Keith Turner: Here comes the electricity shock

COMMENT

One thing the recent preoccupation with electricity and the demand for power savings has made clear to almost everyone is that we are living in a time of major change for our electricity system.

In many ways, this can be compared with the impact of the oil shocks of the early 1970s, when events in the Middle East forced a major shift in the way we thought about our transport.

Then, the act of filling up our cars suddenly took on new significance.

Instead of the inconsequential dollar or two it took to top up the tank, it became a purchase that had to be thought about - even budgeted for.

We became focused on fuel economy and big gas-guzzlers were no longer the family transport of choice.

For a while we even had carless days, and CNG became a common alternative to using oil-based fuels.

Something similar is happening with electricity.

For the past two decades, if not more, New Zealand has enjoyed relatively inexpensive electricity. This in part has been because much of our electricity is generated by hydro stations.

A big factor in the price of electricity in New Zealand has been the availability of low-cost natural gas from the Maui gas field, a huge field even in international terms.

But low-cost Maui gas is running out early, disappearing before our eyes.

Late last year came the news that the field is being depleted faster than we thought, and will run out in 2007.

More recent reports suggest it will run out even before that. Already, it can no longer supply the extra gas needed when our rivers run dry, so we will have to turn to other, more expensive, fuels.

Gas has fuelled our big thermal stations at New Plymouth and Huntly for more than 25 years.

Now these stations will have to find new fuel sources such as coal or fuel oil.

At the same time, rapid economic and population growth is increasing the demand for electricity.

Demand for electricity grows at about 2 per cent a year.

That is like adding a city the size of Dunedin or Hamilton to the country every year.

Figures for January to March this year showed that this growth in demand has expanded to 6 per cent.

This means the excess of supply over demand that has existed for many years is no longer there.

Clearly, we need to make some big decisions quickly on new sources of electricity.

Just as Auckland needs major, multibillion-dollar investment in new transport and roading infrastructure, New Zealand now urgently needs investment in new electricity generation capacity and upgraded transmission lines that can meet the country's thirst for more electricity.

And there will be big costs.



New Zealand and New Zealanders must accept that we have reached the end of the cheap electricity era.

Major industrial users have been making the painful adjustment for nearly two years.

When electricity prices fell 30 per cent in 1997/1998, industries were the first to gain.

For nearly five years they had huge benefits - adding up to nearly $3 billion to $4 billion.

But those prices were unsustainably low, and no one would build new power stations.

Over the past 18 months, contract electricity prices have risen 40 to 60 per cent.

Residential users have been insulated from this by the nature of the pricing arrangements they have with their retailers.

But it is inevitable that the new realities will soon make themselves felt in homes.



This will be hard for many. But if we want to continue to enjoy the favours that electricity - the life-blood of modern society - bestows upon us, we will have to pay the price.

We live in an increasingly electric world - it is impossible to imagine modern life without it.

Building new power plants is not cheap. Meridian's Project Aqua has a predicted price tag of $1.2 billion, and wind-farm developments will require hundreds of millions of dollars.

Meridian is not alone in grappling with these issues. Other electricity companies are also examining their options for more generation.

As we confront the big questions on our electricity future, one piece of wisdom will hold true.

We can have cheap electricity or we can have abundant electricity.

But unfortunately, the days when New Zealand could have cheap and abundant electricity seem to be over.

* Dr Keith Turner is chief executive of Meridian Energy.