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Security of Supply

Electricity is essential to New Zealand’s economy. As evidenced by power outages in Auckland in 1998 and 2006 losses of electrical supply brings modern day life to a halt and inflicts severe economic losses to businesses and the public. Maintaining a secure electricity supply is essential for New Zealand to continue to develop and function as a first world country (MED, 2003, 2004). It has become apparent that as demand is increasing and approaching near production capacity, there will be more periods of high risk to electricity delivery unless sufficient reserve supply is developed and/or effective energy conservation measures are delivered (PCE, 2003). As recently as the 2008 winter supply issues have continue to cause concern with

107 warnings of a North Island power shortage and South Island hydro lakes running below average (The Press, 2008). A reintroduction of emergency electricity saving initiatives had to be enacted during this period. This ongoing situation highlights New Zealand’s great reliance on large hydroelectric schemes for electricity supply, which leaves it vulnerable in years where there is less than normal rainfall.

If and when the Maui gas era draws to an end (as predicted in 2015 – see p106), securing new sources or substitutes will become an urgent requirement for our energy system (CAE, 2003). The option of importing oil/gas supplies for electrical use is not desirable as our security of supply then becomes vulnerable to international pricing. If geopolitical or natural events affect supply chains New Zealand’s distance and isolation from source will mean likely delays in delivery. Recent large increases in the per barrel price of oil spiking at US $147 in July 2008 and rising refined fuel also indicates that a major reliance on overseas oil can leave the country having no option but to pay higher prices (IEA, 2003).

Investment Delay

The need for investment and upgrades in the electricity system in transmission and generation is long overdue (CAE, 2003). The disruption to Auckland in May 1998 illustrated that insufficient investment can lead to malfunction in the grid and set off a city-wide black-out that can take weeks to repair (Herald, 2006). The delivery of energy services both generation and transmission requires decades of large capital investment (CAE, 2003). If further problems (blackouts, brownouts) are to be averted sufficient investment from power companies and other developers must be initiated with the understanding that there is significant lag time for developments to process through consent and be incorporated into the system.

However, further investment itself in many types of large scale generation developments has become difficult, the output of existing hydro stations has been reduced through loss of water rights, coal-fired stations are perceived as undesirable, and even the development of renewables such as geothermal and wind energy is hindered (CAE, 2003). Investment shortage in transmission is also vital, as without the means of an effective and efficient delivery system new generation is pointless. If predicted increased electricity demand of 25 per cent by the MED is realised in New Zealand (MED, 2003) then the next 10 years is crucial for additional such investment otherwise risk of system failure becomes unavoidable.

108 Renewable Generation Decline and Climate Change Mitigation

New Zealand has the third highest level of renewable electricity generation in the world (MFE, 2007a). However, between 1995 and 2002 the proportion of renewable generation dropped 2.2 per cent (Barton, 2005). This is a significant concern as New Zealand is committed to reducing greenhouse gas emission in accordance with the Kyoto Protocol. More use of non-renewables means that our targets for emission reduction becomes further out of reach and our requirements for Kyoto non- obligation payments become significantly greater (EECA, 2006b). New Zealand has vast renewable resources which in theory are capable of providing the greater majority if not all of our electricity needs (EECA, 2006b; PCE, 2005).

If indications of future climate change effects from the ‘IPCC Third Assessment’ and the ‘Stern Report’ are accurate, without urgent reduction in emissions of GHG the ability for the Earth to recover from climate change becomes more difficult and global impacts more severe (IPCC, 2007; Stern, 2007). Therefore, it is prudent that New Zealand, along with all other nations, is promptly, yet responsibly, integrating new renewable energy sources to reduce dependence on fossil fuel supplies. However, gas and coal generation is likely to be required for peaking stations for many decades to come in New Zealand and elsewhere around the world (CAE, 2003).

Lack of Strategic Direction

For the past two decades there has been a general lack of direction for the electricity industry. Development in generation has been reactive rather than proactive (CAE, 2003). Market growth has been opportunistic with minimal regard for sustainability and long-term stability (PCE, 2003). Failure of market forces to direct the future direction has seen energy opportunities in New Zealand languish (CAE, 2003). However, recent legislation and discussion papers by the government (MED, 2004) are indicating that considerable thought is now being applied to the sector and its role is being developed with integrated consideration within the more recent New Zealand Energy Strategy (MED, 2007b).

Electricity industry development in New Zealand and around the world for much of the 20th _{Century had been almost exclusively focused on the supply of electricity,}

with little attention given to the demand side of electricity usage (Dobozi, 1987). However, with the development of the EECA and the NZEECS (New Zealand Energy

109 Efficiency and Conservation Strategy), energy efficiency and the wise use of energy is playing a stronger role in New Zealand energy strategies rather than solely focussing on a supply basis.

Lack of competition

The New Zealand electricity market is still dominated by a small number of major stakeholders: Contact Energy, Trustpower, Genesis, Mighty River Power and Meridian, of which the latter three remain government owned SOE’s. With limited competition generators have little incentive to strive for lower prices for consumers, and less inclination to consider energy efficiency or distributed sources of energy as an alternative to traditional supply (PCE, 2003). The electricity market in New Zealand is relatively exclusive with the possibility for new entrants being low and the ability for community involvement highly restricted (PCE, 2006a). Those who have a role are large companies with vested commercial interest in seeing that no further entrants have access, which would reduce their own market share, and hence profits. Although the situation has improved since the Electricity Reforms Act 1998, improvements are still needed to ensure that barriers to market entry are reduced.

Community ownership and involvement

There are also major barriers not only to community involvement in but also community ownership of electricity in New Zealand. As the state has controlled electricity for the majority of New Zealand’s development and supply has been provided on a reasonable and reliable level, the need for community development of energy has not been present. Having large scale development through central government has also shut out subsidies and other incentives as it did not make sense for the government to make competition against itself as the large scale development catered for ‘everyone’s’ needs. Tax revenue going towards energy generation through the government and eventually the SOE’s has meant that New Zealand citizens have perhaps been reluctant to provide more tax money towards smaller scale projects. At present, Government support of smaller scaled DG is limited to ensuring they can connect to the local lines networks (PCE, 2006a). The highly restrictive electricity sector environment is not conducive to the development of self-sufficient community schemes which sell energy back to local grids, however, indications from government are that these barriers are being reduced (MED, 2007b).

110 Government Research

Government research delivered through the many forms of ‘Crown Research Institutes’ over recent decades has played an extremely important role in the development of New Zealand’s energy sector. During the era of the late 1970’s and 1980’s, a balanced range of energy options were researched through crown research operations such as the Department of Science and Industrial Research. The converting of gas from the Maui field to fuel for use in transport and export, bulk domestic use of gas through reticulation systems, and developing wind energy systems were all given research consideration by the government during this time; however only the first two were encouraged in practice, as wind was not considered to be financially viable at the time (Chapman et al., 2006). With New Zealand now focusing a major part of it international value as a knowledge economy through providing technical solutions, continued government research funding in essential to provide a leading role in alternative energy research and technology development.

Fuel Transition

With the primary gas reserve Maui due to expire by around 2015 (CAE, 2003) and uncertainty surrounding future supplies sources thereafter, a gradual transition to alternative energies is required as major gas reserves are exhausted. This is also the case with oil in coming decades. This is of concern for the future electricity industry as if electricity supply becomes a resource not only for grid purposed but as a significant role in transport then this will have immense supply/consumption implications for the development needs of the electricity industry in New Zealand. With limited possibility of expansion of traditional renewables such as hydro, alternative generation will be required (PCE, 2006a). A transition phase will potentially mean electricity will be characterised by uncertain supply, higher costs, and loss of flexibility and reliability (CAE, 2003).