand’s energy policy relies on market mechanisms to an extent greater than many other IEA countries. In the 1980s and 1990s, successive governments deregulated the economy and the energy sector. The last two years, in particular, have seen dramatic changes in the structure of the electricity industry. In relation to electricity,the Minister of Energy has stated: “The government’s objective is to ensure that electricity is delivered in an efficient, reliable and environmentally sustainable manner to all classes of customer” (The Hon. Peter Hodgson, 16 March 2000). In the same speech the minister outlined the government’s general approach: ■ Industry solutions are used where possible and regulatory solutions where necessary. ■ Legislation is kept to a minimum. ■ Where an industry solution is not agreed between the parties, or only reached at the expense of customers, regulation will be used. The minister has also stated that the government is “shifting the policy focus from energy production to more energy efficient consumption” (The Hon. Peter Hodgson, 16 June 2000). The government’s objectives and approach are also revealed in the explanation of the role of the Ministry of Economic Development. The ministry has lead responsibility for developing energy policy. The Ministry of Economic Development was created on 29 February 2000 to play an active role in fostering business and lifting the New Zealand economy 2. The ministry works with Industry New Zealand to deliver industry and regional policy. Industry New Zealand is a Crown entity 3 managed by a private sector board. The ministry facilitates, leads and implements the government’s vision for economic development in New Zealand. The overarching economic goal is to grow an

2. Paul Carpinter, Chief Executive of the Ministry of Economic Development and the Secretary of Economic Development (Ministry of Economic Development website, www.med.govt.nz). 3. Crown entities are public sector organisations that are not public service departments or stateowned enterprises. Other examples include the Human Rights Commission, the Teacher Registration Board, the Civil Aviation Authority, and the new Energy Efficiency and Conservation Authority. Crown entities make up a significant part of the state sector in New Zealand.

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inclusive, innovative economy for the benefit of all. Sustainable development is considered central to the achievement of this goal. Sustainable development is seen in New Zealand as both a statement of objectives and an administrative process: ■ The economic goal is closely related to the government’s social and environmental goals, including improving the skills of New Zealanders; improving the situations of low-income groups in health, education, employment and housing; and protecting the environment. ■ Sustainable development requires greater integration and co-ordination of policymaking and its implementation across social, economic and environmental policy portfolios, and is characterised by greater partnership between local and central governments, Maori tribes and organisations, private industry and other community groups.

Government Energy Organisation The Resources and Networks Branch is one of three policy branches in the Ministry of Economic Development. The branch has the following structure.

Networks Directorate ■ Energy Markets Policy, ■ Energy Markets Information and Services, ■ Telecommunications and Postal Policy. Resources Directorate ■ Environmental Issues, ■ Natural Resources, ■ Radio Spectrum and Broadcasting. The Networks Directorate advises the government on the network industries (energy, telecommunications, postal services), publishes statistics and forecasts, and administers the information disclosure regimes for the network industries. The latter role gives the Networks Directorate access to information relevant to regulation of the industries. The Resources Directorate advises on environmental issues, resource management and conservation from an economic perspective, including climate change, ozone layer protection, trade and the environment, environmental risk management, and industry-specific environmental issues. 21

Crown Minerals, located in the Operations and Risk Management Branch of the ministry, manages New Zealand’s Crown-owned petroleum, natural gas and mineral estates, including attracting investors to New Zealand, the efficient allocation of prospecting, exploration and mining rights, and ensuring a fair financial return to the Crown. On energy matters, the Ministry of Economic Development shares responsibility for advising the government with, among others, the Ministry for the Environment and the Energy Efficiency and Conservation Authority (EECA). EECA has direct access to the minister on energy efficiency and renewable energy issues. There is no industry-specific energy regulator in New Zealand. New Zealand relies to a significant extent on industry self-regulation, subject to general competition law, the threat of intervention if required and monitoring by the Ministry of Economic Development, other departments and interested parties. The Commerce Commission is the general economic regulator. The purpose of the commission is to bring about awareness and acceptance of, and compliance with, the Commerce and Fair Trading Acts, so that consumers and producers benefit from healthy competition. Disclosure of information on industry activities and performance is generally required under legislation.

Energy Prices and Taxation The level of energy prices are illustrated in Figure 2. Consistent with other OECD countries, real energy prices fell for both industry and residential consumers from 1990 to 1996, but higher crude oil prices contributed to increased prices for both industry and residential consumers in 1997, compared with 1996. Between 1997 and 1998, New Zealand’s residential energy prices fell, but industry prices rose. Taxation of energy in New Zealand is primarily to raise revenue for related purposes, such as roads maintenance and meeting the costs of road accidents rather than to achieve energy policy objectives. In general, energy taxes are low. Charges on transport fuels are the main taxes. The only change in energy taxation since the last in-depth review has been minor adjustments to the excise on motor fuels, which was amended on 15 May 1998. A general Goods and Services Tax (GST), excise duties on liquefied petroleum gas (LPG) and fuel oil, and levies on production of gas from discoveries made before 1986 and on production of coal also apply. Sales of all fuels and electricity are subject to the GST. The tax was introduced in 1986 at a rate of 10 per cent and increased in 1989 to 12.5 per cent. Commercial and industrial consumers generally obtain refunds on any GST paid. Residential consumers generally cannot obtain refunds. A carbon charge is being considered as part of a general tax review. 22

Figure 2 Fuel Prices, 1999

Industry Sector 500 Tax Component

US$/toe

400

300

200

100

0

Electricity

Diesel

Light Fuel Oil

High Sulphur Fuel Oil

Natural Gas

Household Sector 1000 Tax Component

US$/toe

800

600

400

200

0 Electricity

Diesel

Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

23

Gasoline

Natural Gas

ENERGY SUPPLY AND DEMAND Primary Energy Supply Annex A contains information on New Zealand’s energy balances and key statistical data. New Zealand is self-sufficient in all forms of energy required for its own use 4, except oil, where the country produces the equivalent of 38 per cent of its requirements 5. In 1999, oil accounted for about 34 per cent of primary energy supply. Nearly one-third of energy supply is accounted for by renewable sources (hydro 11 per cent, geothermal 14 per cent, and wood about 7 per cent). Production of wood for fuel nearly doubled in the period 1998-1999. Gas accounts for over one-quarter of supply (27 per cent), but the share is expected to fall unless new discoveries allow consumption to grow as rapidly as oil. Coal accounts for about 7.5 per cent of energy supply, and its share is expected to grow.

Figure 3 Energy Production by Fuel, 1973-2020

20

15 Oil Mtoe

Gas 10

Coal Renewables Hydro

5

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

Final Energy Consumption Total final energy consumption in 1999 was 12.93 Mtoe, an increase of 5.6 per cent from 1998, reflecting the increase in Gross Domestic Product in 1998-99 of 4.4 per 4. Uranium resources exist, but are not exploited. 5. Using IEA data, which may differ from national data. See Annex A.

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Figure 4 Primary Energy Supply, 1973-2020

25

20 Oil

15 Mtoe

Gas Coal

10

Renewables Hydro

5

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

Figure 5 Total Primary Energy Supply in IEA Countries, 1999 Ireland Luxembourg Netherlands Italy Greece Australia Portugal Denmark Czech Republic United Kingdom Turkey United States Germany Hungary Spain Japan Belgium Austria Canada New Zealand Finland Switzerland Norway France Sweden

0%

20%

40%

60%

Coal

Oil

Gas

Hydro

Nuclear

Other

Source: Energy Balances of OECD Countries, IEA/OECD Paris, 2000.

25

80%

100%

Combustible Renewables

cent. In 1999,oil accounted for 43.1 per cent of final consumption and the proportion is expected to rise to nearly 50 per cent by 2005. Gas accounted for 20.8 per cent of final consumption in 1999,but the proportion is expected to fall sharply by 2005 as gas supplies are depleted. Electricity, which includes hydro, is expected to maintain a steady proportion of final consumption close to its current share of 21.4 per cent. Renewables account for the remainder: wood 5.4 per cent and geothermal 2.6 per cent. The share of geothermal in final consumption is low in comparison with its share in supply (14 per cent in 1999) because most is used to generate electricity. In 1999, industry accounted for about 44 per cent of final energy consumption, and transport accounted for about 37 per cent. Industrial demand for energy in New Zealand rose by nearly 11 per cent in the period 1998-1999. Industrial demand has risen by about 40 per cent since 1990, in part reflecting the growth in co-generation and the switch of Methanex New Zealand’s production from synthetic petrol to methanol, and by over 160 per cent since 1973. Transport demand for energy rose by 2.8 per cent in 1998-99. Transport energy demand rose by just over 34 per cent since 1990, and by over 120 per cent since 1973.

Outlook Energy supply and demand forecasts for New Zealand were published in the Energy Outlook to 2020 (Ministry of Economic Development, February 2000). The composition of New Zealand’s energy supply and demand balance is projected to alter significantly over the next 20 years as demand growth is met and as ■ the relative growth rates for fuels change, ■ the Maui field depletes, ■ the diversity of new electricity generation projects increases, and ■ climate change responses affect energy use. The following forecasts are made on the basis of existing policies: ■ Energy demand will grow by 1.1 per cent per year between 1998 and 2020, lagging growth in GDP of 3 per cent per year. Industrial and commercial sector demand will fall slightly while energy demand for transport will grow by 2 per cent per year and electricity demand by 1.8 per cent per year. ■ Gas consumption will fall by 2.6 per cent per year between 1998 and 2020 as the Maui field is depleted, while consumption of coal will rise by 0.7 per cent per year, and of oil by 1.9 per cent per year. ■ Energy intensity (the ratio of energy use to GDP) will fall from 1.3:1, its average over 25 years to 1998, to 0.37:1. 26

Figure 6 Total Final Consumption by Fuel, 1973-2020 20

15 Oil Mtoe

Gas 10

Renewables Coal Electricity

5

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

Figure 7 Total Final Consumption by Sector, 1973-2020 20

15

Mtoe

Industry Residential

10

Transport Other*

5

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 * includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

27

Figure 8 Final Consumption by Sector and by Fuel, 1973-2020

Industry Sector 6 5

Mtoe

4

Oil Gas Renewables Coal Electricity

3 2 1 0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Residential/Commercial Sector 4

Mtoe

3

Oil Gas Renewables Coal Electricity

2

1

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Transport Sector 8

Mtoe

6

Oil Electricity

4

2

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

28

■ New electricity capacity totalling 2 200 MW will become economic between 2000 and 2020. The most economic capacity is expected to be coal-fired (31 per cent), hydro (18 per cent), gas combined cycle (14 per cent), co-generation (13 per cent), geothermal (12 per cent), wind (7 per cent), and distillate peaking capacity (6 per cent). Hydro and gas are expected to lose market shares as a proportion of generation, while the share of coal will rise from around 5 per cent at present to around 13 per cent in 2020. ■ Carbon dioxide emissions are projected to grow by 1.7 per cent per year between 1998 and 2020 as new thermal capacity comes on line, and consumer demand for energy, and for transport in particular, rises.

REGULATION The energy sector in New Zealand is primarily regulated under the Commerce Act 1986. Self-regulation is undertaken by the industry under the general oversight of the Ministry of Economic Development and the Commerce Commission. The Commerce Act is expected to be amended early in 2001 to strengthen regulation of market dominance (section 36) and mergers (section 47), increase penalties and remedies, update the price control provisions of the act and provide for electricityspecific price control.

Market Dominance Section 36 of the Commerce Act 1986 is the key instrument relied on by competitors of dominant firms to gain access to essential facilities and to compete effectively in related markets. Section 36 is being amended to increase the number of firms and markets subject to scrutiny. Instead of being limited to firms having a dominant or controlling position, this prohibition will in some cases also apply to major participants in an oligopolistic market and to a leading firm in a less concentrated market.

Merger Threshold The current threshold allows the acquisition of a high market share where a single firm has less than a high degree of market control. The new merger threshold will allow the Commerce Commission and the courts to prevent any mergers and business acquisitions that will substantially lessen competition. An example of a proposed merger that may have resulted in significant market power, but not high market share, was the proposal by TransAlta (a generator/retailer) to acquire Contact (a generator/retailer). The market power of that merged entity would have arisen from being a substantial “marginal price setter” in the wholesale electricity market. The merged entity would have set electricity prices regardless of 29

the output and price decisions of more cost-effective electricity producers. A study commissioned by the Ministry of Economic Development indicated that the merger could have led to average electricity prices 5 per cent higher than otherwise over a five-year period. In the event, TransAlta was unsuccessful, being outbid by the US company Edison Mission Energy. Petrol is another example in the energy sector where mergers and take-overs of firms may have significant effects on the level of competition and prices, but would be unlikely to be subject to close scrutiny under the current dominance threshold.

CRITIQUE Several key features need to be taken into consideration in reviewing New Zealand’s energy policy: ■ All aspects of policy are constrained by the small size of the market, and the international exposure of the economy. ■ The country is self-sufficient in all fuels except oil; the Maui gas field is depleting rapidly. ■ Administration of energy policy is shared by several ministries and independent government bodies. ■ There is an overall reliance on the market with a preference for light-handed regulation. ■ Results of electricity market liberalisation have been successful at a wholesale level and for businesses but have not as yet delivered significant benefits to residential consumers. ■ Important policy objectives have been set by the government, seeking progress in several areas simultaneously. These include: • New electricity legislation to follow the June 2000 electricity inquiry; • A national five-year strategy for energy efficiency and renewables to be finalised by 1 October 2001; possible renewal of negotiated greenhouse agreements with industry, which expired in December 2000; • Ratification of the Kyoto Protocol by mid-2002, proposed legislation to ensure achievement of the Kyoto goal, consideration of a carbon charge as part of an overall tax review.

Changing the historic trends in energy supply and demand will be challenging. The rate of growth in energy consumption has generally been higher than the rate of economic growth. In the period 1979-1990, energy consumption grew at a rate of 3.4 per cent per year, more than twice as fast as the rate of growth in GDP of 30

1.6 per cent. In the period 1990-1997, the rate of growth in energy consumption slowed slightly to 3.1 per cent per year, while the rate of economic growth markedly improved to 2.8 per cent per year. These historic trends stand in contrast to the official energy forecasts that expect energy consumption growth to lag considerably behind economic growth. Containing growth in energy consumption while the economy continues to improve will be a major challenge for policy on energy efficiency. The outlook for energy supply and demand is sensitive to a number of influences analysed in New Zealand’s official projections. The projections note that “the depletion of the Maui gas field in around the next ten years represents a unique challenge for the New Zealand energy sector”. Gas availability will affect relative energy prices, the extent to which coal will substitute for gas and, hence, the level of carbon dioxide emissions, and possibly also industry structure. Even in the high gas discovery case, the outlook assumes existing petrochemicals plants will close in New Zealand. But industry views on gas prospectivity are now more favourable than the assumptions made in the projections, and their impact could be more farreaching than expected. At this stage, the Ministry of Economic Development considers that recent discoveries of gas do not alter the long-term outlook for new gas discoveries and production considered in the baseline scenario. Nonetheless, the assumptions on gas might be updated and their impact re-examined.

Policy co-ordination could help avoid unnecessary costs. In common with most IEA countries, New Zealand has rationalised its administration of energy policy, choosing to integrate energy policy with broader industry policy in the Ministry of Economic Development. Also like most other IEA countries, energy policy is now developed in the context of the objective of sustainable development. Working towards sustainable development necessarily requires policy input on environmental, social and regional issues. The Ministry of Economic Development has to work closely with the Ministry for the Environment, and with the strengthened and independent Energy Efficiency and Conservation Authority, to bring about a balance between economic, environmental and social goals. Achieving this balance will be challenging because of the determined thrust the government has made into several areas simultaneously: regulatory reform, energy efficiency and ratification of the Kyoto Protocol. The energy projections prepared by the Ministry of Economic Development provide an analytical framework for the development of energy policy across all subject areas and departments. They should continue to be used as a reference point in presenting policy options to the government.

Regulatory reform in electricity should bring important economic benefits to consumers. Generally speaking, regulatory reform in electricity is regarded as successful in the wholesale market, but has not delivered all its potential benefits to the retail market. The thrust of recent reforms, discussed in Chapter 6, is to correct some failings in the governance of the electricity market and to bring the benefits 31

of competition to the retail market. The gas industry is considered too small to warrant possibly expensive industry regulatory structures, but electricity/gas competition is expected to bring benefits to gas consumers. The OECD Economic Survey of New Zealand 6 pointed to a number of lessons emerging from economic reforms to date: benefits may be slow to emerge, reform must be on-going, and market players must have a sense of stable and predictable rules. These lessons apply as well to the energy sector as to general economic reforms. The recent reforms to the electricity sector will need to bring competitive prices, while also encouraging private investment and innovation in the sector.

Environment goals are likely to become increasingly prominent. The focus of government energy goals has shifted to energy efficiency and the environment. The energy efficiency strategy required by law to be announced in October 2001 (see Chapter 1) and the announced intention to be in a position to ratify the Kyoto Protocol in 2002 (see Chapter 4) are closely related initiatives that could place New Zealand well ahead of many other IEA countries, but could also carry high economic costs. The Energy Efficiency and Conservation Authority has an independent role in the development of policy on energy efficiency and renewables, while the Ministry for the Environment has overall responsibility in these areas and the responsibility for integrating them with climate response policy. The Ministry of Economic Development and the Treasury must ensure that policies in these areas make sense economically. Of course, the ministries work together constructively according to a common set of government policies. The discipline of preparing a single, crossdepartmental, annual energy report would be a means of assisting all players to work towards a proper balance of economic and environmental/efficiency policies.

Energy security remains an important goal. Without detracting from the importance and appropriateness of the government’s priorities, it will also be important not to lose sight of basic energy security goals. The failure of electricity supply in Auckland’s central business district is a reminder of the importance of monitoring performance and maintaining assets to avoid catastrophic infrastructure failures where the unavailability of a fuel, electricity in this case, results in immediate and significant economic losses. The depletion of the Maui gas field is a reminder of a different aspect of energy security with a longer-term time frame where competing fuels could be expected to substitute for gas. In both these areas the government has responded by improving industry governance on the one hand, and in critically examining the relative attractiveness of the petroleum exploration regime on the other.

Social goals should be achieved in an economically efficient manner. The overarching goal of sustainable development potentially introduces several explicit

6. OECD Economic Surveys 1998-1999 – New Zealand (OECD, 1999).

32

social goals into energy policy, for example improving the skills of New Zealanders and improving the situations of low-income groups. The government’s response to the June 2000 report on electricity contains some elements to balance the interests of rural and urban consumers. The IEA’s Shared Goals make no reference to social goals in energy policy, except that they should not be used to distort market prices. Social goals arise in different forms in most IEA countries. In general, the view is taken that they are best achieved by means other than energy policy, for example by income transfer policies in broader taxation or social welfare policies. The underlying principle should be that social goals are achieved in the most costeffective manner without affecting the efficient operation of free energy markets.

RECOMMENDATIONS The Government of New Zealand should: ■ Ensure effective mechanisms are in place to closely co-ordinate the work of the Ministry of Economic Development, the Ministry for the Environment, and the Energy Efficiency and Conservation Authority, to balance economic, environmental and social goals. Achieving this balance will be challenging because of the determined thrust the government has made into several areas simultaneously: regulatory reform, energy efficiency and ratification of the Kyoto Protocol. Measures might include: • Using an energy scenario agreed by all areas of government involved in energy policy and programme design as a reference point in presenting policy options to the government. • Preparing an annual energy report to encourage departments to work towards a proper balance of economic and environmental policies. ■ Update outlook assumptions in light of recent encouraging gas discoveries and establish a new baseline scenario based on more positive assumptions on gas production. ■ Review policies on security of energy supply generally, noting in particular the impact of depleting oil and gas reserves, and the management of supply security in the energy network industries.

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4 ENERGY AND THE ENVIRONMENT GREENHOUSE GAS EMISSIONS Total Emissions Energy use, excluding transport, accounted for 21.3 per cent of New Zealand’s total greenhouse gas emissions in 1998. Transport contributes 15 per cent of total greenhouse gas emissions. Carbon dioxide emissions from transport are growing the most rapidly — by 32 per cent between 1990 and 1998. Ruminant methane and nitrous oxide from agricultural soils comprise the major part of New Zealand’s emissions — 40 per cent and 16 per cent of total greenhouse gas emissions in 1998. Total greenhouse gas emissions are currently estimated to rise to 9 per cent above 1990 levels by 2008-2012 unless new policies and measures are introduced.

Carbon Dioxide Emissions In 1999, carbon dioxide emissions were 19 per cent higher than in 1990. Energy use, including transport, contributes about 90 per cent of New Zealand’s gross man-

Figure 9 Carbon Dioxide Emissions by Fuel, 1973-1998 35

Million tonnes of CO2

30 25 Gas

20

Oil 15

Coal

10 5 0 1975

1980

1985

1990

Source: CO2 Emissions from Fuel Combustion, IEA/OECD Paris, 2000.

35

1995

made carbon dioxide emissions. Emissions from energy sources and industrial processes were about 25.5 Mt in 1990. Over the period 1990 to 2020, carbon dioxide emissions growth is projected to be around 1.7 per cent per year in a baseline scenario 7. To 2020, growth in emissions will come largely from oil use in transport and to a lesser extent electricity generation. Transport sector carbon emissions are forecast to grow from 2.39 Mt of carbon in 1990 (34 per cent of the total) to 5.5 Mt (or over 47 per cent of the total) in 2020. Electricity production emissions are forecast to grow from 0.9 Mt of carbon in 1990 to 2.9 Mt in 2020. These baseline forecasts assume present policy settings. Apart from the usual sensitivity to assumptions on economic growth, energy prices and exchange rates, the energy outlook in New Zealand is also strongly influenced by a number of assumptions peculiar to the country. New gas discoveries will have an important bearing on the outcome since at present depleting gas reserves are expected to result in progressive closure of the petrochemical plants as contract terms finish in 2003, 2005 and 2006/7. Gas prices are also assumed to rise as a result of depleting supplies. If economic supplies of gas continue to be available, then the share of gasfired electricity is expected to grow and new coal-fired plants may not be built. Similarly, Huntly power station is at present assumed to switch exclusively to coalfired generation in the baseline case.

Figure 10 Carbon Dioxide Emissions by Sector, 1973-1998 35 30 Million tonnes of CO2

Other 25

Residential Transport

20

Manuf. Ind. & Construction

15

Other Energy Industries

10

Public Elec. & Heat

5 0 1975

1980

1985

1990

1995

Source: CO2 Emissions from Fuel Combustion, IEA/OECD Paris, 2000.

7. Energy Outlook to 2020, Ministry of Economic Development, New Zealand (February 2000).

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Figure 11 Energy-related Carbon Dioxide Emissions per GDP (PPP) in New Zealand and in Other Selected IEA Countries, 1973-2010 1.2

1.0

0.8

0.6

0.4

0.2 1975

1980

New Zealand

1985

1990

Australia

1995 Canada

2000

2005

Japan

2010 IEA*

* excluding Norway from 1999 onwards. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000; National Accounts of OECD Countries, OECD Paris, 2000; and country submissions.

Current Policies New Zealand ratified the UN Framework Convention on Climate Change in September 1993 and submitted its national communication, entitled Climate Change: The New Zealand Response (September 1994). This first communication established energy efficiency policy as the main instrument to reach New Zealand’s emission reduction target. The second national communication, entitled Climate Change: The New Zealand Response II (June 1997), provided a progress report on the measures New Zealand had taken to meet its commitment since the end of 1994. New Zealand signed the Kyoto Protocol 8 in May 1998. On 8 May 2000, the prime minister announced that the government aims to ratify the Kyoto Protocol by mid2002. The government is committed to passing the legislation needed to enable New Zealand to ratify the Protocol by this date. New Zealand’s target under the

8. The full text of the Kyoto Protocol can be found on the UNFCC website, www.unfcc.de.

37

Protocol is to hold emissions of six greenhouse gases 9, on average, at 1990 levels between 2008 and 2012. To achieve this goal, New Zealand intends either reducing emissions and/or purchasing permits to offset any emissions that exceed 1990 levels.

Existing Legislative and Regulatory Framework The Resource Management Act 1991 currently provides the basis for local and regional governments’ response to climate change through granting resource consents and developing plans and policies. The government does not consider the use of this act appropriate for meeting international obligations and the act is currently under review. The Energy Efficiency and Conservation Act 2000 provides a legislative basis for promoting energy efficiency and renewable energy and requires development of a National Energy Efficiency and Conservation Strategy. The act also established the Energy Efficiency and Conservation Authority as a stand-alone Crown entity with a statutory role to encourage, promote and support energy efficiency, energy conservation and the use of renewable energy. The budget for the new authority has recently been increased. The energy efficiency regulations to the Building Act 1991, the “Building Code”, have been enhanced. Insulation requirements in the cooler parts of the country have been raised, maximum heat loss levels for hot water systems have been set, and limits placed on building heat loss and on lighting levels in commercial buildings. It is estimated that these measures will result in cumulative carbon dioxide reductions of 1.5 million tonnes, after 15 years of implementation 10. Addtionally, in mid-2000, the government approved a process to apply mandatory energy efficiency labelling and standards for selected product classes.

Negotiated Greenhouse Agreements In July 1994, as part of its CO2 Policy Package, the government announced a programme of negotiated greenhouse agreements. The agreements are not legally binding and there is no penalty for under-achieving, but there is an expectation that they will be renegotiated if annual reporting shows a major variation from target levels. The evidence from companies so far is that they have been conservative in 9. Greenhouse gases contribute to the warming of the Earth’s surface. The Kyoto Protocol (December 1997) defines commitments to reduce emissions of the following six greenhouse gases: CO2 (carbon dioxide), CH4 (methane), N2O (nitrous oxide), HFCs (hydrofluorocarbons), PFCs (perfluorocarbons), and SF6 (sulphur hexafluoride). On a global level, CO2 is the single most important anthropogenic greenhouse gas. Fossil fuel production and use represent about three-quarters of CO2 emissions from human activity. Other energy-related greenhouse gases include CH4 from the production, transportation and use of natural gas and coal, and N2O primarily from fuel wood use. The three other greenhouse gases covered by the Kyoto Protocol are not energy-related: HFCs (used as alternatives to ozone-depleting substances, such as coolants), PFCs (from aluminium smelters), and SF6 (used in insulators for electrical transmission and distribution systems). 10. To place this in context, the estimated savings would represent about 1.5 per cent of the projected growth in carbon dioxide emissions (above 1990 levels) during the commitment period.

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setting their targets for the year 2000, and that several are likely to achieve greater abatement than they have targeted. Twenty-four negotiated greenhouse agreements to reduce emissions of carbon dioxide were signed between September 1995 and March 1998, covering the majority of New Zealand’s largest emitters which create over 40 per cent of New Zealand’s total carbon dioxide output 11. The Ministry of Economic Development implements and monitors the agreements. The Energy Efficiency and Conservation Authority (EECA) developed the methodology for the agreements in consultation with industry particpants. They are audited and monitored independently, and the results are reported annually. These agreements will terminate by 30 June 2001. Options for follow-on agreements are under consideration. Most companies have focused on increased energy efficiency of end-use and generation, particularly co-generation, to reduce their emissions. Growth in emissions from firms covered by negotiated greenhouse agreements is reported to be significantly lower than in the rest of the economy, but the results elsewhere in the economy are influenced by the strong growth in transport emissions. A February 1997 EECA study suggested that, while emissions across the whole economy were projected to increase by 29 per cent from 1990 to 2000, emissions from the 19 industrial agreements in place by then (excluding the former ECNZ) were projected to grow by 9 per cent in the same period. This increase is despite a 25.5 per cent projected increase in aggregate production for the same period. Additionally, the evidence suggests that most of the 9 per cent emissions growth (8.5 per cent) occurred in the first half of 1995. For these signatories, the aggregate projected carbon dioxide abatement is 15.7 per cent.

Transport There has been increased funding and changes to the funding system for public transport, which are intended to reduce private vehicle travel and emissions from land transport.

Policies under Development The government has initiated a broad-based policy development programme to examine how best to provide the framework to ratify the Kyoto Protocol. This programme involves a wide range of government departments including Environment, Economic Development, Agriculture and Forestry, Transport, Research, Science and Technology, Maori Development and the Treasury. The options being examined include price mechanisms, such as emissions trading and carbon charges, and non-price measures, such as improved energy efficiency.

11. The agreement with former state-owned electricity company ECNZ has been followed through by its successor companies, Genesis, Meridian and Mighty River.

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Funding of over NZ$ 2 million 12 per annum has been provided to ensure that New Zealand meets its commitments. Officials have made the following proposals to the government for new or revised response measures: ■ Extended government Energy Efficiency Leadership Programme, including more than the present 34 government agencies participating, to include hospitals, schools,defence,etc. Stronger commitments would be sought from larger agencies, possibly through formal negotiated agreements. Targets might be set, for example 15 per cent energy savings by 2005 over 2000, equivalent to 100 000 tonnes of carbon dioxide or NZ$ 14 million. The proposal would require investment of NZ$ 30-40 million. The programme is seen as the basis for seeking similar commitments from the private sector. ■ Eco-efficient vehicles. Funding the additional cost of purchasing fuel-efficient vehicles for the government fleet. As part of the programme, best practice efficiency guidelines would be developed for the government fleet covering benchmarking, monitoring and reporting. Officials proposed investigation of road user charges to replace excise tax on CNG and LPG vehicles. ■ Expand the product coverage for energy efficiency standards and labelling. ■ Enhance the existing voluntary agreements through a new programme of binding negotiated greenhouse agreements with key emitters and sectors. The aim would be to expand the coverage of emitters and gases and could include mechanisms to allow cross-business projects and emission “bubbles” across a number of emitters. The agreements might negotiate more challenging sector commitments and improve monitoring and transparency. ■ Transport measures, including: • Implementation of the Vehicle Fleet Emissions Control Strategy, which includes techniques for assessing the emissions impact of traffic management, a requirement for all imported vehicles to meet emissions standards of the country of manufacture, and a review of petroleum product specifications to ensure available products match vehicle technologies; • Vehicle fleet fuel modelling as a means of selecting effective measures. Preliminary work has shown that expected improvements in the technical performance of the vehicle fleet over time, and the use of road space demand management measures, could lead to considerable reductions in carbon dioxide emissions from the land transport sector. ■ Transport strategy, possibly including transport environmental objectives and performance targets, some of which may relate to reducing greenhouse gas emissions.

12. On average in 2000, NZ$ 1 = US$ 0.451, NZ$ 1 = € 0.491.

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■ Public education on energy efficiency actions and choices, primarily in the residential and business sectors.

Economic Instruments New Zealand recognises that a carbon charge would introduce a price signal to influence the use of fossil fuels and products. If a decision is taken to include a carbon charge in the package of measures, it would be considered in the context of a wider Tax Review now under way. Tax changes emerging from the review would not be implemented until after the 2002 general election. Officials have advised the government that emissions trading is inevitable and that preparations should be made to participate in an international regime. A domestic trading system is also considered plausible, and would complement an international regime to lower the overall cost to New Zealand of meeting the Kyoto target. The government has also been advised to make all or most of the value of sinks allowed to New Zealand under the Kyoto Protocol to be tradeable in an international emissions trading system. This is considered necessary to ensure emitters in New Zealand take responsibility for their emissions at an internationally determined cost, and to ensure those involved in sink activities are recognised.

OTHER ENERGY-RELATED ENVIRONMENTAL REGULATIONS AND MEASURES The environmental impacts of energy production and use are primarily managed through the Resource Management Act 1991. This act promotes sustainable management of natural and physical resources. The act is implemented by local authorities through national and regional policy statements and regional and district plans. Maximum acceptable levels of pollution are determined and enforced at the level of regional and local government. Non-renewable resources are explicitly excluded from the sustainable usage provisions of the act. The act allows local authorities the discretion to require resource consents to take account of contaminant discharges into the air. While greenhouse gases fall within the definition of “contaminants”, it has been rare for local authorities to require that resource consents take account of carbon dioxide emissions with the notable exception of the gas combined-cycle electricity station in Taranaki. The Ministry for the Environment monitors environmental impacts at the national level. The ministry is currently developing a comprehensive package of environmental performance indicators including those for air, such as particulate matter and sulphur dioxide, climate change and energy. 41

CRITIQUE Ratification of Kyoto is a major step. By undertaking to ratify the Kyoto Protocol by mid-2002 New Zealand has taken a dramatic step ahead of other IEA countries. New Zealand is the only OECD country to make such a commitment outside the EU, where individual countries have a degree of protection from adverse impacts as all members must ratify together.

All sectors must contribute to meeting New Zealand’s greenhouse target. Unlike most other IEA countries, agriculture is the main contributor to greenhouse gas emissions in New Zealand. Any response policy must obviously be based on a fair and cost-effective mitigation strategy in all contributing sectors. This poses some challenges for New Zealand. While opportunities exist for reductions in emissions from agriculture, current understanding of ways to achieve emissions reductions from the major sources – methane from ruminant animals and nitrous oxides from soils – is limited. Scientific research into opportunities for reductions from ruminants is regarded as preliminary, and from soils as being at an even earlier stage. Significant progress has been achieved in recent years and New Zealand plans to step up its work in these areas 13. New Zealand does not expect the transport sector to respond readily, at least in the short term, to price measures such as a carbon charge, because of engrained behavioural patterns and the frequent lack of ready substitutes for vehicle travel. Moreover, because of the low price elasticity of demand for transport (responsiveness of fuel consumption decisions to a change in price of fuel), a large welfare loss is expected if blunt measures are taken to force a rapid change in demand. Road management measures will be relied on to reduce passenger and freight transport sector fuel demand over time. These factors – uncertain knowledge in the agriculture sector, expectations of a slow rate of response in transport coupled with possible high costs, and caution about a carbon charge – are likely to place increased pressure on the energy sector to contribute significantly and quickly to meeting New Zealand’s Kyoto commitment. Care will be necessary to ensure an equitable and economic outcome for the economy as a whole. The energy sector, excluding transport, should not bear a disproportionate share of the burden of meeting New Zealand’s Kyoto target. Compared with most other countries, electricity generation contributes very little to greenhouse gases because of the already high proportion of generation from hydro and geothermal sources. Emissions from electricity generation could rise because the share of hydro and gas are currently projected to decline, and the share of coal could rise, but at present the focus of attention should be on agriculture and transport. Prospects for gas exploration and development are crucial for assessing the outlook for the energy sector, but no matter what gas discoveries might

13. Cabinet Papers (joint submission by the Minister of Energy and the Minister for the Environment), released by the Minister of Energy, 30 August 2000.

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reasonably be assumed, options to reduce emissions through changes in energy supply are limited.

Domestic economic instruments are not expected to be used in the immediate term, although they are still being actively considered, but stronger energy efficiency measures will almost certainly be necessary. For the time being, therefore, the focus of government attention is on information, advisory and some regulatory energy efficiency measures. More complex economic and regulatory measures are either seen as matters for consideration without commitment as yet, such as a carbon charge, or subject to the outcome of international agreement, such as emissions trading and sinks. Measures agreed to date include amendments to the Building Code, energy performance standards for lighting and appliances, and public education. Businesses are being encouraged to investigate opportunities that could arise, and voluntary agreements may be enhanced, possibly with higher standards of performance. Funding for public transport has been increased. These measures are worthwhile, but almost certainly insufficient to have an impact on transport, where the principal problem lies.

International agreement on emissions trading and sinks are vital to New Zealand’s approach. New Zealand could probably achieve its Kyoto target using emissions trading and credits for sinks alone, international agreement on these measures permitting. Although the government nonetheless does not wish to focus on these measures alone, particular note should be made of progress in international negotiations on the role to be played by emissions trading and sinks in settling a final package of policies and measures. Before ratifying the Kyoto Protocol, New Zealand should ensure that it has fully analysed the impacts and quantified the costs and benefits of its actions. More information is needed on the credits attributable to sinks and the scope for emissions trading. The preliminary course of action advised by officials, to make the value of sinks tradeable, is appropriate. Ensuring those who participate in sink activity are rewarded by the emissions market is consistent with such a market-oriented approach, but care will be needed to design a policy that equitably deals with windfall gains.

RECOMMENDATIONS The Government of New Zealand should: ■ Agree on a cost-effective package of policies and measures based on the full range of technically feasible options to achieve New Zealand’s target for greenhouse gas emissions; the package should be agreed with stakeholders and announced before ratifying the Kyoto Protocol. 43

■ Quantify the contribution to be made by each group of policies and measures (such as for energy efficiency, domestic emissions trading, a carbon charge, negotiated greenhouse agreements, international emissions trading including credits for sinks, and investment in renewable energy). ■ Ensure that methane emissions from agriculture and carbon dioxide emissions from transport are addressed, as well as emissions from the energy sector. ■ Evaluate and announce the impact on the energy sector of the proposed package of climate policies and measures, in particular the impact on international competitiveness; clearly identify policies and measures which require international agreement, such as emissions trading and credits for sinks. ■ Contribute to the international development of a policy on allocating and trading credits for sinks; develop a domestic policy on these issues that addresses the treatment of windfall gains.

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5 ENERGY EFFICIENCY TRENDS IN ENERGY USE Energy Consumption Compared with other IEA countries, the residential and commercial sectors consume a relatively small share of energy in New Zealand. There has been steady growth in consumption by manufacturing, from about a third of all energy use in 1977 to over 40 per cent currently. Travel energy use has also expanded.

Energy Intensity Energy intensity (energy use per unit of output) in New Zealand was stable during the mid-to late 1990s after steadily rising in the 1980s. Unlike other IEA countries and the IEA average shown in Figure 14, energy intensity began to rise in the late 1990s. Figure 15 shows that rise is a result of movements in the transport and industry sectors, while energy intensity in the residential/commercial sector has been stable. Figure 12 Per Capita Energy Use in New Zealand, 1980-1995 120

GJ/Capita Final Energy

100 80 60 40 20 0

1980

1982

1984

1986

1988

1990

1992

1994

Freight

Travel

Residential

Services/Commercial

Other Industries*

Manufacturing

* agriculture, mining and construction. Source: “Energy Use and Efficiency in New Zealand in an International Perspective: Comparison of Trends through 1995”, International Energy Agency and the Lawrence Berkeley National Laboratory (1999, unpublished).

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Figure 13 Energy Use per Capita by Major End-Use

GJ/Capita Final Energy

250 200 150 100 50 0

France, Italy, Germany, United Kingdom 1993/94

Japan 1994

United States 1994

Netherlands 1994

Australia 1994

Canada 1994

Other Travel Commercial/ Services Fuel Other Manufacturing

Cars Other Home Heavy Manufacturing Other Freight

New Zealand 1994/95

Home Heat Commercial/ Services Electricity Trucks

Source: “Energy Use and Efficiency in New Zealand in an International Perspective: Comparison of Trends through 1995”, International Energy Agency and the Lawrence Berkeley National Laboratory (1999, unpublished).

Figure 14 Energy Intensity in New Zealand and in Other Selected IEA Countries, 1973-2010 (Toe per thousand US$ at 1990 prices and purchasing power parities) 0.60 0.50 0.40 0.30 0.20 0.10 1975

1980

New Zealand

1985

1990

Australia

1995 Canada

2000

2005

Japan

2010 IEA*

* excluding Norway from 2000 onwards. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000; National Accounts of OECD Countries, OECD Paris, 2000; and country submissions.

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Figure 15 Energy Intensity by Sector in New Zealand and in Other Selected IEA Countries, 1973-2010 (Toe per thousand US$ at 1990 prices and purchasing power parities) Industry Sector 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 1975

1980

1985

1990

1995

2000

2005

2010

Residential/Commercial Sector 0.16 0.14 0.12

New Zealand Australia Canada Japan IEA*

0.10 0.08 0.06 0.04 0.02 1975

1980

1985

1990

1995

2000

2005

2010

2000

2005

2010

Transport Sector 0.12 0.10 0.08 0.06 0.04 0.02 1975

1980

1985

1990

1995

* excluding Norway and Spain from 1999 onwards. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000; National Accounts of OECD Countries, OECD Paris, 2000; and country submissions.

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Some of the key factors affecting New Zealand’s energy intensity include the following: ■ Space heating intensity in residences is generally lower than in other IEA countries, partly because of the temperate climate. ■ Commercial sector fuel intensity is lower than the average, whether compared with floor area or with output from this sector. Electricity intensity is average, however. The lower fuel intensity is largely a result of the lack of space heating, and the use of electric heating and water heating, as well as the higher use of lighting in South Island, where winters are darker. ■ Branch by branch, New Zealand’s manufacturing energy intensities are above average. Some of this effect is due to the high concentration of raw materials within each branch, but much is because of higher use of energy per unit of output for specific products. ■ Passenger transport is more energy-intensive than travel in Europe, but less so than in Australia or North America. ■ New Zealand’s commercial sector electricity intensity is higher than the average for IEA countries. ■ Freight transport is about average in energy intensity. The above-average share of trucking in freight transport is offset by slightly lower than average trucking energy intensity.

ENERGY EFFICIENCY POLICIES14 Energy Efficiency and Conservation Authority (EECA) EECA was established in October 1992 as an arm of government, accountable for its outputs through the Ministry of Commerce. Since 1 July 2000, EECA has operated as an independent government agency under the Energy Efficiency and Conservation Act 2000. It is governed by a board that reports directly to the Minister of Energy. The Ministry for the Environment has responsibility to provide primary policy advice to government on energy efficiency and related issues. EECA has a

14. The IEA publishes summaries of Member country energy policies in IEA Energy Efficiency Update (www.iea.org/pubs/newslett/eneeff).

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complementary policy-advising role informed by its own operational knowledge and expertise. In 1994, the government launched a long-term Energy Efficiency Strategy focusing attention on a range of practical measures aimed at increasing efficiency in selected end-uses of energy. Initial funding for the strategy ended on 1 July 1997, although many activities started during this early phase have subsequently been integrated into EECA’s ongoing work programme. With the expiry of funding for the Energy Efficiency Strategy, government funding for EECA fell from 1997 to 1999. This downward trend has since been reversed. As part of the 2000/2001 budget, the government has boosted the budget of the Energy Efficiency and Conservation Authority by extra funding of NZ$ 3 million per year from 2000/01. The new funds raise the EECA operating budget to NZ$ 10.7 million. The extra funding will initially support: ■ Additional grants to upgrade low-income housing with energy efficient devices. ■ The development of minimum energy performance standards and labelling for energy using appliances. ■ The development of a national strategy for energy use. The government allocated a further NZ$ 3 million per year to fund energy efficiency and renewable energy programmes largely through EECA but also through the Ministry for the Environment. In the first year, NZ$ 400 000 is to be used to fund consultation and communication on climate change. In 1998-99, EECA streamlined its activities into the following four areas: ■ Energy-Wise Business – to provide companies with tailored information services, publications, forums, seminars, field support and annual awards for outstanding energy efficiency performance. ■ Energy-Wise Homes — to administer the Energy Saver Fund for the installation of household energy efficiency measures and to encourage improvement in the energy efficiency of whiteware products and buildings. ■ Energy-Wise Information – to keep a range of target audiences informed on energy efficiency and new renewable energy developments through publications such as “Energy–Wise News” and “EECA Update”; the EECA website (www.eeca.govt.nz); e-mail newsletters; monitoring and analysis publications; technical publications and seminars. ■ Energy-Wise Government — to service the energy efficiency needs of a range of national and local government organisations and client groups, for example through the Crown Loan Scheme to fund energy efficiency projects in the public 49

sector; Government Leadership Scheme; the Energy-Wise Councils Partnership targeting the local government sector, and provision of advice to government processes including the climate change policy debate.

Energy Efficiency and Conservation Act The Energy Efficiency and Conservation Act entered into force on 1 July 2000, as part of the government’s Kyoto response. The act provides the legislative basis for promoting energy efficiency and renewable energy, including: ■ The promotion of energy efficiency, energy conservation, and the use of renewable energy. The Minister of Energy is made responsible for developing the government’s policy on the promotion of these matters. ■ The minister must develop a National Energy Efficiency and Conservation Strategy. ■ The minister is also made responsible for: • Promoting public awareness of the importance of energy efficiency and conservation and the use of renewable energy, and practices and technologies that further these matters. • Monitoring and reviewing the state of energy efficiency, energy conservation, and renewable energy use. ■ The establishment of the Energy Efficiency and Conservation Authority as a stand-alone Crown entity from 1 July 2000. It has a statutory role to encourage, promote and support energy efficiency, energy conservation and the use of renewable energy. ■ A regulations-making power, for example for minimum energy performance standards and energy efficiency labelling, and powers to monitor and review the state of energy efficiency, energy conservation and renewable energy use, and to promote public awareness of the importance of energy efficiency and conservation and the use of renewable energy, and practices and technologies that further these matters.

National Energy Efficiency and Conservation Strategy A draft National Energy Efficiency and Conservation Strategy has to be prepared and publicly released by 1 April 2001 and a final strategy issued by 1 October 2001. The strategy will establish objectives, targets and policies on energy efficiency, energy conservation and the use of renewable sources of energy. It is also expected to enable the government to quantify how these technologies and measures will help New Zealand to meet its obligations under the Kyoto Protocol. Development of the strategy is being led by EECA, in conjunction with the Ministry for the Environment. 50

ENERGY EFFICIENCY PROGRAMMES Residential Sector Building Code In 2000, regulations were passed enhancing energy efficiency provisions under the Building Code by increasing insulation requirements in the cooler parts of the country, setting maximum heat loss levels for hot water systems, and setting limits on heat losses and lighting levels in commercial buildings. These measures are estimated to result in cumulative reductions in carbon dioxide of 1.5 million tonnes, after 15 years.

Standards and Labelling The government has approved mandatory energy performance standards and energy performance labelling for selected electrical products. Additional classes of products are under investigation. The combined scheme will be closely aligned with Australian requirements. The necessary technical standards are largely in place.

Energy Saver Fund The Energy Saver Fund was established in 1995, administered by EECA, to promote residential energy efficiency activities. Grants are allocated by competitive tender to help finance practical measures designed to improve the efficient use of energy in homes. Projects must address market barriers, other than cost, to energy efficiency improvements, such as lack of information. Projects must also result in the more sustainable provision of energy efficiency services. Funding for the programme was judged to be rising faster than the developing energy efficiency services market could absorb, and funding has subsequently been reduced. Grants totalling NZ$ 1.85 million were allocated during 1996/97 and nearly NZ$ 4 million was allocated in 1997/98. The budget for 1998/99 was NZ$ 2.5 million. Additional funding of NZ$ 1.15 million per year was approved for financial year 2000/01 onwards for residential sector initiatives including the Energy Saver Fund, Maori housing, pilot residential schemes for state housing as well as other energy/community-based measures. This brought to NZ$ 2 million per year the total to be allocated to such measures. EECA also manages a NZ$ 1.1 million fund dedicated to a particular Maori healthy housing scheme with a strong energy efficiency and employment focus. Over the first five years of operation, the Energy Saver Fund made grants to improve energy efficiency in some 49 000 households, saving consumers in the order of NZ$ 50 million over the lifetime of the measures and around 300 000 tonnes of carbon dioxide. The total cost per kWh of the energy savings made was under four cents – very much less than the typical retail price of electricity. The cost to government to achieve these savings is estimated by EECA to be under two cents per kWh. Possible changes to the future targeting and operation of the programme may be made as the National Energy Efficiency and Conservation Strategy is developed. 51

Public Sector The Government Leadership Programme was established in 1993 to encourage improvements in energy efficiency in the public sector. Under the programme Memorandums of Understanding are made with individual government bodies, and funding provided for investments to improve energy efficiency, to provide training and advice, and to encourage energy cost accountability and annual monitoring of energy performance outcomes. Under the Crown Energy Efficiency Loan Scheme, a further NZ$ 1 million will be spent during 2000/01 financial year in the wider public sector to encourage the application of energy efficiency projects. Annual energy savings resulting from these investments are estimated at NZ$ 4 million and reductions in carbon dioxide amount to some 22 000 tonnes per year. In November 2000, the government announced that it would extend and strengthen its energy efficiency leadership commitments. The voluntary scheme will be expanded to include the wider state sector, with emphasis on agencies spending over NZ$ 100 000 a year on energy. An energy saving goal of 15 per cent by 2005 has been set, equivalent to energy savings of NZ$ 14 million and carbon dioxide savings of 100 000 tonnes a year. Local government has been targeted through the Energy-Wise Councils programme. Priority has been given to information dissemination (newsletters, seminars, forums), and better monitoring, reporting, benchmarking and ranking among member councils. Special efficiency projects in the areas of street-lighting, water and sewage pumping are also being given priority.

Commercial and Industry Sectors Negotiated greenhouse agreements play an important role in promoting energy efficiency in the industry sector. This programme is described in Chapter 4. EECA activities in this sector are focused on: ■ Running the Energy-Wise Companies Campaign and the development of a successor to the campaign. ■ Providing support to the energy services industry. ■ Running an energy audit incentive programme. The Energy-Wise Companies Campaign was launched in August 1994 to promote commitment to energy efficiency at the top management level within companies. The main features of the campaign are: ■ A public commitment to energy management by company chief executives and managing directors through endorsement of a common charter of key principles, 52

■ Endorsement of the campaign by the Minister for Energy and the Minister for the Environment. ■ Support from, and participation by, energy suppliers. ■ Support from major business, consumer and environmental organisations. ■ Practical information, and advisory and secretariat support from EECA. ■ Annual awards to companies making the most creative and significant improvements in energy efficiency. Over 600 of the country’s largest companies are now actively committed to the campaign. They are implementing energy management practices and drawing support from EECA’s best-practice advisers and technical literature. A related programme will initially target government agencies. EECA is working through the Energy Management Association to establish accreditation for auditors and to run seminars on new technologies. EECA maintains a directory of energy service and product suppliers as well as a database of consultants. The Audit Incentive programme provides funding (NZ$ 150 000 for 2000/01) to encourage energy audits in the commercial and industrial sectors, as well as the public sector.

Transport New Zealand has approximately 2.2 million passenger cars and 400 000 dieselpowered commercial vehicles. The majority of older cars were imported from Japan or assembled in New Zealand. Car assembly ceased in New Zealand about three years ago and most new cars are now imported from Japan and Europe. Most new cars are petrol-powered, but there is a trend to dieselpowered cars and four-wheel-drive recreational vehicles. About 67 per cent of small commercial vehicles, and virtually all medium and heavy-duty trucks, are dieselpowered. Since 1986, imports of used vehicles from Japan have been permitted. More than 60 per cent of passenger cars and small commercial vehicles sold in New Zealand for the first time are now used Japanese vehicles. On average, they are about seven years old when they arrive. This has had several important effects: ■ Cars are now more affordable. Used cars were expensive before 1986. ■ Scrapping of cars from the 1960s and 1970s has increased, but cars manufactured in the 1980s are largely unaffected. 53

■ The proportion of newer cars, less than five years old, is lower than in any other OECD country. Cars less than five years old are mostly company cars, with engine capacities two litres or greater. ■ There is a population bulge of cars between seven and twelve years old. ■ The total number of cars per head has increased.

Modelling The Ministry of Transport is currently developing a quantitative model to evaluate the potential for greenhouse gas reductions of a wide range of land transport policy options. Each measure will be assessed for its potential to reduce greenhouse gases, its cost-effectiveness,the way in which it could be introduced,and the lead times required. A report with specific policy recommendations is expected before the end of 2001.

Road Reform In December 1998 the government released a discussion document which proposed wide-ranging reforms for the management of the country’s roads. The impact of proposed fuel and road pricing could bring benefits for energy efficiency and the environment through encouraging use of other transport modes and reduced demand for road transport generally.

Vehicle Fleet Emissions Control Strategy The Ministry of Transport’s Vehicle Fleet Emissions Control Strategy proposes a range of initiatives to manage the local air quality impacts of vehicle emissions. The policies proposed are expected to also lead to energy efficiency improvements and carbon dioxide savings.

Role of EECA EECA has given priority to: ■ Demand management initiatives such as “Rideshare”software,education programmes, and information services through local government. ■ Energy-efficient modes including walking and cycling. ■ Information on vehicle fuel efficiency. ■ Government leadership initiatives on use of eco-efficient vehicles. A fund to promote use of eco-efficient vehicles in fleets is under investigation. ■ The Sustainable Transport Network newsletter and seminars. ■ Development of vehicle fleet management guidelines. 54

PROGRAMME MONITORING AND ASSESSMENT An independent review in 1997 of EECA’s activities found that core EECA activities such as information programmes, commercial and industrial partnerships and the Energy Saver Fund are highly regarded by intended audiences, but some smaller programmes had questionable benefits. It has proven difficult to measure the full effect of EECA’s programmes because they are minimally interventionist and operate by informing and facilitating markets. However, the results of four programmes, representing about 40 per cent of EECA’s resources, can be quantified. EECA estimates that the energy savings from these programmes amount to NZ$ 59 million in present value terms, or a return of more than two dollars for every dollar of total government funding for energy efficiency since EECA’s establishment. The total benefits from all EECA’s activities are considered to be more than this, especially if allowance is made for value of greenhouse gas abatement and other environmental benefits, and health benefits. EECA collects and analyses demand-side energy use data, monitors energy end-use and efficiency patterns and trends, and prepares indicators and sectoral analyses. Results are published quarterly and provide insights useful in the design of new or amended private and public sector energy efficiency programmes.

CRITIQUE New Zealand’s record of energy savings has been smaller than in other IEA countries, but the trend since 1991 suggests some areas where savings might be made 15. The New Zealand economy has a structure of mixed energy intensities. Many factors offset one another. For example, the share of output in energy-intensive raw materials is low, but the share of manufacturing in total GDP is average on international comparison. Passenger and freight transport volumes, relative to population and GDP, are slightly higher than the average, and both passenger travel and freight are heavily weighted towards road traffic. Above-average home area per capita and per unit of GDP contributes to making New Zealand’s energy use structure more energyintensive than the IEA average, but its impact on energy use is more than offset by a mild climate that moderates both heating and cooling demands. Despite differences in climate, geography, output mix, housing structure and other factors, New Zealand’s overall output structure resembles that of European countries. From 1985 to 1991, New Zealand’s manufacturing, household and transport sectors became more energy-intensive probably as a result of a fall in output

15. All but the last section of the critique is based on “Energy Use and Efficiency in New Zealand in an International Perspective: Comparison of Trends through 1995”, International Energy Agency and the Lawrence Berkeley National Laboratory (1999, unpublished).

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and capacity utilisation in many branches of the economy. Part of the rise in energy intensity is also attributable to growth in production of primary aluminium. After 1991, intensities began to fall as the economy recovered and capacity utilisation increased, and investment was undertaken in new, more energy-efficient, capacity. Between 1990 and 1994/95, the New Zealand economy showed a small decline in energy intensity that was nevertheless greater than in some other IEA countries 16. New Zealand’s record of energy savings has been smaller than in other IEA countries, but the trend since 1991 suggests some areas where savings might be made. Cars and light trucks, household appliances, air travel, and possibly some industrial uses of electricity and process heating appear to be good targets for improved efficiency. Space heating energy intensity could be expected to rise as standards for indoor heating and comfort rise, but increased use of insulation could offset this increase or even lead to a decline in space heating energy use.

Residential sector energy use may grow to levels seen in other countries. Residential energy use per capita is very low by international standards, and in 1995 was the lowest of the sample of IEA countries studied to compare with New Zealand. This is because of the low use of energy for space heating, while other residential energy uses appear closer to the average of all the countries studied. New Zealand homes are larger than those in Europe and Canada, which could be expected to increase energy use for space heating, but the New Zealand winter climate on the whole is mild, with only 50 per cent of the average number of heating degree-days for other countries studied. The summer climate on average is also mild, with little potential cooling demand. The period 1980 to 1995 nonetheless saw an increased use of space heating, water heating and electric appliances in New Zealand homes. Fuel use did not increase because of improved end-use efficiency and some conversion from fuels to electricity. Electricity use grew rapidly as households acquired more appliances. Efficiency improvements offset growth in demand so that space heating intensity fell by about 1.4 per cent a year between 1980 and 1994, while the unit consumption of appliances in the stock fell by about 0.6 per cent a year during the same period.

16. The IEA study of New Zealand makes comparisons with Australia, the United States, Denmark, Sweden, Norway, Finland, France, Italy, Canada, the United Kingdom and the former West Germany.

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There is potential for further improvements in energy use for space heating, water heating and electric appliances. There is also potential for significant increases in energy use for space heating if New Zealanders start to heat their houses to typical IEA country levels.

Energy use in the commercial sector is low. The period 1980 to 1995 saw an expansion in the floor area for the commercial and services sector that followed the expansion in the sector’s contribution to GDP. Relative to sectoral GDP, floor area in the commercial sector in New Zealand is greater than the average of the IEA countries studied, and has raised energy use in New Zealand. Relative to floor area, energy use in the commercial and services sector is, however, lower than in most other countries studied, probably because of the mild climate.

Manufacturing has become more energy-intensive. Reliable data for analysing New Zealand’s manufacturing sector are not available at a level of disaggregation available in some other IEA countries. Aggregated data for New Zealand manufacturing show that both manufacturing share of GDP and energy use per manufacturing value-added are about average among the countries studied. New Zealand is one of the few IEA countries where the manufacturing structure has become more energy-intensive since 1980. Unlike many other IEA countries, New Zealand did not reduce total manufacturing energy per unit of value-added between 1980 and 1995. The restructuring of the economy that took place during the last half of the 1980s probably influenced this development. If allowance is made for these structural changes, New Zealand probably reduced energy intensities by about 10 per cent between 1980 and 1995, a result that nevertheless ranks at the bottom of the countries studied.

Energy use in the transport sector needs to be addressed. Passenger transport levels rose throughout the 1970s and the 1980s because of increased car ownership and air travel. Relative to its GDP, New Zealand has a high level of vehicle ownership, and a high proportion of travel using personal vehicles. Relative to the other IEA countries studied, New Zealand has the second highest ownership of cars. Although each car is only driven approximately 13 500 kilometres per year, a low value even for Europe and considerably lower than in Australia or North America, the overall per capita ownership of cars lies between that of the latter countries and Europe. Overall, New Zealand’s per capita energy use for travel lies above that of Europe or Japan because of the large number of cars in New Zealand, but below that of North America, Canada or Australia, because of the lower driving distances and better fuel economy in New Zealand. Importing used cars from Japan gave a noticeable boost to car ownership and total use, even during times of recession. Over half the first-time purchased cars in New Zealand are seven years old when they arrive in the country. Because these cars have better fuel economy than cars in New Zealand (usually imported from 57

Australia), this source of cars actually improved on-road fuel economy in New Zealand from the late 1980s. Consequently, energy use has not increased as fast as the number of cars or distances driven. But if a large proportion of the New Zealand car fleet continues to be replaced by imports of used Japanese cars, then the improvements seen in New Zealand could slow as more recent, larger Japanese cars become popular in New Zealand. Exactly which cars New Zealanders purchase will depend on what is available and purchased “new”, and what is available from Japan and purchased as “used”. Road fuel prices in New Zealand also will affect the kinds of cars in demand. What is crucial for the government at this stage is to determine the nominal (test) fuel economy of cars purchased new, and cars purchased used, to see how the two groups compare, and to see what policies might encourage the purchase of more efficient cars from either group. The mix of freight transport modes in New Zealand is similar to mixes in the Nordic countries, dominated by trucking but with sizeable shares of rail, barge and coastal shipping. This reduces energy use for freight, per tonne-km, slightly. But relative to larger countries such as Canada, Australia and the United States, the New Zealand mix boosts energy use significantly. If New Zealand had the average modal mix of the other IEA countries studied, freight energy use could be 15 per cent lower.

Energy intensity gives some guide to overall performance. New Zealand is less energy-intensive than many other IEA countries. The most obvious reasons for this difference are the mild climate, the relatively low level of GDP per capita, the low share of manufacturing in GDP, and relatively short travel distances. New Zealand has been steadily developing more energy-intensive use patterns. Energy consumption in the transport, commercial and residential sectors have grown closer to the IEA average as economic growth has improved. Energy efficiency improvements have offset some of this influence, but the overall impact has been more growth in energy consumption, and less of a decline in energy intensity than in many other IEA countries. Per capita consumption in households, services and light manufacturing is still below average, but energy use for travel and in heavy manufacturing is above average. The mild climate, which reduces heating needs in New Zealand (as in Australia and Japan), leaves the share of energy in manufacturing higher than in colder countries. Overall, when allowance is made for the level of economic activity and growth, the structure of manufacturing, the mild climate, the high level of cars and trucks in transport, and the high level of total transportation, energy use per capita or per unit of GDP in New Zealand is about 10-15 per cent lower than the IEA average, about 5 per cent lower than in Europe, and about 20 per cent lower than in the United States or Canada.

But these conclusions are clouded by uncertainties over data. New Zealand would benefit from surveys of energy use in each sector to measure activity, output 58

and energy use by fuel. The lack of information is particularly evident in the manufacturing sector. New Zealand is the only one of the 14 IEA countries studied, four of which have populations under 10 million, with incomplete energy accounts for manufacturing. Better information on end-use could assist policy-making for greenhouse gas emissions, transport policy, and research and development, as well as economic policy generally. If government policies on energy efficiency are effective, demand for energy use information in the private and public sectors could be expected to rise.

Some considerations in developing the National Energy Efficiency and Conservation Strategy. The National Energy Efficiency and Conservation Strategy will be the means by which an analysis of trends in energy use and efficiency in New Zealand will be translated into concrete measures to improve efficiency of energy end-use. The challenge for policy advisers is very great: energy efficiency is seen as a principal domestic means for meeting New Zealand’s Kyoto target, yet the strategy will almost certainly be based in the immediate term on non-price instruments. The Energy Efficiency and Conservation Authority and the Ministry for the Environment have also been given responsibility for advising the government on renewables. It will be important to strike an appropriate balance between policies to promote energy efficiency and policies to promote renewables. While efficiency and renewables are both seen in popular terms as the “good” aspects of energy policy, energy efficiency gains are likely to be most cost-effectively achieved by focusing on conventional energy sources, possibly for some time into the future. Renewables are one means of producing electricity with lower carbon emissions. In the New Zealand context, where hydro and geothermal renewable energy are the basis of electricity production, the primary issue for “new” renewables should be how to integrate them into the liberalised electricity market. The use of renewables as a means to help achieve the Kyoto target should be determined by their costeffective ranking when compared with other measures. Some points which might be taken into account in defining the scope and content of the strategy include the following. ■ Objectives should be clearly defined taking into account policies already in place. New Zealand’s principal energy efficiency challenge is transport, where considerable effort, and some progress, is being made to bring about change in energy use patterns through working to achieve transport policy goals. Similarly, the Ministry for the Environment and the Ministry of Economic Development are advanced in preparing policies and measures to achieve New Zealand’s Kyoto target. The electricity market is being further reformed and steps are being taken to encourage efficient use of electricity through tariffs. The strategy must work consistently with these initiatives. ■ The strategy should review the available information on energy efficiency in New Zealand and propose measures to correct its deficiencies. 59

■ The strategy should give priority to transport, domestic space heating, water heating and electrical appliances. ■ Energy use in manufacturing should be addressed only after data deficiencies are corrected and the underlying causes of relatively low energy efficiency are better understood. ■ The strategy should be based closely on the legislative requirement to be a practical document. Efforts should be made to avoid raising expectations that the strategy could bring about fundamental change in the way the economy or society is organised. It should focus on incremental change to existing production and consumption patterns. ■ The New Zealand economy has a high external exposure, and is at an early stage of a possibly sustained economic recovery. The strategy should be developed in close consultation with, and ultimately have the support of, industry. ■ The time frame for the strategy is five years. The strategy should not interpret this as a requirement to make major achievements during this period. It would be better directed to establishing a framework of measures to encourage longerterm changes in the way energy is consumed. The focus should be on ongoing steady change, rather than on one-off changes. ■ Many energy efficiency improvements can be achieved as a result of the normal functioning of the market. Information measures such as energy audits and follow-up advice can play an important role in ensuring industry managers are aware of the costs involved in using energy. Similarly, domestic consumers will take rational economic decisions on energy use if they have sufficient information on energy costs. Much of the strategy should be aimed at making the economy function better through ensuring good information flows. ■ The strategy should take a realistic view of what might be achieved. Measures should be prioritised and their benefits and costs quantified. An overall assessment of their contribution to achieving New Zealand’s Kyoto target would place the strategy in perspective. ■ Energy is properly seen as a commodity with a value, like any other. Except where external costs are identified, energy should be valued by the market without government intervention. If external costs are identified, they should be quantified objectively and market-based measures designed to internalise the costs so that market players take decisions on the appropriate level of energy use. If the strategy makes proposals on economic instruments, it should do so on the basis of an objective analysis of their costs and benefits. ■ To the extent that technological solutions are proposed, preference should be given to analysing the contribution of commercially proven technology; and otherwise, allowance should be made for time and costs involved in capital stock turnover. 60

RECOMMENDATIONS The Government of New Zealand should: ■ Support data collection on energy end-use by funding and regulation. ■ As far as possible, quantify the greenhouse gas emissions benefits and associated costs of the components of the National Energy Efficiency and Conservation Strategy. ■ Take particular note of the requirements of the Energy Efficiency and Conservation Act 2000 to establish only targets that are measurable, reasonable and practicable; take into consideration the findings of the IEA’s study on energy efficiency in New Zealand; ensure adequate means to enforce compliance with the strategy. ■ Ensure that the National Energy Efficiency and Conservation Strategy is based on cost-effectiveness and is integrated into existing and proposed policies on competitive energy markets. ■ Give priority in the National Energy Efficiency and Conservation Strategy to improving efficiency of energy use in transport, domestic space heating, water heating and electrical appliances. Energy use in manufacturing should be addressed only after data deficiencies are corrected and the underlying causes of relatively low energy efficiency are better understood. ■ Determine the nominal (test) fuel economy of cars purchased new, and of cars purchased used, to see how the two groups compare; develop policies to encourage purchase of more efficient cars from either group.

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6 ELECTRICITY INDUSTRY STRUCTURE Concern about New Zealand’s overall economic performance in the 1980s led to the introduction of wide-ranging economic reforms, and strengthened public sector accountability arrangements. The government role in the electricity industry came under scrutiny in this period, with a view to separating operational from other functions, and to improving commercial performance and introducing commercial discipline for trading activities. Major changes included: ■ Separation of generation and transmission from retail by the creation of the Electricity Corporation of New Zealand (ECNZ) in 1987. ■ Accounting separation of transmission from generation by the creation of Transpower in 1988. ■ The establishment of Transpower as a stand-alone state-owned enterprise in 1994. ■ The spinning-off of Contact Energy from ECNZ in 1996. ■ The beginning of operations of the wholesale market, also in 1996.

Wholesale Market New Zealand’s wholesale electricity market was developed by industry participants as a voluntary and self-regulating market. The Marketplace Company (M-co) was established in 1993 as the market administrator. The sale and purchase of wholesale electricity are organised by the participants in a competitive process. Spot prices are set half-hourly, two hours in advance, to match supply and demand. Generators compete for despatch. Generators and buyers also hedge against spot prices for most of their supply and demand. Nodal pricing is used because it incorporates the cost variation of electricity transmission owing to location, outages and constraints. It also sends strong price signals to encourage investment by transmission network owners, generators and purchasers. Three-quarters of New Zealand’s total electricity volume is traded through the wholesale market, with the remaining electricity covered by bilateral contracts directly between generators and consumers.

Transmission Transpower is a state-owned enterprise established in 1994 when its functions were separated from the Electricity Corporation of New Zealand. It operates the national 63

grid connecting most of the major power stations. Transpower sends electricity to local distribution companies from major generating stations, and directly to the largest users such as Comalco,Tasman Pulp and Paper, and BHP Steel. Power transmission between North and South Islands is through a high-voltage direct current link, which allows surplus power in South Island to be transmitted to North Island where demand is greatest, but also allows transmission from north to south when South Island lakes are at low levels. Transpower is required to contract with users for new investment and security standards. The Multilateral Agreement on Common Quality Standards moved responsibility for setting supply quality standards from Transpower to the electricity industry and end-users.

Distribution There are 30 distribution businesses (generally referred to as line businesses) in New Zealand with a variety of ownership forms, from publicly listed companies to local authority-owned and local community-owned trusts.

Retailing There are about 10 competing retailers. These include the major generators that have become retailers as well. Prior to ownership separation of retailing and distribution, competition in electricity retailing was very limited. Unless the incumbent and the entrant agreed otherwise, customers switching to a new entrant retailer had to install a time-of-use meter. This was generally only cost-efficient for larger users. Arrangements known as profiling were put in place by the industry, at the request of the government on 1 April 1999, to ensure that small electricity consumers could change electricity retailer. The state-owned electricity generators Meridian, Genesis and Mighty River Power, and Contact Energy decided to expand into the retail market, as did TrustPower and TransAlta, two former integrated distribution and retail companies. To help consumers make an informed choice of electricity retailer, the government contributed funding to establishing a consumer information service run by the Consumers’ Institute, a non-governmental consumer organisation. Consumer PowerSwitch is designed to sort out which electricity retailer and pricing plan offers the best deal for each consumer. This service is available free on the Consumers’ Institute website at http://www.consumer.org.nz. Of the 1.7 million electricity consumers in New Zealand, 178 701 or more than 10 per cent have switched retailer during the first 15 months of competition, April 1999—June 2000. 64

Figure 16 Electricity Consumption by Sector, 1973-2020 4

3

Mtoe

Industry Residential

2

Transport Other*

1

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 * includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

Figure 17 Electricity Generation by Fuel, 1973-2020 60 50 40

Oil

TWh

Gas 30

Coal Renewables

20

Hydro

10 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

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ELECTRICITY INDUSTRY DEVELOPMENTS SINCE THE LAST IN-DEPTH REVIEW September 1997: revised objectives for Transpower. Transpower’s objectives were revised to more strongly emphasise the need to continually improve the efficiency of transmission services, by making the services contestable wherever possible and by producing customer-driven services at least cost. The key outcome sought by the government was to reduce transmission costs as a percentage of total electricity costs on a sustainable basis.

Auckland Cable Failures After a series of cable failures on 20 February 1998, Mercury Energy Limited, the major distributor and retailer of electricity to Auckland announced that it could no longer supply power to the central business district. Emergency supply was required. The report of the Inquiry into Auckland Power Supply Failure drew attention to a number of technical features contributing to the failure, and made recommendations concerning the responsibilities of network companies and the government to avoid future supply failures. In 1998,Auckland’s central business district was supplied by four 110 kV underground cables (two 110 kV nitrogen-gas-filled cables and two 110 kV oil-filled cables). The electricity supply to the central business district was operated on the basis that a failure of the gas-filled cables would result in the electrical load being shared by the remaining oil-filled cables, without loss of electricity to customers. The planning strategy relied on the integrity of the oil-filled cables, based on the very good service history of the oil-filled cables compared to the poor service history of the gas-filled cables. When the two gas-filled cables failed, additional load was placed on the two oilfilled cables. The first oil-filled cable failed owing to thermo-mechanical reasons. The higher than allowable cable temperature caused movement in the metallic conductors in relation to their insulation and metallic sheath. This movement caused a joint to be compressed internally resulting in the electrical failure of that joint. The remaining oil-filled cable then took on additional load and became overheated, to the extent that it failed under “thermal run-away”, meaning that the cable generated more heat than its environment could dissipate, causing the insulation to break down and the cable to fail electrically. During the late 1980s it was determined that by 1997 there would be a need to enhance supply security to the central business district. A tunnel was proposed capable of carrying additional 110 kV cables, and other services. The tunnel project was delayed because of difficulties in securing a route, but was completed in 2000.

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April 1998: electricity generation, distribution and retail reforms. In April 1998, the government announced a package of reforms to promote competition in electricity generation, distribution and retailing. The key features of this package are: ■ Decision, in principle, to split the Electricity Corporation of New Zealand into three state-owned enterprises. ■ Ownership separation of line and energy businesses. ■ Line businesses, which do not face competition, to face increased risk of price control if they do not deliver best possible prices to consumers. ■ Strengthening of the Electricity (Information Disclosure) Regulations 1994 and the handbook for valuing line businesses. ■ The government to publish improved analysis of disclosed information to enable better comparisons of the performances of power companies. ■ The industry required to establish low-cost switching arrangements to enable customers to change retailers; the government to introduce mandatory default system if the industry fails to deliver within 12 months.

July 1998: Electricity Industry Reform Act 1998 – ownership separation. The Electricity Industry Reform Act 1998 requires that line businesses be owned separately from retail and generation businesses. The rationale behind separation of competitive retailing from natural monopoly lines is that integrated electricity supply companies could otherwise restrict a competitor’s use of their lines, crosssubsidise between distribution, retail and any generation business, and charge monopoly prices in distribution and retail markets. Companies complied with the ownership separation requirements of the Electricity Industry Reform Act much more rapidly than the act required with most companies having completed ownership separation by 1 April 1999. Most electricity companies decided to retain ownership of their line business and to sell their retail business. By April 1999, there were seven retailers, many owned by generators, including the three state-owned generators. Merger activity over the period of ownership change was less pronounced among line businesses, of which there were 32 on 1 April 1999.

November 1998: government decision to sell Contact Energy. On 30 November 1998, the government announced its intention to sell all of the Crown’s shares in Contact Energy through a 60 per cent public share float combined with a cornerstone share sale of 40 per cent. Edison Mission Energy successfully bid NZ$ 1.208 billion for the 40 per cent cornerstone shareholding. 67

April 1999: Electricity Corporation of New Zealand split. Since its establishment in 1986, the state-owned Electricity Corporation of New Zealand (ECNZ) was dominant in the generation market. Before being split, ECNZ generated around 70 per cent of New Zealand’s electricity. In April 1999, ECNZ was split into three competing stateowned generators. The three new companies, which commenced trading immediately, are: ■ Genesis Power Ltd, based in Manukau City, owns the Huntly and Tongariro power stations and owns electricity retailer First Electric. ■ Meridian Energy Ltd, based in Wellington, owns South Island’s Waitaki and Manapouri power stations. ■ Mighty River Power Ltd, based in Auckland, owns the Waikato hydro system. April 1999: inauguration of a system for switching electricity retailers. A key requirement of the government’s 1998 electricity reforms was for customers to be able to switch retailers. The electricity industry launched a profiling system that enables consumers to switch electricity retailers easily. Wholesale market administrator M-co operates the system.

May 1999: government sells its remaining stake in Contact Energy. The government sold its remaining share of Contact Energy to more than 225 000 retail investors at NZ$ 3.10 per share. The government’s revenue from the sale of Contact, including the 40 per cent sold in March 1999 to Edison Mission Energy, was more than NZ$ 2.3 billion. After the sale of Contact Energy in 1999, the private sector generated around 45 per cent of total generation in New Zealand.

November 1999: industry self-governing arrangements for grid security. The Grid Security Committee (GSC) was formed in early November 1999 after the Multilateral Agreement on Common Quality Standards (MACQS) was authorised by the Commerce Commission and signed by industry participants. The GSC consists of an independent chair, three elected representatives from generators, one from retailers, and one each from local networks, grid owners, domestic end-users, commercial end-users and industrial end-users. The GSC’s functions are to evaluate proposals to change parts of MACQS, oversee the Common Quality Co-ordinator contracting arrangements, admit members to MACQS, appoint mediators and arbitrators for disputes,carry out or participate in certain reviews and perform other such functions and tasks as allocated to the GSC under MACQS.

1999/2000: electricity information disclosure regulations. New information disclosure regulations for electricity were introduced in 1999 to replace the 1994 regulations. The 1999 regulations take account of industry restructuring following 68

the Electricity Industry Reform Act 1998 so that disclosure focuses only on noncompetitive lines activities. The regulations also introduce a mandatory avoidable cost allocation methodology for the allocation of assets, liabilities, revenue and expenses to the line business. Amendments to the 1999 regulations were introduced in 2000 to improve the transparency and usefulness of disclosures.

February 2000: electricity industry inquiry announced. In February 2000 the government established an inquiry into the electricity industry 17. The report of the inquiry was released in June 2000. The inquiry evaluated whether the current regulatory regime for the electricity industry is meeting the government’s objective of ensuring that electricity is delivered in an efficient, reliable and environmentally sustainable manner. The inquiry’s key recommendations were: ■ The governance framework for the physical wholesale market should be strengthened with membership mandatory 18 for market participants. The framework would include a set of overarching objectives and principles. An independent board, made up mainly of non-industry participants, would administer the market. ■ Improved regulatory arrangements for distribution including a bigger role for the Commerce Commission in electricity. The Commerce Commission should have the ability to impose price control on individual distribution companies, if necessary. ■ The establishment of an Electricity Ombudsman Scheme to hear consumers’ complaints. ■ Fixed network charges to be limited to no more than about 25 per cent of the typical household’s electricity bill.

THE POWER PACKAGE ■ In October 2000, the government announced its response to the report of the inquiry. The response sets out principles that the government expects the industry to follow in developing significantly enhanced self-regulatory arrangements. Legislation will allow the government to introduce mandatory arrangements by regulation, if the industry response does not accord with the government’s policy statement. The response contains the following decisions. 17. For further information, see the Inquiry’s website - www.electricityinquiry.govt.nz/ 18. By making membership mandatory, all participants are bound by a common set of rules. The requirement does not limit trading to the physical wholesale market. Trading using financial instruments, for example, is possible.

69

Governance An independent Electricity Governance Board (EGB) will replace three existing bodies: New Zealand Electricity Market, the Metering and Reconciliation Information Agreement, and the Multilateral Agreement on Common Quality Standards. The EGB will develop rules for the wholesale market, transmission, distribution and retailing,binding on generators,Transpower,distributors and retailers. All market participants are required to belong to the EGB. The EGB will report to the minister each year,and its report will be tabled in Parliament. Reports will also be made on the EGB’s financial and environmental performance.

Consumer Complaints The industry is required to develop an independent consumer complaints resolution scheme. The EGB will have powers to impose fines for breaches of rules on key consumer issues such as billing and disconnection.

Retailing The EGB will develop and implement rules on switching suppliers, and for security of supply in the event of retailer insolvency and other causes of outages. Retailers supplying domestic customers must offer at least one tariff with a fixed charge of no more than 10 per cent of the bill of the average domestic consumer. Retailers serving more than 25 per cent of the market for domestic consumers in line network areas must offer pre-payment meters to domestic consumers at reasonable cost. The EGB will develop a voluntary model use-of-system agreement for access by retailers to networks.

Transmission and Distribution Distribution companies are expected to keep changes to rural line charges “in line” with urban line charges. Distribution companies may own distributed generation 19 up to 2 per cent of the network’s maximum demand or 5 MW, whichever is greater. Line companies may own distributed generation capacity exceeding these limits, if the capacity is based on a renewable energy resource carried out in a separate company. The EGB will develop access terms and conditions for distributed energy connected to networks as well as model approaches to distribution pricing. 19. Distributed generation refers to generation capacity that is located close to a specific load and is connected to the local distribution network rather than to the national grid. It may be any size or technology (for example, a CHP plant to serve a steel-works, a gas turbine for a small town, a photovoltaic installation for a house, etc.). Distributed generation may be connected to the network for back-up power or to sell surplus generation, but could operate independently of the network.

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Electricity Market Governance in New Zealand Existing Three multilateral contracts on the pool, bilateral trade, and security and quality standards. New Zealand Electricity Market (NZEM) ■ Voluntary wholesale market. Physical pool in which generators sell, retailers buy. M-co administers and clears. ■ Price determined by energy cost plus losses at exit points (244 nodes) each half-hour. Marginal price established on actual supply and demand. ■ No specific government regulator or legislation. Metering Reconciliation and Information Agreement (MARIA) ■ Rules and codes of practice for trade outside the pool. Accounts for 25 per cent of all electricity trade (16 per cent without the Comalco contract), but level falling because of lower transaction costs through the pool. ■ Establishes reconciliation process and timetable, competitive trading metering standards, and customer switching regime. ■ Separate governance structure from NZEM, but rules similar to NZEM. Multilateral Agreement on Common Quality Standards (MACQS) ■ Moves decisions on security and quality from Transpower to grid users. ■ Common quality co-ordinator.

Under Development Single governance structure with rules binding on all participants on a contractual basis. ■ Electricity Governance Board replaces NZEM, MARIA and MACQS. Covers trading security and transport. Majority of board members independent. Broad responsibilities for implementing rules in line with guiding principles, including efficient operation of the market, consumer protection, as well as environmental and social goals. ■ Independent market surveillance body. ■ Establishes evolutionary process, for example to expand contestability in transmission services. ■ Lines activity (including transmission) to be regulated by the Commerce Commission which will be given specific duties in relation to the electricity market.

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Distribution companies and Transpower will be placed under price control if they breach thresholds or criteria set by the Commerce Commission. The Commerce Commission will design and enforce information disclosure requirements. The commission will also recalculate distribution fixed asset valuations on a common and specific basis. Transpower will develop a transmission pricing methodology consistent with the government’s objectives and principles for the provision of transmission services outlined in the government policy statement. The EGB will ensure consistency. If the EGB and Transpower are unable to agree on a satisfactory methodology,the government can empower the Commerce Commission to determine the transmission pricing methodology. The EGB will develop rules on transmission grid security, grid expansion and replacement. The EGB may also make recommendations to the government on any Transpower services that could be made contestable.

Wholesale Market Information on spot prices, hydro spills and future prices must be disclosed. Market participants are responsible for managing dry-year and other supply risks. Competing trading arrangements may be established. Development of financial instruments to manage risk of transmission losses and constraints is also supported. An independent market surveillance body must be established to monitor and enforce market rules. The EGB must establish a real-time market to encourage demand-side participation. The EGB must also explore arrangements for preparing and releasing short- and medium-term projections of system adequacy including forecasts of reserve availability, transmission outages, etc. that may affect prices.

Electricity Trusts Trusts must develop a Code of Practice providing for information and meeting attendance for trust beneficiaries, together with a review procedure where access to meetings or information is declined. Audited financial statements must be issued.

MARKET TRENDS Generation Capacity The need for new generation capacity is based on pricing signals provided through the market. Table 1 summarises changes in generation capacity since 1992. Generation is currently predominantly hydro-based – 66 per cent, with gas 22 per cent, geothermal 6 per cent, coal 3 per cent and other means such as biogas, industrial waste, wood and wind, accounting for the remainder. Co-generation accounts for about 9 per cent of generation. 72

Over 50 per cent of the growth in generation capacity since 1992 is accounted for by three new gas-fired combined cycle plants (Southdown, TCC and Otahuhu B). A further 25 per cent is accounted for by the new Clyde hydro plant. Non-hydro renewable sources of generation (geothermal, wastes and wind) account for about 13 per cent of the growth since 1992. Table 1 Changes in Generation Capacity since 1992 Location

Type

Clyde

Hydro

Te Awamutu

Gas co-generation

Haunui

Wind

Edgecumbe

Gas co-generation

Southdown

Gas combined cycle/co-generation

McLachlan Kinleith

MW

GWh

Commissioned

432

2 300

September 1992

26

219

3.5

August 1995

13

June 1996 October 1996

10

70

114

930

December 1996

Geothermal

55

458

June 1997

Wood waste co-generation

34

274

mid-1997

Rotokawa 1

Geothermal

24

189

October 1997

Glenbrook/Waiuku

Kiln waste co-generation

72

470

January 1998

TCC (Stratford)

Gas combined cycle

379

3 100

July 1998

Kapuni

Gas co-generation

25

196

February 1998

Hawera

Gas co-generation

70

490

August 1998

Tararua Ranges

Wind

30

130

April 1999

Ngawha

Geothermal

Otahuhu B

Gas combined cycle

Te Rapa

Gas co-generation

Total

10

80

390

3 200

45

275

1 720

12 394

October 1998 December 1999 January 2000

Source: Ministry of Economic Development.

Market Share The approximate market share held by generators and retailers is set out in Table 2. Contact Energy was spun off from ECNZ to form a separate state-owned enterprise in 1996 and was sold In 1999. The remaining ECNZ assets were split into three state-owned enterprises in 1999. The government has a policy not to sell strategic assets. There are therefore no plans for further sales of state-owned electricity assets.

Prices Both industrial and domestic electricity prices are low on international comparison (see Figures 18 and 19). Both industry and household sector prices rose steeply from 1985 to 1988, and again from 1990 to 1995 (see Figures 20 and 21). 73

Table 2 Market Share – Generation and Retail Generation Capacity (MW)

Generation (%)

Contact Energy

2 131

25

355 000

21

Genesis Power

1 594

19

155 000

9

Meridian Energy

2 323

28

72 000

4

Mighty River Power

1 075

13

268 000

16

530

6

578 000

34

NGC

Customers

Customers (%)

TrustPower

398

5

215 500

13

Other

327

4

57 500

3

Total

8 378

100

1 701 000

100

NGC: Natural Gas Corporation. Note: Data incorporates NGC’s purchase of 75.8 per cent of TransAlta. Source: Burrell Communications, January 2000.

Regulation There is no electricity sector regulator in New Zealand. The Commerce Commission is the general competition regulator. The Power Package announced four additional areas of responsibility for the commission: ■ The commission will administer a targeted price control regime for line companies. This will involve setting and publishing thresholds for the declaration of price control. The commission will be able to use incentive-based methods of control such as CPI-X. The commission has announced an inquiry into electricity network business pricing. ■ The commission will administer the information disclosure regime, which will continue to be an important part of the regulatory regime. ■ The commission will carry out an examination of asset values in network companies. ■ A new Optimised Deprival Value (ODV 20) handbook was released with the Power Package. The commission will mandate the appropriate fixed asset valuation methodologies. These functions will be funded by a levy on the industry. 20. Independently valuing network assets is necessary since transmission and distribution are usually monopoly businesses. Prices for their services will depend greatly on the value placed on the network. The ODV methodology is one means of valuing the assets. It is essentially a valuation of the replacement cost of the assets.

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Figure 18 Industrial Electricity Prices in IEA Countries, 1999 Switzerland Italy Portugal Turkey Denmark United Kingdom Netherlands Ireland Spain Hungary Greece Czech Republic Finland New Zealand United States

Tax Component 0

0.05

0.10

0.15

0.20

0.25

US$/kWh Note: Ex-tax prices for the United States. Data not available for Australia, Austria, Belgium, Canada, France, Germany, Japan, Luxembourg, Norway and Sweden. Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

Figure 19 Domestic Electricity Prices in IEA Countries, 1999 Denmark

Italy Spain

Portugal Netherlands Switzerland Luxembourg Ireland United Kingdom Finland Greece Turkey United States Hungary New Zealand Norway Czech Republic

Tax Component 0

0.05

0.10

0.15

0.20

0.25

US$/kWh Note: Ex-tax prices for the United States. Data not available for Australia, Austria, Belgium, Canada, France, Germany, Japan and Sweden. Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

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Figure 20 Electricity Prices in New Zealand and in Other Selected IEA Countries, 1980-1999 Industry Sector 0.08 0.07

US$/KWh

0.06 0.05 0.04 0.03 0.02 0.01 1980

1985

1990

New Zealand

Canada

1995

1999

United Kingdom

Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

Figure 21 Electricity Prices in New Zealand and in Other Selected IEA Countries, 1980-1999 Household Sector 0.14 0.12

US$/KWh

0.10 0.08 0.06 0.04 0.02 1980

1985

1990

New Zealand

Canada

Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

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1995 United Kingdom

1999

Regulatory functions will also be undertaken by other bodies in future. For example: ■ The Electricity Governance Board will have responsibility for developing and enforcing rules for the wholesale market; grid security,expansion and replacement; advising on contestability in transmission; making rules on switching suppliers; and issuing a model agreement on network access. ■ A new market surveillance body will have functions related to monitoring operation of the market. ■ A body with ombudsman-type powers will hear consumer complaints and award compensation. ■ Parliament will review the environmental performance of the industry. ■ The Ministry of Economic Development will continue to play a role in monitoring performance. If the self-governance arrangements prove inadequate, the government will use regulations to establish an electricity governance board as a Crown entity.

RENEWABLES Generation from Renewables and CHP The government’s policy is to structure the electricity market so as not to discriminate against renewables and co-generation. An increasing range of generation possibilities from non-traditional renewable sources, such as wind and biogas, is under investigation. Generation from wind was estimated to have increased 71 per cent to 24 GWh in the year ending March 1999, compared with 14 GWh in the previous year owing to the commissioning of Tararua windfarm in March 1999.

The National Energy Efficiency and Conservation Strategy The Energy Efficiency and Conservation Act, which was passed in May 2000, provides the legislative basis for promoting energy efficiency and renewable energy. The National Energy Efficiency and Conservation Strategy being developed by the Energy Efficiency and Conservation Authority (EECA) 21 and the Ministry for the Environment 21. The Energy Efficiency and Conservation Act 2000 requires that the strategy state: “the Government’s policies in relation to the promotion in New Zealand of energy efficiency, energy conservation, and the use of renewable sources of energy; and the objectives to be pursued to achieve the Government’s policies in relation to the promotion in New Zealand of energy efficiency, energy conservation, and new renewable sources of energy”. See also Chapter 5.

77

will include a framework for measures to improve renewable energy uptake in New Zealand. To date, the authority’s renewable energy programmes have largely been to inform and facilitate competitive markets. The renewable energy support programme is part of the Energy-Wise Information group of programmes, which includes wide-ranging renewable energy communication and market education programmes (including publications, seminars, promotional events, forums and conferences) and complementary renewable energy sector activities.

The Energy-Wise Renewables Programme The Energy-Wise Renewables programme has been instrumental in helping establish industry networks to support the uptake of renewable energy technologies in New Zealand. Networks established to date are the New Zealand Wind Energy Association, the Bioenergy Network, and the Solar Industries Association of solarthermal manufacturers. A network or industry association is currently being established for the photovoltaic industry. Direct assistance grants have been provided in the form of support for reduced interest payments for the installation of a small number of solar water heaters for low-income family homes. These grants were provided as part of the domestic sector energy efficiency programme – the Energy Saver Fund. These grants had a significant impact on the solar water heating industry as the whole sector received a boost from the publicity that resulted from a small injection of grant money. Feedback from industry indicates that at least three unsubsidised water heaters were installed for each subsidised one. Further assistance to another group of houses and a regional solar water heating manufacturing business has resulted in more water-heating units being installed in low-income family homes.

Promotional Information on Renewable Energy Technologies EECA has published a range of material including guide books explaining how to implement renewable energy projects, and general technical renewables support information sheets. EECA has also published planning guidelines for wind farms and small hydro developments. A range of technical information sheets for the public and other interested parties has been developed and distributed. Renewable energy topics have been widely covered in all issues of EECA’s flagship publication “EnergyWise News”. Articles have included case studies, reports from national and international conferences, technology information, research updates and policy options. Several joint seminars have been held and facilitated by EECA to examine the potential for commercialisation of renewable energy technologies. These include seminars on wind energy, bioenergy, solar photovoltaics and New Zealand research. 78

CRITIQUE Reform has been beneficial to date. Recent reforms seek to improve industry self-governance and bring benefits of reform to the retail market. New Zealand has a small electricity market dominated by the Auckland area. The market is comparable with Ireland, with a similar national population, and which is dominated by Dublin. Also like Ireland, New Zealand has a widely dispersed rural market. Generation is based on large-scale hydro in South Island, with long transmission links to the main markets in North Island. The electricity supply industry is based on large-scale hydro, about 63 per cent of generation capacity, but varying seasonally and from year to year. Also important are gas (24 per cent and growing), geothermal (6 per cent), and coal (3 per cent). New Zealand has demonstrated that electricity market liberalisation can be successful in a small country. Since the last in-depth review, transmission and distribution have been successfully separated from generation and retailing. The previously dominant generator, the Electricity Corporation of New Zealand, has been split with Contact Energy being spun off in 1996 followed by the remainder of ECNZ being split into three state-owned enterprises in 1999. Government shareholdings in generation and retailing nevertheless remain high, and the government owns Transpower, the transmission and system operator. Disposal of the remaining government interest in the electricity sector could be beneficial for the further development of competition, for example by ensuring capital market pressures on efficiency. Electricity industry liberalisation policy has been successful in reducing wholesale prices, reducing prices to businesses, and in improving efficiency in the sector. The present government considers that reforms were poorly implemented in the past and have damaged the reputation of the industry. Small domestic consumers have not been competed for and customer service standards have been poor. Further reforms (the Power Package,October 2000) have been introduced to strengthen industry selfgovernance,to bring the benefits of market reform to the retail market,and to address weaknesses in information disclosure as a tool for industry regulation. The industry appears to have responded positively to the government’s proposals. Critical to acceptance of the new regime will be the implementation of independent monitoring and enforcement. The threat of intervention alone may not be sufficient. Modification of the regime will be necessary in the light of experience. Effective monitoring and reporting will be required to ensure that any modifications do not threaten the overall credibility of the policy package.

Regulation nonetheless remains an issue. New Zealand’s approach to energy sector regulation is unique in the world. The latest reforms continue the policy of light-handed regulation. The Electricity Governance Board is a new institution replacing three existing institutions (NZEM, MARIA and MACQS). Regulatory functions are now focused on the EGB, the Commerce Commission, and a new electricity ombudsman (the status of which is to be determined). The government 79

has stated several times that proposed legislation will spell out contingency and wide-ranging regulatory powers that the minister will use if the minister judges that the industry has failed to meet satisfactory standards. This approach raises a number of issues. ■ It requires the government to have contingency powers to replace industry selfgovernance, if the threat of intervention is to have any real impact. If the government has to set up an electricity governance body as a Crown entity, it would replace the existing industry arrangements. ■ It introduces a degree of subjectivity and uncertainty about how the minister (or future ministers) will exercise their contingency powers. A degree of uncertainty is considered by the government to provide an incentive for the industry to govern itself effectively. ■ It mixes several regulatory approaches. For example, the Commerce Commission could be expected to take a formal and legal approach, usually based on an ex post examination of a complaint (from the government as in the present case of network charges, or a consumer, generator, retailer, etc.), while the market surveillance body could be expected to deal with issues in private and with minimum disruption to industry operations. The ombudsman introduces a further element that is focused on specific issues, albeit important to individual consumers. These approaches may work harmoniously side by side, provided the respective roles are clearly defined. ■ The three bodies that make up the regulatory system lack a focal point where issues arising are kept in perspective and dealt with in the interests of the sector as a whole. This may make ex ante intervention more difficult. The UK regulator, for example, announces undesirable features judged to be developing in a sector, and the industry has the opportunity to correct problems before intervention is necessary. In such cases, industry can also approach expert regulators for their views before decisions are taken and announced. ■ The role of the Commerce Commission is to be expanded to take on industryspecific functions. These will require industry expertise on an ongoing basis to monitor and anticipate issues. Buying-in knowledge for specific inquiries may not be as satisfactory as permanently engaged in-house expertise, even if adequate funding is made available. An alternative approach would be to amalgamate the regulatory functions proposed for several bodies into a single industry-specific regulatory office. This approach need not be expensive. Other small countries, such as Ireland and Finland, have industry regulators. Of course, it is not the case that “one size fits all”, and there is no doubt that New Zealand’s approach endorses the objectives shared by other IEA countries for regulatory reform and for regulatory mechanisms. The benefits of New Zealand’s approach may be summarised as follows. 80

■ Self-governance avoids or minimises the costs of an industry-specific bureaucracy. ■ Self-governance should avoid or minimise risks inherent in regulatory institutions, such as capture by industry players,or development of an unproductive adversarial relationship with industry. ■ The key objective is outcomes. Over time, the industry should come to internalise the government’s objectives; peer pressure is likely to be more effective in delivering timely and effective outcomes; the industry has the expertise and knowledge to make things work effectively and self-governance can harness this capacity.

Some other firm goals of the latest reforms may carry cost. The Power Package includes a requirement for consumers to be offered at least one tariff with fixed charges limited to 10 per cent of the typical consumer bill. The intention is to encourage the efficient use of electricity and to assist low-income consumers. The government inquiry considered that such a tariff should be mandatory, but recommended that the fixed charge component be much higher, at 25 per cent. The bill introduced into Parliament allows the government to regulate the level of fixed charges levied by distributors on retailers to ensure that retailers do not make a loss on supplying smaller consumers. It will be important that regulated prices do not lead to the re-introduction of crosssubsidies between consumers, and/or cause a reduction in the level of service to affected consumers as a means of cost-saving to offset the loss incurred by a price judged too low by a distributor. The Power Package also stated that the government expects distribution companies to keep changes in rural line charges in line with urban line charges and will monitor developments in rural charges. As with regulated fixed charges, this policy could lead to price distortions. At a minimum, the policy needs to be clarified to ensure that the cost of delivery to remote areas is not subsidised by urban consumers. In principle, tariffs should reflect costs. The cap on fixed charges, and the requirement to keep changes in rural line charges in line with urban line charges, are both potential impediments to the free market and may prevent clear market signals for investment in the network. Any attempt to control prices for social reasons may discourage retail competition. Competition is likely to be a more effective means of delivering lower prices to consumers than market intervention. The proposals on distributed power are intended to encourage the development of distributed power such as stand-alone and small-scale power generation. The proposals are expected to result in the use of renewable energy power generation technologies. It is possible that the proposals could result in substantial cost-saving by avoiding remote extensions to the network. But the result may simply be wider use of conventional technologies (for example, LPG- and diesel-powered generation), because there are no economic incentives for higher-cost new forms of renewable energy. 81

Distribution activities are often community-owned, small in scale and influenced by non-economic objectives. Accountability issues relating to local trusts is addressed in the Power Package, and should continue to be monitored. The relaxation of restrictions on line companies investing in distributed generation may result in some uneconomic investment in distributed power where community-owned trusts are not focused on the need for economic return. In general, investment in distributed power should only occur where it is genuinely economic.

Further encouragement of renewables should be compatible with energy market reforms. Renewable energy already accounts for about one-third of total primary energy supply, primarily from hydro and geothermal electricity production, but also from wood. There are no specific policies to encourage “new” (small-scale) renewables, other than the proposals in the Power Package. Renewables are nevertheless expected to play a part in helping New Zealand reduce greenhouse gas emissions; and the National Energy Efficiency and Conservation Strategy is expected to provide a framework for their further development. To date, the government has encouraged industry self-help. Any further action should continue this approach by promoting industry initiatives to develop a more commercial focus and to develop a means for closer integration into electricity markets. Measures could include “green” pricing to test consumer interest in smallscale renewable energy at current prices.

Security of supply remains an important issue. The report of the inquiry into the cables failure in Auckland offers some valuable lessons concerning the importance of security of supply as a broad objective of energy policy. New Zealand expects policy guidelines to be developed and implemented in liberalised markets by companies. While the report focuses on network companies, many of the issues raised in the report have wider implications for all participants in the energy market. So far as companies are concerned, the report of the inquiry drew attention to lessons which network companies could learn from the experience. Generalising some of the conclusions of the inquiry, these lessons include: ■ Specialist assets require specialist skills to develop appropriate asset management strategies. Where services are contracted out, companies must still have the skills to properly define the contract service required to implement asset management strategies. ■ During the operational life of assets, evaluation of risks must be undertaken as a systematic process. In every company, security of supply must be foremost in risk management objectives and assessment schedules. ■ An essential element in the management of risk in companies is a strong corporate structure, with effective checks and controls arising from the interaction of owners, the board, and the executive of the company. In a network company with monopoly characteristics serving the public, security of supply is a vital objective. 82

■ Customer contracts should place an appropriate incentive or economic discipline on the company to give priority to security of supply. In relation to the last point, it should be noted that energy security is not solely a matter for governments and companies. Consumers at all levels should recognise the value of security and have the capacity, to the extent possible, to take an informed decision on the level of security they require and to pay according to the level of security they require. It is worth noting the following roles suggested for government by the report of the inquiry, each of which also has wider application in the energy sector: ■ Ensure adequate lines of accountability exist in network companies. ■ Require network companies to publish regularly an asset management plan together with security standards for each consumer class, supply area and voltage level. ■ Encourage distribution companies to develop customer contracts for network service providers that reflect security of supply standards and liability provisions appropriate to each type of consumer, and which give network companies incentives to manage security on a commercial basis. Importantly, the inquiry argues that security of supply can be met through the free operation of markets, provided governments impose a regulatory requirement that is supported by expert monitoring of performance. Companies will respond, provided they have adequate economic incentives to do so by compensating extra costs without distorting competition.

RECOMMENDATIONS The Government of New Zealand should:

Electricity ■ Specify in legislation that the overarching goal of electricity market reform is the creation of the conditions for full and free competition wherever possible. ■ Ensure clarity and co-ordination in the respective roles of the Electricity Governance Board and the Commerce Commission with respect to: • Industry self-governance, including regular consultation between the Minister of Energy and the chairman and members of the Electricity Governance Board to monitor the performance of self-governance; 83

• • • •

Promoting competition in the market; Regulating natural monopoly areas (transmission and distribution); Achieving energy efficiency and environmental goals at least cost; Ensuring accountability and transparency through regular public reporting, including by the Commerce Commission on its interpretation of its statutory duties and intended activities in the electricity sector.

■ Ensure that the Commerce Commission has the authority and capacity for evaluating performance and regulating prices of transmission and distribution to support the intention of intervention should self-governance fail. • Consider the need for establishing an energy group within the Commerce Commission in view of the specialised and ongoing task the Commission is likely to face. ■ Monitor performance of the transmission and distribution companies; establish incentives for continuing improvement in transmission and distribution prices and services to electricity consumers. ■ Ensure that consumer representatives participate in the development of final proposals for self-governance of the electricity sector; ensure that domestic, commercial and industrial consumer interests are fully represented on the Electricity Governance Board. ■ Define social goals contained in the Power Package and consider options for achieving these goals with a view to removing any distorting impact on the electricity market of the policy on rural tariffs and arbitrary limits on fixed charges; promote the evolution of cost-reflective pricing for all consumers. ■ Consider privatising remaining government interests in the electricity sector to improve credibility and transparency in the market, as well as efficient operation. ■ Monitor measures to allow switching between suppliers in the retail market; ensure genuine customer choice.

Renewables ■ Consider how small-scale renewable sources of energy can efficiently participate in the competitive electricity market. ■ Encourage small-scale renewable energy generators to address problems of reliability and to improve overall operational efficiency through innovations in industry organisation and management.

84

7 OIL, GAS AND COAL OIL Industry Structure The structure of the oil industry is illustrated in Figure 22. Oil and gas dominate New Zealand’s primary energy requirements. New Zealand depends on imports for 62 per cent of its oil requirements. Crude oil and products are imported from a number of countries, including Australia, Kuwait, Saudi Arabia, United Arab Emirates, Qatar and Malaysia. All New Zealand’s crude oil and condensate production comes from onshore and offshore fields in the Taranaki region. There are currently nine fields in production. The main producers and operators are Fletcher Energy, Shell (Petro) Energy, Todd Energy and NZOG. In October 2000, Shell announced a takeover of Fletcher Energy. The Commerce Commission has approved the takeover subject to a number of conditions. Deregulation of the oil industry in the late 1980s removed price controls, licensing of wholesalers and retailers, and restrictions on imports of refined products.

Exploration for Oil and Gas Level of Activity Currently there are 49 petroleum exploration permits in New Zealand. Twenty-one of these are located outside the Taranaki Basin and cover areas in five other petroleum basins: East Coast, Northland, Canterbury, Westland, West Southland. Crown Minerals in the Ministry of Economic Development is currently assessing nine exploration permit applications, six of which are located within the Taranaki Basin, and the remainder in the Waikato and Westland Basins, Westland and Great South Basins. Since June 1999, Crown Minerals has awarded 13 new petroleum exploration permits. In 2000, 26 wells were drilled in New Zealand, of which 18 were exploration wells, compared with only five exploration wells drilled in 1999. Of the 18 exploration wells, eight were located outside Taranaki compared with only one exploration well drilled outside Taranaki in 1999. Planning is under way for a possible on/offshore Taranaki and on/offshore Canterbury competitive exploration permit tender round to be advertised in second quarter 2001. 85

Figure 22 Oil Ownership Flows in New Zealand

Kamiro

FIELDS

Maui

McKee Ngatoro

Kapuni

Oil Imports1

TAWN/Piakau

PRODUCERS

FCE Shell (Petro) Todd

Shell (Petro) Todd

FCE NZOG Ngatoro

FCE

Refinery feedstocks

REFINERS/ BLENDERS

New Zealand Refining Company

Finished products

WHOLESALERS

BP, Caltex, Mobil, Shell

RETAILERS

CONSUMERS

Exports

Agriculture

Challenge2

Terminals New Zealand3

Gull

BP, Caltex, Mobil, Shell

Independent Service Stations

Challenge

Industry

Transport

Commercial

Residential

BP is BP Oil NZ Limited; Caltex is Caltex Oil (NZ) Limited; Challenge is Challenge Petroleum Limited; FCE is Fletcher Challenge Energy Limited; Gull is Gull Petroleum Limited; Mobil is Mobil Oil NZ Limited; Shell is Shell NZ Limited; NZOG is New Zealand Oil & Gas Limited; Shell (Petro) is Shell (Petroleum Mining) Company Limited; TAWN is Tariki, Ahuroa, Waihapa and Ngaere; Todd is Todd Petroleum Mining Company Limited. 1. Crude and processed oil are imported by the four oil companies. Only finished product is imported by Challenge Petroleum and Gull Petroleum. 2. Challenge is a division of FCE. 3. Terminals New Zealand is a division of Gull. Source: Ministry of Economic Development, New Zealand Energy Data File January 2000.

Discoveries Encouraging discoveries have been made. In the East Coast Basin, the Kauhauroa, Awatere and Tuhara gas discoveries are being appraised. These gas discoveries are relatively small in size, but are significant as the first apparently commercial discoveries outside of the Taranaki Basin. The Rimu oil discovery, onshore Taranaki, 86

is under appraisal, and well-drilling is under way. Also in Taranaki is the Pohokura gas/condensate discovery, located immediately offshore adjacent to Methanex’s plant at Motonui. Other discoveries under appraisal include Maari oil discovery and the Windsor gas discovery. Crown Minerals has received a petroleum mining permit application for the 1998 onshore Taranaki Mangahewa gas/condensate discovery.

Ranking Independent industry surveys comparing various petroleum regimes and exploration investment destinations show New Zealand in a favourable light from explorers’ perspective. New Zealand’s world ranking on the basis of exploration and production activity rose 17 places during 1999. New Zealand’s ranking based on fiscal terms dropped three places, because other countries improved their terms, but the ranking on political risk improved one place over the previous year, from fifth to fourth. Overall, New Zealand has been ranked twenty-fourth out of 98 countries as a favourable place to explore. This overall ranking is up 13 places from the previous year’s ranking. Compared with 12 countries in the region, New Zealand is ranked first for fiscal terms and political risk, ninth for the level of exploration and production activity, and fifth overall.

Production Oil reserves are dominated by the Maui field, which contains around 70 per cent of New Zealand’s reserves (see Table 3). The Kupe field contains about 12 per cent, Kapuni around 5 per cent, McKee around 7 per cent, and the remaining fields about 6 per cent. Production of crude oil and condensate peaked in the 1990s, then declined slightly, and is now rising as a result of newly discovered oil fields. A significant proportion of indigenous production is exported. New Zealand’s production of crude oil and condensate was about 2.3 Mtoe in the year ending December 1999. Production is largely from the Maui field, which supplies about 69 per cent of the total, with 8 per cent from the Kapuni field, 5 per cent from the Waihapa field, 13 per cent from the McKee field, 2 per cent from the Ngatoro field, and 4 per cent from the remaining fields. Self-sufficiency peaked at the beginning of the 1990s, but has declined since. The trend in self-sufficiency is largely accounted for by a decline in the use of natural gas as a feedstock for the production of synthetic gasoline. In the late 1980s, as a result of the expansion of the Marsden Point refinery and the construction of the synthetic fuels plant at Motunui, New Zealand was briefly a net exporter of petroleum products. Since then, New Zealand has again become a significant and growing net importer of petroleum products, mainly motor gasoline. 87

Table 3 New Zealand’s Petroleum Reserves as at 1 July 1999 Total Reserves Mining Permits

Remaining Reserves

Oil/Condensate (million barrels)

Gas 109

Oil/Condensate (million barrels)

Gas 109

202.300

3 830.00

70.50

1 329.00

Kapuni

63.000

1 322.00

4.90

462.00

Kaimiro

3.310

12.62

1.42

8.14

Maui

Waihapa/Ngaere

23.750

22.77

0.37

0.50

McKee

46.127

121.89

4.19

50.05

3.390

119.13

2.15

91.12

Tariki/Ahuroa Ngatoro

3.960

7.90

1.25

3.62

Kupe

16.300

264.00

16.30

264.00

Total

362.457

5 700.31

101.08

2 208.43

Source: Ministry of Economic Development.

Refining In 1999, New Zealand imported 6.3 Mtoe of crude oil and oil products, of which 90 per cent was crude oil. The New Zealand Refining Company Ltd (NZRC) operates the only refinery in the country at Marsden Point, around 150 km north of Auckland. The 95 000 b/d refinery processes imported crude oil and locally produced crude and condensate. About 93 per cent of the feedstock for the refinery is imported. The refinery currently supplies around 75 per cent of total New Zealand demand. About a third of the refined product from the NZRC refinery is transported by a companyowned pipeline to Wiri in South Auckland. The remainder is shipped by coastal tankers to the rest of the country. A small amount of refined product is exported.

Distribution Demand is spread over a large area with a long logistics chain that has a strong influence on distribution costs. The geography and low population density of New Zealand result in significant movement of petroleum products around the country by sea. It may take up to five months from the time crude oil is ordered to when it is distributed at the retail level as a refined product. Coastal Tankers Ltd was established by the major oil companies to ship petroleum products from the Marsden Point refinery, and the Methanex synthetic gasoline 88

plant at Motunui, to terminals at ports located mainly on the eastern coasts of North and South Islands. Coastal Tankers Ltd moves 3.5 to 4 million tonnes of refined products, crude oil and condensate per year between New Zealand ports. It also has shipped crude oil and condensate to Australian refineries and back-hauled products to New Zealand ports. The major product import ports are Tauranga (Mt Maunganui),Wellington and Lyttelton (Christchurch).

Retail Market Four international oil companies (BP, Caltex, Mobil, Shell) have dominated the retail market for many years. In April 1998, an independent, Challenge (a subsidiary of Fletcher Energy), entered the market, followed by Gull in December 1998. Vigorous price competition has ensued resulting in a declining importer margin and in retail prices (less taxes) which are competitive compared with other IEA Members. The four international companies have stakes in the New Zealand Refining Company Ltd which operates the Marsden Point oil refinery, and between them they own the bulk storage facilities as well as most of the retail outlets. In April 1999,Gull officially opened New Zealand’s first independent petroleum storage terminal at Mount Maunganui. A refinery-owned pipeline transports about a third of the production from Marsden Point refinery to bulk storage facilities at Wiri, supplying the Auckland area, New Zealand’s main petroleum market. Petroleum products are distributed to the rest of the country mostly by coastal tankers supplying port depots. Each port depot has storage facilities, from which road tankers distribute petroleum to retail outlets and directly supply customers. There is no sector-specific legal provision for mandatory access by independent companies to storage and terminal facilities. Any access requirements are governed by general competition law under the Commerce Act 1986. Challenge uses Fletcher Challenge storage depot at New Plymouth, and Gull has constructed a storage terminal at the Port of Tauranga.

Consumption New Zealand consumes about 5.5 million metric tonnes per annum of refined petroleum products. Consumption is over 80 per cent transport fuels, of which 41 per cent are gasolines, 15 per cent aviation fuels and 44 per cent diesel. Motor gasoline growth during the second half of the 1980s was boosted when the government eliminated financial incentives for using compressed natural gas in vehicles. During the 1990s, motor gasoline growth moderated as the share of dieselpowered new registrations increased. Domestic demand for diesel grew by over 5 per cent per year between 1985 and 1995. During the 1990s, diesel demand grew 89

by nearly 9 per cent per year because of stronger economic growth and the lower level of taxation on diesel. Domestic oil product consumption is concentrated in the transport sector. Practically all motor gasoline is used in domestic transport, while 67 per cent of diesel (excluding international marine fuel sales) is consumed in the transport sector. Table 4 Oil Consumption in 1998 and 1999 (thousand metric tonnes) Product

1998

1999

Gasoline of which unleaded

2 183 2 164

2 152 2 140

Kerosene and jet fuels

921

928

Gas/diesel oil

1 749

1 740

Residual fuel oil

214

218

Other

397

453

Total

5 464

5 491

Source: Quarterly Oil Statistics IEA/OECD Paris.

Figure 23 Final Consumption of Oil by Sector, 1973-2020 10

8

Industry

6 Mtoe

Transport Residential 4

Other*

2

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 * includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

90

Prices Prices for petrol (gasoline) and automotive diesel are illustrated in Figures 24 and 25. Both before and after tax, product prices in New Zealand are among the lowest prices in IEA countries.

Import Margins The IEA noted in its last in-depth review that the Ministry of Commerce had concerns about an increase in the “importer margin”. The ministry planned to study the importance of barriers to market entry. The study “Barriers to entry to the New Zealand Downstream Oil Market”, ACIL August 1997, was released in August 1997. The study investigated whether there are barriers to entry to the petroleum market. It concluded that there were “no persistent long run barriers to entry into New Zealand’s downstream oil industry”. The importer margin is at its lowest level in real terms since 1983, excluding the Gulf War period. There has also been a significant reduction in the after-tax retail price of petrol in New Zealand compared with Australia. The differential between Auckland and Melbourne prices fell from around 20 cents per litre in June 1995 to around six cents per litre by March 2000.

Crude Oil Prices The government has been concerned by the recent rises in retail petrol prices, a result of rises in crude oil prices and the recent decline in the value of the New Zealand dollar. In the latter part of 1999, the Commerce Commission conducted an investigation of price rises between July and November 1999. The commission concluded that there was no evidence of collusive behaviour and that price rises were justified by the substantial increases in the cost of crude oil and imported petrol and by the operation of competitive pressures.

Emergency Response Measures Policy The core members of the New Zealand National Emergency Sharing Organisation (NESO) are the Ministry of Economic Development and the major oil operators in the country. Other government agencies and user groups would be invited to participate as required. The New Zealand NESO is convened and activated only when required, i.e. for actual or prospective crises and for allocation systems or other tests. The principal measures for oil supply crisis management are the International Energy Agreement Act of 1976, the Petroleum Demand Restraint Act of 1981, and the Petroleum Demand Restraint (Regulations Validation and Revocation) Act of 1981. Under the International Energy Agreement Act, a petroleum emergency may be 91

92

0.2

0.4

Source: Energy Prices and Taxes, IEA/OECD Paris, 2001.

0

Tax Component

0.8

1

1.2

51.3% Greece 55.8% Poland 58.2% Spain 54.5% Luxembourg 53.8% Czech Republic 47.2% Portugal 59.4% Switzerland 57.9% Ireland 58.5% Hungary 59.4% Austria 61.2% Turkey 67.6% Germany 64.8% Belgium 55% Japan 63.4% Italy 68.4% France 65.5% Denmark 66.1% Sweden 65.8% Finland 65.3% Netherlands 68.6% Norway 74.7% United Kingdom

US$/litre

0.6

22.2% United States 51.7% Australia 40.3% Canada 40.4% New Zealand 13% Mexico

Figure 24 OECD Gasoline Prices and Taxes, 3rd Quarter 2000

93

0.2

0.4

US$/litre

0.6

0.8

1

New Zealand 29.3% United States 48.3% Mexico 52.1% Australia 52.7% Poland 51.2% Portugal 52.5% Spain 50.9% Greece 50.4% Czech Republic 48.1% Luxembourg 53.6% Austria 60.2% Germany 52% Belgium 56.1% Ireland 53.7% Finland 62% France 55.6% Netherlands 41% Japan 59.2% Italy 60.4% Switzerland 55.6% Denmark 54% Sweden

Note: Data not available for Canada, Hungary and Turkey. Source: Energy Prices and Taxes, IEA/OECD Paris, 2001.

0

11.6%

Tax Component

1.2

64.6% Norway 74.4% United Kingdom

Figure 25 OECD Automotive Diesel Prices and Taxes, 3rd Quarter 2000

proclaimed, and regulations issued to restrain demand for petroleum and to ensure supplies of petroleum. In an oil supply emergency, the government would be advised by the Officials Committee on Energy Policy chaired by the Department of the Prime Minister and Cabinet, which has as members the Ministry of Economic Development, the Treasury, and the Ministry for the Environment. Demand restraint measures, drawdown of stocks or surge production would be arranged by the Ministry of Economic Development, either through co-operation with the industry or by invoking regulations. New Zealand does not have specific guidelines on national fair sharing. If required, they could be established in consultation with the major operators in the oil market or by regulation.

Emergency Reserves The only crude oil and product stocks held in New Zealand are company stocks. The Petroleum Demand Restraint Act of 1981 allows government drawdown of these stocks. Stockdraw would be achieved by agreement with the major stockholders, as happened during the 1990/1991 Gulf Crisis. Operational aspects would be managed by the stockholders. The maximum stockdraw envisaged is 10 per cent of stocks during a three-month period. Industry stocks would be released through normal commercial channels at prevailing market prices. Under the International Energy Agreement Act of 1976, the minister has the authority to order the maintenance of reserve supplies of petroleum at a level required by the International Energy Program. However, the government does not place legal stockholding obligations on industry. New Zealand meets its IEA commitment with a generous margin, and the government has no plans to change its stockholding policy.

Demand Restraint Measures New Zealand considers that market mechanisms are the most cost-effective response to a supply shortage. Light-handed measures, such as publicity campaigns, stockdraw, and speed limit restrictions could be applied immediately. Stronger measures, such as car-less days, petrol-less weekends and allocation, are regarded as instruments of last resort.

NATURAL GAS Industry Structure Figure 26 illustrates the ownership of the gas industry and physical flows of gas. 94

Figure 26 Natural Gas Ownership. Flows in New Zealand

McKee

FIELDS

Maui

Kapuni

Kamiro

Ngatoro

TAWN/Piakau

0.6%

0.5%

4.0%

By net production: 4.3%

80.3%

10.3%

PRODUCERS

FCE Shell (Petro) Todd

Shell (Petro) Todd

FCE

NGC

AGL

RETAILERS

Enerco*, TransAlta

Contact Energy

NGC, Nova, Qest, Wanganui

Major users supplied directly from the CONSUMERS transmission system By consumption:

FCE Bligh

Shell (Petro) Todd

TRANSMITTERS DISTRIBUTORS Powerco,

FCE

KGCL (FCE)

The Crown

WHOLESALERS

FCE NZOG Ngatoro

Users supplied from distribution systems

26.2%

Methanex

Petrochem

Electricity generation

38.6%

3.0%

32.2%

* Owned by Contact Energy. Notes: The arrows portray significant flows of gas ownership up to the wholesale/transmission stage. They portray the physical and/or ownership flow of gas from the distribution stage onwards. FCE is Fletcher Challenge Energy Limited; KGCL is Kapuni Gas Contracts Limited; NZOG is New Zealand Oil & Gas Limited; Shell (Petro) is Shell (Petroleum Mining) Company Limited; TAWN is Tariki, Ahuroa, Waihapa and Ngaere; Todd is Todd Petroleum Mining Company Limited; NGC is Natural Gas Corporation. Source: Ministry of Economic Development, New Zealand Energy Data File, January 2000.

Production All gas is produced in the Taranaki region, mainly from the Maui field. The Maui field is owned by Fletcher Challenge Energy, Shell Petroleum Mining and Todd Energy. The Kapuni field is owned by Shell Petroleum Mining and Todd Energy. In 1999, the Maui and Kapuni fields produced 90.7 per cent of total gas production in New Zealand. Figure 27 illustrates the likely depletion profile of the Maui field. The graphic is not a projection of gas production from the Maui field, but rather the annual contracted quantities for Maui. The maximum annual offtake can be significantly higher and has been in some recent years owing to flexibility in the contract. 95

Figure 27 Maui Contracted Gas Commitments 180 160 140

PJ per annum

120 100 80 Annual Contracted Quantities

60 40 20 0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Ministry of Economic Development, New Zealand.

Distribution and Retailing Gas is reticulated in North Island only. The gas distribution network is illustrated in Figure 28. In 1987, the government sold 30 per cent of Petrocorp, a state-owned company responsible for production, distribution and transmission of gas. In 1988, the government’s remaining interest in Petrocorp, including the Natural Gas Corporation (NGC), was sold. NGC operates the gas transmission network and owns about two-thirds of the high-pressure pipeline network. Maui Development Limited owns the remainder of the network, but NGC is the sole operator. There are five distributors and six retailers. Four of the retailers are also involved in distribution. Compressed natural gas is supplied to the automotive market through North Island service stations.

Gas Consumption Natural gas consumption is illustrated in Figure 29. There are three major consumer groups: the petrochemical industry, electricity generation and direct reticulated users. 96

Figure 28 Natural Gas Network Kauri

Whangarei Marsden Point Refinery

Pacific Ocean

Maungaturoto

Warkworth

Auckland

Henderson Valley

Alfriston

Papakura West GlenBrook

Ramarama

Rotowaro

Hamilton

Tasman Sea

Pokuru

Huntly

Tauranga

Mount Maunganui Whakatane

Rangiuru

Tirau Kihikihi North

Te Kuiti Mahoenui Methanol Plant

Waitoa

Rotorua

Opotiki Kawerau

Kinleith

Gisborne

Mokau

Taupo

New Plymouth

Inglewood Derby Road Eltham

Pungarehu Opunake Lactose Plant

Maui Platform

North Island

Kapuni

Waitotara Waverley Kaitoke

Napier Hastings

Marton Lake Alice Feilding Ashhurst Palmerston North

Wanganui

Longburn Levin

Mangatainoka Pahiatua

Tawa B

Pacific Ocean

Wellington

South Island 0

Km 50

100

Delivery Points Compressor Stations

Source: International Energy Agency, Paris.

97

Figure 29 Natural Gas Consumption, 1973-2020 3.0 2.5

Mtoe

2.0

Industry Residential

1.5

Transport Other*

1.0 0.5 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

* includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and country submission.

In 1999, 42 per cent of New Zealand’s natural gas was used for petrochemicals, in the production of chemical methanol at the Montunui and Waitara methanol plants, both owned by Methanex New Zealand Limited. Crude methanol is produced from natural gas and either distilled into high-grade methanol or made into synthetic petrol. In April 1999, the methanol-to-petrol unit was permanently closed at the Montunui plant. Gas used in chemical methanol production increased by 25 per cent in 1999 over 1998. Natural gas is also used as a fuel and feedstock in the manufacture of ammonia and urea fertilisers. A further 41 per cent of gas was used for electricity generation in 1999. Consumption for co-generation is also growing rapidly. The remaining 17 per cent of gas was reticulated through a high-pressure pipeline system direct to major users, and to gas utilities for distribution to other industrial users and to the commercial and industrial sectors. Reticulated demand, excluding co-generation, is decreasing. The market for automotive compressed natural gas has also decreased markedly following the removal of government subsidies in 1987.

Prices Gas prices in New Zealand are illustrated in Figures 30 and 31. Prices are high relative to other IEA countries in both the industry and the household sectors. 98

Methanol (methyl alcohol) Methanol is a primary liquid petrochemical made from synthesis gas, usually produced from steam-reformed natural gas and carbon dioxide. Methanol is synthesised under pressure in a catalytic process. The crude methanol produced is purified to chemical grade by distillation. Natural gas is the feedstock used in most of the world’s production of methanol and typically represents the most significant cost component. Methanol is used to manufacture the fuel additive MTBE as well as other chemical products. It can be used as a fuel, including in blends of up to 85 per cent methanol with gasoline. It has potential for use in fuel cells. Synthesis gas may also be used to produce liquid fuels and speciality products such as lubricants and waxes. In New Zealand, the Methanex plant at Montunui produced petrol until 1997. Methanex transports methanol from production sites in Chile, New Zealand and North America to world-wide markets. New Zealand exports methanol to Australia and Asia.

Regulation Gas franchise areas were removed in 1993. Wholesale gas price controls lapsed in 1993, by which time retail price controls had already lapsed. Self-regulation is undertaken by the industry with monitoring by the Ministry of Economic Development. Information disclosure regulations are intended to ensure that consumers and the government are informed on performance, pricing and costs.

Gas Information Disclosure Regulations Information disclosure regulations were introduced for the gas industry in 1997. The regulations closely resemble the 1994 electricity information disclosure regulations and require pipeline owners to disclose financial statements, performance measures, contracts, line charges and pricing methodologies. A project to introduce new gas regulations is under way. These regulations will more closely resemble the 1999 electricity regulations.

Access Code The Gas Pipeline Access Code came into effect in early 1999. It is a voluntary, selfregulatory initiative between pipeline owners and users. It covers all gas pipeline systems except gas gathering pipelines. The code provides for neutral, nondiscriminatory access to available capacity. It sets out high level principles, leaving pipeline owners to interpret and to include details on application in Information Memorandums which the pipeline owners issue. The code covers the following areas: 99

Figure 30 Gas Prices in New Zealand and in Other Selected IEA Countries, 1980-1999

Industry Sector 600

US$/10E7 kcal GCV

500

400

300

200

100

0 1980

1985

1990

1995

1999

1995

1999

Household Sector 1600 1400

US$/10E7 kcal GCV

1200 1000 800 600 400 200 0 1980

1985 New Zealand

1990 Australia

Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

100

Canada

Japan

Figure 31 Gas Prices in IEA Countries, 1999

Industry Sector Greece New Zealand Switzerland Ireland Turkey Czech Republic France Hungary Spain Finland United States United Kingdom

Tax Component

Canada

0

50

100

150

200

250

300

350

US$/10E7 kcal GCV Note: Data not available for Australia, Austria, Belgium, Denmark, Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal and Sweden.

Household Sector Denmark Italy Spain Switzerland Ireland Austria France New Zealand United Kingdom United States Luxembourg Turkey Canada Czech Republic Greece Finland Hungary

Tax Component 0

100

200

300

400

500

600

700

US$/10E7 kcal GCV Note: Data not available for Australia, Belgium, Germany, Japan, the Netherlands, Norway, Portugal and Sweden.

Source: Energy Prices and Taxes, IEA/OECD Paris, 2000.

101

■ Ownership and confidentiality of information. ■ Ring fencing of energy trading and transportation activities. ■ Unbundling of services. ■ Facilitating tradability of service entitlements. ■ Access to all capacity on day-ahead basis. ■ Access to developable capacity. ■ Access to receipt and delivery points – interconnection. ■ Access request process with timelines. ■ Measurement and reconciliation procedures. ■ Pricing principles. ■ Contents of Information Memorandums. ■ Administration of the code. ■ Dispute resolution. ■ Signing-on to the code. The code is voluntary, has no sanctions, does not affect pricing, and relies on information disclosure regulations. The industry considers that the code is working satisfactorily because there have been no complaints and the dispute resolution procedure has not been invoked.

Reconciliation Code A Reconciliation Code came into effect on 1 July 2000 to assist the development of a competitive gas market. The code provides a uniform process for customer transfers between competing retailers, and the allocation and reconciliation of gas quantities between users at receipt points into a transmission system or distribution network (at which possession, control or ownership of gas passes from one person to another). The code was established by a gas industry working group made up of representatives of industry service providers. The working group agreed that any person wishing to be involved in the transport or trading of gas on open access facilities must comply with the code.

COAL The structure of the industry is illustrated in Figure 32. 102

Figure 32 Coal Ownership Flows in New Zealand

South Island MINING AREAS

West Coast

North Island Other South Island

Southland

Waikato

PRODUCERS

Solid Energy (Coal Corporation of New Zealand Ltd)

WHOLESALERS DISTRIBUTORS RETAILERS

BHP NZ Steel

CONSUMERS

Other Producers Glencoal Energy Francis Mining Greymouth Coal Newvale Coal Company (and about 20 smaller producers)

Japan, Chile, India, Australia, China and Netherlands

Steel manufacture

Export

Other Companies Many of them small retailers

Industry Commercial Residential Agriculture Transport Electricity Generation

Source: Ministry of Economic Development, New Zealand Energy Data File, January 2000.

Coal resources in New Zealand are extensive and are present in four major coal production areas: Waikato in North Island, and Nelson-Westland, Otago and Southland in South Island. Total in-ground resources are estimated to be about 15 billion tonnes, of which about 8.6 billion tonnes are economically recoverable. About 80 per cent of the recoverable resource is low-grade lignite, 15 per cent subbituminous, and 5 per cent high-grade bituminous. Solid Energy New Zealand Ltd (formerly the Coal Corporation of New Zealand Ltd) was established in 1987 as part of the government’s interests in coal operations. Solid Energy produces about two-thirds of New Zealand’s coal from 11 mines. It has major export contracts and supplies about 48 per cent of the local market. Private operators supply the remainder. There are no production subsidies. Production in 2000 grew to 2.8 Mt from 2.6 Mt in 1999, of which about 37 per cent was coking coal for steel-making and the remainder classified as steam coal, principally for power generation. Solid Energy’s operations on South Island supply export coking coal, while its North Island operations supply the domestic steam 103

coal market. The company’s Mt. Davy mine was closed in mid-1999 following a safety review. Also in 1999, Greymouth Coal (a joint venture between Solid Energy and Todd Energy) began development of the Rapahoe deposit, with an initial design output of 0.5 Mt per year of premium quality steam or PCI 22 coal. Exports of coal grew from 1.1 Mt in 1998 to 1.3 Mt (see Table 5). Export markets for premium grade New Zealand coal developed rapidly from 1990 to 1996 but declined from 1997 until 1999. In 1999, New Zealand’s largest export markets were Japan (32 per cent), India (17 per cent), and Australia (12 per cent). Table 5 Hard Coal Exports (thousand tonnes) 1978

1980

1985

1990

Australia Japan

11

70

378

395

178

80

158

158

546

640

487

377

432

207

222

137

224

121

216

134

134

132

108

349

321

287

387

42 70

230

1998 1999e

263

17

11

1997

51

Other Total

1996

243

India Other Asia and Oceania

1995

336

1 268 1 590 1 244 1 093 1 333

e: estimate. Source: Coal Information 1998, OECD/IEA, Paris, 2000.

Coal accounts for 7.5 per cent of total primary energy supply in New Zealand. In 1999, about 62 per cent of coal produced was used domestically while the rest was exported. Electricity generation accounted for 32 per cent of domestic use and basic metals for 32 per cent. Coal consumption by the transport and residential sectors has remained relatively steady.

CRITIQUE Oil and Gas Exploration activity is at record levels, but may need to be even higher if reserves of gas, in particular, are to be replaced. Petroleum exploration in New Zealand is going through a major upsurge with a record of 26 wells drilled in 2000. The last peak in activity was in 1994 when 23 wells were drilled. Only

22. Pulverised Coal Injection – coal injected into blast furnaces during steel-making; used in addition to coking coal.

104

Figure 33 Coal Consumption by Sector, 1973-2020 1.2 1.0

Mtoe

0.8 Industry 0.6

Residential/ Commercial

0.4 0.2 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000 and country submission.

10 wells were drilled in 1999. Importantly, many of the wells drilled in 2000 are “wildcat” exploration wells in previously unexplored areas. Exploration wells will account for 18 wells in 2000 compared with only five in 1999. The exploration effort is now more broadly spread than in the recent past. Nine exploration companies were drilling in 2000, compared with two in 1997. In 2000, overseas-based oil exploration companies were responsible for 16 wells, and international companies were participants in a number of other wells. Most exploration investment was in the Taranaki region, where 18 wells were drilled. But there were also five wells drilled in the Hawke’s Bay and Gisborne areas and two in rural Canterbury. The rate of exploration reflects the success of policies to attract investment to New Zealand’s exploration industry, and companies’ assessment of prospectivity in New Zealand. A high rate of exploration is necessary if there is to by any real chance of replacing the Maui oil and gas field, which is expected to be largely depleted by 2006-2012. New Zealand’s official outlook assumes that the field will be depleted by 2009, and that it will not be replaced by sufficient fields to sustain the present level of gas consumption. The petrochemical plants, at present consuming 39 per cent of New Zealand’s gas supply, are assumed to close by the end of their current gas contracts around 2005. 105

If gas reserves are not replaced, there will be major impacts on New Zealand’s energy sector, not only economically but also environmentally. Gas-fired power accounts for 23 per cent of generation currently, and the share is growing. Coalfired power has a share of only 5 per cent at present, and could be an economic replacement of gas, if gas supplies are depleted. The likelihood of gas reserves being depleted is a matter for judgement. However, high exploration activity, the anecdotal views of major exploration companies, and the views of others in the industry, suggest reserves will be replaced. For example, the Natural Gas Corporation has stated 23 that it is “ ... optimistic about the future outlook for gas supply in New Zealand following positive signals from a number of explorers. ... finds on the East Coast of the North Island also indicate that New Zealand has more than one hydrocarbon-containing geological basin and exploration activity is expected to increase over the next few years.” As high as the level of exploration activity is, the question arises if it could be higher still. Exploration fiscal and policy regimes are kept under constant review in all countries with potentially economic petroleum resources. New Zealand is no exception. Nevertheless, some industry sources consider the level of activity should be higher to raise the probability of present reserves being replaced. They point to more remote and hostile areas, such as the Great South Basin, as potential areas for exploration. Explorers in these areas would require special incentives to justify the risks involved. Industry has also suggested that the commendably flexible petroleum exploration regime in New Zealand may introduce a degree of uncertainty into investment decisions. Both of these points could be addressed through discussions with the industry.

Oil security remains a fundamental issue for New Zealand. Existing policies should be kept in place. Depleting oil supplies are of lesser importance to the make-up of New Zealand’s energy sector than the depletion of gas because most of New Zealand’s crude oil requirements are already imported. Only a small proportion of locally produced crude oil is refined in New Zealand. As reserves are depleted, the level of self-sufficiency will fall, but no great adjustment will be necessary in the refining and retailing industries as a consequence. Of course, there will be a corresponding increase in exposure to international supply disruptions, but New Zealand already has in place a diversified range of suppliers, its pricing of petroleum products already reflects world movements in crude oil prices, and stocks and emergency supply arrangements are in place. It will be important to stay with these policies as oil reserves are depleted. Despite recent rises in fuel prices as a result of movements in crude oil prices, import parity pricing is the best means by which economies can adjust to volatility in the world oil market. Adjustment of taxation to soften the effect on consumers may be attractive in the short term, but potentially damaging in the longer term.

23. Chief Executive Officer’s Report, Annual Report 2000, Natural Gas Corporation Holdings Limited.

106

Alternative Sources of Gas Liquefied Petroleum Gas (LPG) In 1998, New Zealand produced 0.216 Mtoe of LPG/natural gas liquids. Production has doubled since 1985, but is still only equivalent to about 5 per cent of the total net production of natural gas. The market for LPG is nevertheless growing and LPG can provide a nationwide gas supply, particularly in South Island and other areas where reticulated supply is not available. The Natural Gas Corporation has mounted a promotional campaign to raise awareness of the advantages of LPG, supported by imported LPG cylinders from Australia. LPG is also being marketed as a transport fuel.

Liquefied Natural Gas (LNG) LNG is not used in New Zealand, but could be an option in the future. However, for LNG to become economic, wholesale prices would have to rise significantly in order to pay for a dedicated production centre, and a port and processing centre in New Zealand. It would also have to compete with coal and oil, but could have greenhouse emissions benefits. Overall, there probably will not be enough high-value consumers (who could not be satisfied by remaining domestic supplies or alternative fuels) to make LNG economically viable in New Zealand.

Regulatory reform for gas has not progressed as far as for electricity. The gas market is small and dominated by large industrial users that can negotiate bilaterally for gas supplies at competitive prices. Only 27 per cent of gas supplies are reticulated to industrial, commercial and domestic customers on North Island. For these reasons, further regulatory reform of the gas market is not considered a high priority. Removal of statutory barriers to competition (in 1993), industry governance, such as the new access code, and information disclosure have been considered adequate. Convergence of the gas and electricity markets may call for market reforms in the gas sector consistent with those in the electricity sector. Companies supplying both electricity and gas are becoming more common. Energy advisory services are being offered to consumers on the appropriate mix of energy sources to use. Dual energy bills were introduced by the Natural Gas Corporation for the first time in January 2000. At present, gas prices are limited by competition with electricity. But only if both markets are operating freely and transparently will the outcome be optimised. There is, for example, a risk of cross-subsidisation where single companies have interests in both sectors. Consistency of the gas and electricity regimes could help promote integration of the markets. The government’s concern to avoid an expensive regulatory regime is understandable in such a small market. The issues involved deserve consideration. Preparation of an options paper would be one means of exposing the issues and analysing their consequences. 107

Coal Continued government ownership of coal assets is questionable. The government-owned Solid Energy New Zealand Limited produces about two-thirds of the country’s coal and supplies about half the domestic market. Coal is currently a minor fuel for electricity generation in New Zealand. The share may rise to replace gas and as electricity consumption rises with economic growth. Earlier attempts to sell the government’s interest were postponed pending improvements in market conditions. Although the international coal market has recently seen a recovery in prices, coal prices have historically been low and the outlook for prices must realistically be assessed as flat. There is nevertheless a strongly competitive market for coal assets as demonstrated by the number of ownership changes in Australia. Unlike the electricity sector, there would appear to be no public interest considerations preventing the sale of Solid Energy.

RECOMMENDATIONS The Government of New Zealand should:

Oil and Gas ■ Review policy and invite industry submission on the regime necessary to encourage exploration in the Great South Basin and in other remote areas, and on further improving administration of petroleum exploration generally. ■ Investigate the benefits of regulatory reform in the gas market and publish a paper on possible options for reform; in particular, review the implications of the close relationship between the gas and electricity sectors.

Coal ■ Review the rationale for government shareholding in the coal industry; reconsider the postponement of the privatisation of Solid Energy New Zealand Ltd in view of recent improvements in international coal prices, but also the generally flat outlook for growth in coal prices expected in the long term.

108

8 ENERGY RESEARCH AND DEVELOPMENT POLICY DEVELOPMENT In the 1980s New Zealand’s research, science and technology system had a strong science focus. Funding was determined largely by allocations in the previous financial year, and research was driven largely by individual curiosity. The government’s involvement was generally restricted to providing the funding in the expectation that others would identify ways to use the knowledge gained. In the 1990s the government overhauled the structure with the aim of developing a system that featured transparent decision-making, clear priorities and strong accountability. In 1996, the gouvernment published a strategic vision for research, science and technology, RS&T 2010: The Government Strategy for Research, Science and Technology in New Zealand, and undertook to increase public investment to a target of 0.8 per cent of GDP by 2010. In Blueprint for Change (May 1999), the government proposed four goals for investment in research, science and technology: ■ Innovation: Investments under this goal should assist the overall innovation system to operate as effectively as possible. The costs of developing and running the system are included under this goal. ■ Economic: Investments should assist New Zealand enterprises to compete effectively in foreign markets. Strategic research to identify new products and services is included under this goal. ■ Environment: Investments under this goal should help New Zealanders to understand, maintain and enhance a healthy environment. ■ Social: Investments should help generate knowledge to improve social well-being.

PRIORITIES The government has three immediate priorities for research, science and technology: ■ Boosting private sector research and development. ■ Developing new ideas and skilled people. ■ Investing in strategic areas. To achieve these objectives, the government in the 2000/2001 budget announced an allocation of NZ$ 473.99 million for research, science and technology, a net 109

increase of 43.6 million above the 1999/2000 budget allocation. The extra funding puts the government on track to meet the target of 0.8 per cent of GDP invested in research and development by 2010. The funding is broken down as follows. ■ Private sector research and development • NZ$ 11.8 million for a new Grants for Private Sector Research and Development Scheme. • NZ$ 8.5 million increase for Technology New Zealand. ■ Basic research • The newly established New Economic Research Fund has a budget of NZ$ 50.8 million. • The Marsden Fund and the Supporting Promising Individuals programme have both received increases in funding. ■ Strategic areas • Innovation – increase of NZ$ 0.6 million. • Economic – increase of NZ$ 2.1 million. • Social – increase of NZ$ 4.1 million. • Environmental – increase of NZ$ 0.4 million.

GOVERNMENT ENERGY RESEARCH AND DEVELOPMENT The Ministry of Research, Science and Technology (MoRST) is the government’s principal adviser on research and development. Its principal duties are: ■ Providing advice on science, investment and strategic priorities for innovation in New Zealand. ■ Measuring and reporting on the overall performance of the research, science and technology system (including the parties within the system) and individual investments. ■ Working with stakeholders to respond to challenges and opportunities. The Foundation for Research, Science and Technology (FoRST) is responsible for investing the majority of public money in research, science and technology. The foundation also plays a leading role in facilitating alliances, linkages and collaborations with stakeholders to achieve the government’s goals of wealth creation, and environmental and social well-being in New Zealand. The foundation’s mission is to invest in innovation for New Zealand’s future, and accordingly it is responsible for proposing a wide range of strategic initiatives in the area of industry research, science and technology. 110

Figure 34 Energy Research and Development Public Budget (excluding Nuclear) vs GDP in IEA Countries, 1999

Turkey Portugal France United Kingdom Spain New Zealand Germany Canada Denmark United States Japan 0

0.1

0.2

0.3

0.4

per thousand units of GDP Conservation

Fossil Fuels

Power & Storage

Other*

Renewables

* cross-cutting technologies, system analysis, hydroelectric, hydrogen and energy technology information dissemination. Note: data not available for Australia,Austria, Belgium, Czech Republic, Finland, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Sweden, Switzerland. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2000, and National Accounts of OECD Countries, OECD Paris, 2000.

In 2000/01 FoRST has a budget of NZ$ 382 million and is seeking to take a role as a proactive investor, facilitator and catalyst within New Zealand’s innovation system. FoRST, the Health Research Council and the Royal Society of New Zealand disburse funding for research, science and technology. These agencies operate at arm’s length from the minister but work closely with MoRST to ensure that funding decisions are aligned with policy. A wide range of providers carries out the actual research: universities, Crown Research Institutes, research associations, and private businesses. There are nine Crown Research Institutes in the following areas: • Forestry • Pastoral Agricultural • Crop and Food • Horticulture and Food • Landcare 111

• • • •

Geological and Nuclear Sciences Industry Water and Atmospheric Environmental Science

CHANGING PRIORITIES In 1999/2000 the Public Good Science Fund invested NZ$ 6.4 million in energy research, including research into fossil fuels (oil, gas and coal), traditional renewables (geothermal and hydro), new and emerging energy technologies and energy efficiency. Over the past 10 years the proportion of funding allocated to fossil fuels and traditional renewables has declined, particularly for fossil fuels, while that for new and emerging technologies and energy efficiency has increased significantly. This trend is likely to continue. In 1992, fossil fuels received NZ$ 2.6 million (or 56 per cent of total energy funding). Since then, funding has declined substantially – in 1999 fossil fuel research received just over NZ$ 1.4 million (23 per cent). Since 1992, funding for traditional renewables (mainly geothermal) has also declined. In 1991 renewables received NZ$ 636 000 or just over 33 per cent of total energy funds. In 1999, traditional renewables received NZ$ 1.7 million (26.5 per cent). In 1992, new renewables received no funding. Since then, funding has increased to just over NZ$ 1.3 million or 20.4 per cent of total energy funds in 1999. In 1992, energy efficiency projects received NZ$ 793 000 or nearly 17 per cent of the total. In 1999, energy efficiency projects received NZ$ 1.9 million or just under 30 per cent of the total.

NEW STRUCTURE Outputs for research, science and technology funded by FoRST are now classified in the following areas as part of FoRST’s purchase agreement with the government: ■ The New Economy Research Fund, to create innovation opportunities in any area. ■ Research for Industry, to improve the competitiveness of New Zealand industries. ■ Technology New Zealand, to enhance capability of business to grow through adoption of new technologies. ■ Maori Knowledge and Development, to enhance the capability of Maori. ■ Health Research, to improve New Zealanders’ health. ■ Social Research, to improve societal well-being. ■ Environmental Research, to enhance understanding and management of our environment. 112

Funding for a large part of energy research will be from the second of these output classes, including most of the production and supply research. Energy research that has an environmental focus will be funded from the environmental output class. In 2000/1, energy research managed by FoRST will receive NZ$ 17.6 million, broken down as follows: New and emerging Conventional Distribution and utilisation Environmental impact Risk management Energy materials

NZ$ 11.2+ million NZ$ 15.2+ million NZ$ 12.2+ million NZ$ 11.2+ million NZ$ 10.53 million NZ$ 17.03 million

Total investment

NZ$ 17.36 million

Energy materials includes research for electronic applications and may overstate the total.

PRIORITIES IN SPECIFIC AREAS Energy Management Priorities are energy efficiency and conservation, social attitudes towards energy use, and understanding and mitigating the adverse environmental effects of processing, distributing and using energy. Research relating to alternative or improved fuels can also be funded within this category. ■ Example (1999/2000): The Building Research Association of New Zealand (BRANZ) was funded to conduct research into energy use and management in residential buildings.

Oil, Gas and Coal Research into oil, gas and coal forms the majority of the Conventional output class. Priorities are better defining oil and gas reserves, and using fossil fuels more efficiently and effectively and with least harm to the environment. Oil and gas research will be aimed specifically at proving and evaluating New Zealand’s hydrocarbon reserves. Coal research is directed towards options for utilising New Zealand’s coal reserves in more efficient, beneficial and environmentally acceptable ways. ■ Example (1999/2000): The Institute of Geological and Nuclear Sciences (IGNS) was funded to conduct research into New Zealand basin evolution and petroleum potential. 113

Renewable Energy (Hydro and Geothermal) Priority is given to research to increase the use of geothermal energy and to use it in a sustainable and efficient manner. The focus of geothermal research is on low enthalpy systems. A substantial research effort on large hydro systems is not anticipated as it is regarded as a mature technology, but there may be minor funding available for hazard prediction, demand forecasting, and environmental and social research associated with new developments. The research effort on hydro is focused on micro-hydro. ■ Example (1999/2000): Montgomery Watson (NZ) Ltd was funded to conduct research into the implementation of novel end-uses of low-grade geothermal energy.

New and Emerging Energy Technologies FoRST is looking to focus its investment in new and emerging technologies. Wind, biomass and solar are the key priorities for research in this area. Research should be appropriate to New Zealand conditions and have regard to international research. For wind, key research areas include studies related to developing wind power generation systems suitable for New Zealand conditions, identifying optimum and environmentally appropriate sites for locating wind farms, and merging wind power to energy distribution systems. For biomass, key research areas include demonstrating the technical and economic feasibility of biomass energy production and maximising efficiency in production and use. For solar, research priorities include assessing the resource, developing technologies and designs suitable for local conditions, economic viability, and the consequences of climate change scenarios. ■ Example (1999/2000): DesignPower NZ Ltd was funded to conduct research into improving wind farm viability in New Zealand. ■ Example (1999/2000): the New Zealand Forest Research Institute (FRI) was funded to conduct research into renewable woody biomass as a sustainable energy source.

CRITIQUE New Zealand invests around 1 per cent of its GDP on research and development. About half of this is funded by the government, and most of the remainder is from the private sector. A small proportion comes from overseas and non-profit sources. Government investment in research and development in New Zealand is slightly below the OECD average. Private sector investment is about one-third of the OECD average and lower in high-tech areas. About three-quarters of the publicly-funded 114

research is carried out in New Zealand’s nine government-owned Crown Research Institutes, established in 1992, and seven universities. Five of the institutes are focused on rural interests, two on the environment, one on geology and nuclear, and one on industry. New Zealand’s energy research capabilities are comparatively small. Energy research has therefore focused on issues specific to New Zealand and on adapting the results of international research. The government makes a substantial contribution to research and development generally, but energy-related activities are spread across a number of programmes and undertaken in a number of the Crown Institutes and elsewhere. There is no organisation dedicated to energy research and development. The present structure of research and development may impede its full potential contribution to achieving the government’s objectives for the energy sector. Energy research in New Zealand is characterised by user and research groups that are either supply- or demand-side oriented and this makes the job of prioritising research difficult. There may also be a need to increase funding for energy research and development, possibly by transferring funds from areas that now have a lower priority in the present government’s objectives. The proposal to ratify the Kyoto Protocol and the development of a National Energy Efficiency and Conservation Strategy introduce new and major priorities for research and development. The time frame for meeting the Kyoto target is relatively short. If research is to make a contribution, consideration might need to be given to setting energy research and development priorities for the pre- and postcommitment periods to ensure an appropriate balance between research close to commercialisation and fundamental research with longer-term goals in mind. For the pre-commitment period, in particular, efforts should be made to encourage the take-up of the results of energy research and development. The strategy is intended to provide a framework for enhancing the take-up of renewable energy, as well as for improving the efficient use of energy. Both aspects of the strategy have a research dimension, commencing with basic informationgathering on the present efficiency of energy use in New Zealand, and on ways of integrating available renewable energy technologies into the liberalised electricity market.

RECOMMENDATIONS The Government of New Zealand should: ■ Review the structure of government research and development in light of government priorities for the energy sector; enhance co-ordination of existing energy research and development in supporting the government’s National Energy Efficiency and Conservation Strategy and climate change policy programme. 115

■ Continue to assess the government’s overall research and development priorities in light of policy goals with a view to reallocating available funds to increase funding for energy research and development. ■ Further develop effective mechanisms for monitoring and assessing the performance of government-funded energy research and development to improve energy efficiency and to meet the Kyoto target. ■ Further improve the conditions for commercial application of the results of energy research and development activities; consider, at the outset, alliances of industry/government/universities to develop the knowledge base and technologies of strategic importance.

116

A ANNEX ENERGY BALANCES AND KEY STATISTICAL DATA Unit: Mtoe

SUPPLY 1973

1990

1998

1999P

2005

2010

2020

4.05 1.29 0.18 0.28 – – 1.23 1.07 –

12.18 1.39 2.11 3.87 0.62 – 2.01 2.17 –

13.84 1.91 2.57 4.15 0.66 – 2.10 2.45 0.00

15.00 2.33 2.13 4.81 1.21 – 2.00 2.52 0.01

15.32 3.03 2.15 3.10 1.32 – 2.27 3.44 0.01

16.05 3.16 2.15 2.97 1.56 – 2.27 3.92 0.03

18.69 3.88 2.15 3.28 2.03 – 2.34 4.96 0.07

TOTAL NET IMPORTS4 Exports Coal1 Imports Net Imports Oil Exports Imports Bunkers Net Imports Gas Exports Imports Net Imports Electricity Exports Imports Net Imports

4.27 0.02 – –0.02 – 4.60 0.31 4.29 – – – – – –

2.03 0.23 0.01 –0.22 1.47 4.04 0.32 2.25 – – – – – –

3.29 0.77 – –0.77 1.85 6.24 0.33 4.06 – – – – – –

3.39 1.00 0.01 –0.99 1.61 6.27 0.28 4.38 – – – – – –

4.38 1.16 – –1.16 – 5.90 0.37 5.53 – – – – – –

4.56 1.16 – –1.16 – 6.10 0.39 5.71 – – – – – –

6.04 1.16 – –1.16 – 7.63 0.43 7.20 – – – – – –

TOTAL STOCK CHANGES

–0.05

–0.05

0.03

–0.42

–

–

–

TOTAL SUPPLY (TPES) Coal1 Oil Gas Comb. Renewables & Wastes2 Nuclear Hydro Geothermal Solar/Wind/Other3 Electricity Trade5

8.27 1.26 4.42 0.28 – – 1.23 1.07 – –

14.15 1.13 4.35 3.87 0.62 – 2.01 2.17 – –

17.16 1.21 6.60 4.15 0.66 – 2.10 2.45 0.00 –

17.97 1.34 6.08 4.82 1.21 – 2.00 2.52 0.01 –

19.70 1.87 7.68 3.10 1.32 – 2.27 3.44 0.01 –

20.61 2.00 7.86 2.97 1.56 – 2.27 3.92 0.03 –

24.74 2.72 9.35 3.28 2.03 – 2.34 4.96 0.07 –

Shares (%) Coal Oil Gas Comb. Renewables & Wastes Nuclear Hydro Geothermal Solar/Wind/Other Electricity Trade

15.3 53.5 3.4 – – 14.9 12.9 – –

8.0 30.7 27.4 4.4 – 14.2 15.4 – –

7.0 38.4 24.2 3.9 – 12.2 14.2 – –

7.5 33.9 26.8 6.7 – 11.1 14.0 – –

9.5 39.0 15.8 6.7 – 11.5 17.5 0.1 –

9.7 38.1 14.4 7.6 – 11.0 19.0 0.1 –

11.0 37.8 13.3 8.2 – 9.4 20.1 0.3 –

TOTAL PRODUCTION Coal1 Oil Gas Comb. Renewables & Wastes2 Nuclear Hydro Geothermal Solar/Wind/Other3

P is preliminary, – 0 is negligible, – is nil, .. is not available. Please note: Forecast data refer to the fiscal year.

117

Unit: Mtoe

DEMAND FINAL CONSUMPTION BY SECTOR 1973

1990

1998

1999P

2005

2010

2020

TFC Coal1 Oil Gas Comb. Renewables & Wastes2 Geothermal Solar/Wind/Other Electricity Heat

6.05 0.87 3.67 0.14 – – – 1.37 –

9.91 1.01 4.43 1.30 0.51 0.27 – 2.39 –

12.25 0.87 5.46 2.40 0.53 0.31 – 2.68 –

12.93 0.85 5.57 2.69 0.70 0.34 – 2.77 –

13.87 1.00 6.85 1.78 0.78 0.38 – 3.10 –

14.44 1.04 7.48 1.30 0.84 0.40 – 3.39 –

16.96 1.09 8.94 1.51 0.97 0.47 – 3.98 –

Shares (%) Coal Oil Gas Comb. Renewables & Wastes Geothermal Solar/Wind/Other Electricity Heat

14.4 60.6 2.4 – – – 22.6 –

10.2 44.7 13.1 5.1 2.7 – 24.1 –

7.1 44.5 19.6 4.3 2.6 – 21.9 –

6.6 43.1 20.8 5.4 2.6 – 21.4 –

7.2 49.3 12.8 5.6 2.7 – 22.3 –

7.2 51.8 9.0 5.8 2.8 – 23.5 –

6.4 52.7 8.9 5.7 2.8 – 23.5 –

TOTAL INDUSTRY6 Coal1 Oil Gas Comb. Renewables & Wastes2 Geothermal Solar/Wind/Other Electricity Heat

2.18 0.69 0.96 0.05 – – – 0.48 –

4.07 0.86 0.59 1.06 0.39 0.22 – 0.96 –

5.15 0.75 0.52 2.18 0.41 0.25 – 1.04 –

5.70 0.73 0.51 2.43 0.55 0.28 – 1.19 –

5.22 0.79 0.63 1.45 0.62 0.30 – 1.43 –

4.97 0.83 0.66 0.95 0.67 0.32 – 1.53 –

5.57 0.87 0.72 1.10 0.78 0.38 – 1.74 –

Shares (%) Coal Oil Gas Comb. Renewables & Wastes Geothermal Solar/Wind/Other Electricity Heat

31.5 43.9 2.4 – – – 22.2 –

21.1 14.4 25.9 9.6 5.4 – 23.6 –

14.5 10.1 42.3 8.0 4.9 – 20.2 –

12.9 9.0 42.7 9.7 4.9 – 20.9 –

15.2 12.1 27.7 11.9 5.8 – 27.4 –

16.6 13.4 19.2 13.5 6.5 – 30.9 –

15.6 13.0 19.6 13.9 6.7 – 31.2 –

TRANSPORT 7

2.15

3.54

4.63

4.76

5.73

6.29

7.60

TOTAL OTHER SECTORS Coal1 Oil Gas Comb. Renewables & Wastes2 Geothermal Solar/Wind/Other Electricity Heat

1.72 0.19 0.57 0.09 – – – 0.88 –

2.30 0.15 0.37 0.18 0.12 0.05 – 1.42 –

2.47 0.12 0.35 0.21 0.12 0.06 – 1.61 –

2.47 0.11 0.34 0.25 0.15 0.06 – 1.55 –

2.92 0.21 0.50 0.32 0.16 0.08 – 1.66 –

3.19 0.21 0.54 0.34 0.17 0.08 – 1.85 –

3.78 0.22 0.63 0.41 0.19 0.09 – 2.24 –

Shares (%) Coal Oil Gas Comb. Renewables & Wastes Geothermal Solar/Wind/Other Electricity Heat

10.7 32.8 5.3 – – – 51.2 –

6.6 16.0 7.8 5.2 2.3 – 62.0 –

5.0 14.1 8.5 4.8 2.5 – 65.1 –

4.6 13.7 10.1 6.2 2.5 – 62.9 –

7.0 17.1 11.1 5.3 2.6 – 56.9 –

6.5 16.9 10.7 5.2 2.5 – 58.1 –

5.8 16.5 10.9 5.1 2.5 – 59.2 –

8

118

Unit: Mtoe

DEMAND ENERGY TRANSFORMATION AND LOSSES ELECTRICITY GENERATION INPUT (Mtoe) OUTPUT (Mtoe) (TWh gross)

1973

1990

1998

1999P

2005

2010

2020

3.16 1.59 18.53

5.37 2.77 32.27

6.32 3.23 37.57

6.85 3.18 36.94

7.73 3.62 42.09

8.81 3.97 46.15

10.97 4.65 54.04

8.5 6.1 1.4 – – 77.3 6.7 –

1.7 0.0 17.6 1.5 – 72.3 6.8 –

3.9 – 23.2 1.4 – 64.9 6.6 0.1

3.2 – 24.2 3.0 – 63.0 6.4 0.1

7.7 0.0 16.5 4.8 – 62.6 8.0 0.3

7.8 0.1 20.0 5.9 – 57.1 8.4 0.7

13.3 0.2 18.2 7.3 – 50.3 9.2 1.4

2.35

4.21

4.51

5.07

5.83

6.16

7.78

1.57 0.36 0.43

2.60 0.88 0.73

3.09 0.41 1.02

3.67 0.60 0.79

4.33 0.61 0.89

5.08 0.44 0.65

6.59 0.44 0.75

–0.13

0.03

0.40

–0.03

–

–

–

1973

1990

1998

1999P

2005

2010

2020

41.30 2.97 0.20 0.49 2.78 0.11 0.15 2.04

51.66 3.36 0.27 0.86 4.21 0.08 0.19 2.95

62.81 3.79 0.27 0.81 4.53 0.11 0.20 3.23

65.58 3.81 0.27 0.83 4.72 0.09 0.20 3.40

78.31 3.87 0.25 0.78 5.10 0.10 0.18 3.59

90.78 4.03 0.23 0.78 5.11 0.09 0.16 3.58

122.00 4.39 0.20 0.76 5.63 0.08 0.14 3.86

17.7

24.1

30.5

..

34.6

35.7

43.6

1.6

2.4

2.8

..

2.9

3.0

3.1

73–79

79–90

90–98

98–99

99–05

05–10

10–20

1.6 –4.5 –0.7 20.0 – – 4.6 –2.2 –

4.1 1.5 0.2 14.8 2.3 – 2.0 8.0 –

2.4 0.8 5.4 0.9 0.7 – 0.5 1.5 –

4.7 10.9 –7.8 16.1 83.1 – –4.4 2.9 25.0

1.5 5.8 4.0 –7.1 1.4 – 2.1 5.4 15.7

0.9 1.3 0.5 –0.9 3.5 – – 2.6 19.3

1.8 3.1 1.7 1.0 2.6 – 0.3 2.4 8.7

2.1

3.4

2.7

5.5

1.2

0.8

1.6

3.0 4.5 –2.3 0.7 0.8 1.3

3.5 7.9 –4.5 1.6 2.4 1.8

1.4 1.6 7.7 2.5 –0.0 0.2

3.5 8.4 8.0 4.4 0.3 1.1

1.9 0.4 4.0 3.0 –1.4 –1.8

1.8 0.9 0.6 3.0 –2.0 –2.1

1.6 1.5 2.3 3.0 –1.1 –1.3

9

Output Shares (%) Coal Oil Gas Comb. Renewables & Wastes Nuclear Hydro Geothermal Solar/Wind/Other TOTAL LOSSES of which: Electricity and Heat Generation10 Other Transformation Own Use and Losses11 Statistical Differences INDICATORS GDP (billion 1995 US$) Population (millions) TPES/GDP12 Energy Production/TPES Per Capita TPES13 Oil Supply/GDP12 TFC/GDP12 Per Capita TFC13 Energy-related CO2 Emissions (Mt CO2)14 CO2 Emissions from Bunkers (Mt CO2) GROWTH RATES (% per year) TPES Coal Oil Gas Comb. Renewables & Wastes Nuclear Hydro Geothermal Solar/Wind/Other TFC Electricity Consumption Energy Production Net Oil Imports GDP Growth in the TPES/GDP Ratio Growth in the TFC/GDP Ratio

Please note: Rounding may cause totals to differ from the sum of the elements.

119

Footnotes to Energy Balances and Key Statistical Data 1. Includes lignite and peat, except for Finland, Ireland and Sweden. In these three cases, peat is shown separately. 2. Comprises solid biomass and animal products, gas/liquids from biomass, industrial waste and municipal waste. Data are often based on partial surveys and may not be comparable between countries. 3. Other includes tide, wave and ambient heat used in heat pumps. 4. Total net imports include combustible renewables and waste. 5. Total supply of electricity represents net trade. A negative number indicates that exports are greater than imports. 6. Includes non-energy use. 7. Includes less than 1% non-oil fuels. 8. Includes residential, commercial, public service and agricultural sectors. 9. Inputs to electricity generation include inputs to electricity, CHP and heat plants. Output refers only to electricity generation. 10. Losses arising in the production of electricity and heat at public utilities and autoproducers. For non-fossil-fuel electricity generation, theoretical losses are shown based on plant efficiencies of 33% for nuclear, 10% for geothermal and 100% for hydro. 11. Data on “losses” for forecast years often include large statistical differences covering differences between expected supply and demand and mostly do not reflect real expectations on transformation gains and losses. 12. Toe per thousand US dollars at 1990 prices and exchange rates. 13. Toe per person. 14. “Energy-related CO2 emissions” specifically means CO2 from the combustion of the fossil fuel components of TPES (i.e. coal and coal products, peat, crude oil and derived products and natural gas), while CO2 emissions from the remaining components of TPES (i.e. electricity from hydro, other renewables and nuclear) are zero. Emissions from the combustion of biomass-derived fuels are not included, in accordance with the IPCC greenhouse gas inventory methodology. TPES, by definition, excludes international marine bunkers. INC-IX decided in February 1994 that emissions from international marine and aviation bunkers should not be included in national totals but should be reported separately, as far as possible. CO2 emissions from bunkers are those quantities of fuels delivered for international marine bunkers and the emissions arising from their use. Data for deliveries of fuel to international aviation bunkers are not generally available to the IEA and, as a result, these emissions have not been deducted from the national totals. Projected emissions for oil and gas are derived by calculating the ratio of emissions to energy use for 1999 and applying this factor to forecast energy supply. Future coal emissions are based on product-specific supply projections and are calculated using the IPCC/OECD emission factors and methodology. 120

B ANNEX

INTERNATIONAL ENERGY AGENCY “SHARED GOALS”

The Member countries* of the International Energy Agency (IEA) seek to create the conditions in which the energy sectors of their economies can make the fullest possible contribution to sustainable economic development and the well-being of their people and of the environment. In formulating energy policies, the establishment of free and open markets is a fundamental point of departure, though energy security and environmental protection need to be given particular emphasis by governments. IEA countries recognise the significance of increasing global interdependence in energy. They therefore seek to promote the effective operation of international energy markets and encourage dialogue with all participants. In order to secure their objectives they therefore aim to create a policy framework consistent with the following goals:

1 Diversity, efficiency and flexibility within the energy sector are basic conditions for longer-term energy security: the fuels used within and across sectors and the sources of those fuels should be as diverse as practicable. Non-fossil fuels, particularly nuclear and hydro power, make a substantial contribution to the energy supply diversity of IEA countries as a group.

3 The environmentally sustainable provision and use of energy is central to the achievement of these shared goals. Decision-makers should seek to minimise the adverse environmental impacts of energy activities, just as environmental decisions should take account of the energy consequences. Government interventions should where practicable have regard to the Polluter Pays Principle.

2 Energy systems should have the ability to respond promptly and flexibly to energy emergencies. In some cases this requires collective mechanisms and action: IEA countries co-operate through the Agency in responding jointly to oil supply emergencies. *

4 More environmentally acceptable energy sources need to be encouraged and developed. Clean and efficient use of fossil fuels is essential. The development of economic non-fossil sources is also a priority. A number of

Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland,Turkey, the United Kingdom, the United States.

121

7 Undistorted energy prices enable markets to work efficiently. Energy prices should not be held artificially below the costs of supply to promote social or industrial goals. To the extent necessary and practicable, the environmental costs of energy production and use should be reflected in prices.

IEA Members wish to retain and improve the nuclear option for the future, at the highest available safety standards, because nuclear energy does not emit carbon dioxide. Renewable sources will also have an increasingly important contribution to make. 5 Improved energy efficiency can promote both environmental protection and energy security in a costeffective manner. There are significant opportunities for greater energy efficiency at all stages of the energy cycle from production to consumption. Strong efforts by governments and all energy users are needed to realise these opportunities.

8 Free and open trade and a secure framework for investment contribute to efficient energy markets and energy security. Distortions to energy trade and investment should be avoided. 9 Co-operation among all energy market participants helps to improve information and understanding, and encourage the development of efficient, environmentally acceptable and flexible energy systems and markets worldwide. These are needed to help promote the investment, trade and confidence necessary to achieve global energy security and environmental objectives.

6 Continued research, development and market deployment of new and improved energy technologies make a critical contribution to achieving the objectives outlined above. Energy technology policies should complement broader energy policies. International co-operation in the development and dissemination of energy technologies, including industry participation and co-operation with non-member countries, should be encouraged.

(The Shared Goals were adopted by IEA Ministers at their 4 June 1993 meeting in Paris.)

122

C ANNEX GLOSSARY AND LIST OF ABBREVIATIONS In this report, abbreviations are substituted for a number of terms. bcm

billion cubic metres

b/d CHP CNG CPI

barrel per day combined production of heat and power; sometimes, when referring to industrial CHP, the term “co-generation” is used compressed natural gas consumer price index

ECNZ EECA EGB

Electricity Corporation of New Zealand Energy Efficiency and Conservation Authority Electricity Governance Board

GDP GHG GST GW

gross domestic product greenhouse gases (see footnote 9) Goods and Services Tax gigawatt, or 1 watt × 109

LPG

liquefied petroleum gas; refers to propane, butane and their isomers, which are gases at atmospheric pressure and normal temperature

MARIA MACQS mcm Mt Mtoe MW Mwe MWh MWt

Metering Reconciliation and Information Agreement Multilateral Agreement on Common Quality Standards million cubic metres million tonnes million tonnes of oil equivalent; see toe megawatt of electricity, or 1 Watt × 106 megawatt of electrical capacity megawatt-hour = one megawatt × one hour,or one watt × one hour × 106 megawatt thermal capacity

NOx NZ$ NZEM

oxides of nitrogen New Zealand dollar New Zealand Electricity Market

ODV OECD

optimised deprival value Organisation for Economic Co-operation and Development 123

OPEC

Organisation of the Petroleum Exporting Countries

PCI PJ PPP

pulverised coal injection petajoule purchasing power parity: the rate of currency conversion that equalises the purchasing power of different currencies, i.e. estimates the differences in price levels between different countries

R&D

research and development, especially in energy technology; may include the demonstration and dissemination phases as well

TFC

toe TPES TW TWh

total final consumption of energy; the difference between TPES and TFC consists of net energy losses in the production of electricity and synthetic gas, refinery use and other energy sector uses and losses tonne of oil equivalent, defined as 107 kcal total primary energy supply terawatt, or 1 watt × 1012 terawatt × one hour, or one watt × one hour × 1012

UNFCCC

United Nations Framework Convention on Climate Change

124

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