At the election, New Zealanders voted for change. Within our sector, we know Lake Onslow will no longer be considered as a solution to dry year risk. Beyond that, it is incumbent on the sector to engage with the new Government on what needs to change, and what priorities should remain. A key, initial way to do this is through submissions to MBIE on its energy strategy consultation.
At MEUG, we have suggested that the Government continues to develop an energy strategy. While the new Government undoubtedly has a different perspective on a range of issues, we could all benefit from a greater understanding of the intended pathway forward.
The key challenge and focus for MEUG will be affordability.
Electricity affordability is inextricably tied to productivity and our shared prosperity as a country. After the personal needs of warmth, shelter, food, connectivity, etc., the main benefit of electricity to the economy is leveraging a person’s individual productivity, which leads to higher wages and higher taxes from the individual and the company.
The Pan Pac Pulp mill is an example of electricity enabling productivity. Pan Pac employs 20 people to make over 600 tonnes of mechanical pulp per day through the investment in machinery and that machinery having access to affordable electricity. Without machinery and electricity, those 20 people could only make a few kilos per day. Electricity is leveraging an individual employee’s efforts by over a thousand times. Consequently, that individual is paid a very good wage.
In an export-dependent economy, when electricity becomes less affordable relative to overseas competitors, it constrains production and thereby our shared prosperity. Estimates, based on work by the Electricity Authority and independent investment advisors, are that consumers are paying between $1 and $1.9 billion a year more than they would under a workably competitive market. We need a better understanding of what is driving those prices, particularly given the Electricity Authority’s Market Design Advisory Group suggests pricing will become less affordable as we transition to a more renewable future. That has certainly been the international experience, where moving to highly renewable supply has resulted in significant price increases due to the costs associated with network integration.
We also need a market-driven approach to the mix of renewable and non-renewable generation. New Zealand is moving to higher levels of renewable generation. Consumers are demanding it, voters are demanding it, and emissions pricing is incentivising it. But, within the context of a more renewable future, Government should not set an arbitrary percentage of renewable generation. The market is best placed to weight the costs and benefits involved.
It is also reasonably clear we will need gas into the foreseeable future, particularly to provide reliable peaking supply. The certainty gas provides is essential to underpinning confidence in a highly renewable overall supply. That means existing, aging thermal generation needs to be replaced by new peaking supply. This might, for example, be battery-powered in the future, but for the foreseeable future, gas is the obvious answer.
And in the absence of Lake Onslow, we still need to think about the risk of intermittent supply. This is not just dry year risk, but the risks associated with periods of intermittent wind and sun (in a country literally called the Land of the Long White Cloud).