Power generation 'challenge, not crisis', says Minister

By BRIAN FALLOW

We should not be overly concerned about the future of our energy supply, says Energy Minister Pete Hodgson.

"I'm not about to say that there is no problem," he told the Herald. Transition to an environment without the comfort of abundant and cheap Maui gas was always going to pose challenges.

But commentators who elevated that into "a crisis or a calamity" just to get attention were boring, he said.

The Mood of the Boardroom survey undertaken by the Herald in association with Business New Zealand identified the energy outlook as a major worry for business. After coping with electricity shortages, actual or potential, in two of the past three years that it is unsurprising.

And Meridian Energy chief executive Keith Turner, appearing before the commerce select committee recently, pointed to the failure of expected investment in electricity generation capacity to materialise.

"Four years ago there was a pretty universal prediction of the need for new power stations by 2005. But we still do not have committed construction for major new electricity plant today," he said.

"I'm delighted to see our lakes full because without strong hydro inflows we may be facing a difficult time with electricity supply once again."

Under the market model adopted by the previous Government in the late 1990s, no one has the responsibility of ensuring that adequate investment will occur.

Boards of directors are expected to appraise supply and demand, identify opportunities for profit and put their shareholders' capital at risk in pursuit of that profit.

But the view from the generators' boardrooms right now appears to be clouded by too much uncertainty for serious money to be committed.

Key uncertainties include gas supply, carbon tax, environmental consents, the future of the Comalco smelter and even the weather.

In a system which gets about two-thirds of its electricity from hydro schemes which have comparatively little storage, the variability of rainfall and snow melt provide a continued inherent risk to investors in generation.

Electricity commission chairman Roy Hemmingway said last Thursday that the difference in inflows into the hydro lakes between the wettest and the driest years over the past 70 years equated to 12,000 gigawatt hours of electricity.

Set against annual electricity demand of around 40,000 gigawatt hours, that is a big swing.

Hemmingway said that in more than half of those years there was a variance of 2000GWh from normal one way or the other, or about as much power as you would get from a large thermal power station running for four months.

The risk this poses to potential investors is obvious: the possibility of a string of wet years in which their shiny new plant is called on to generate less than they bargained on.

Then there is the risk around future supplies of natural gas, which has been the fuel of choice for thermal power stations.

How much gas is left in the Maui field and who should get it are issues yet to be determined.

Beyond the fields awaiting development, Pohokura and Kupe, both small compared with Maui, there is the question of what new gas will be found.

Hodgson said the Government was actively examining whether it had got the regime for oil and gas exploration right. "We know that it is by international standards fair or on the slightly generous side of fair. But then we are a long way away."

There might be a role for the Government in assisting with some of the associated costs.

"The chances of finding gas are reasonably good. We have any number of sedimentary basins," Hodgson said.

Traditionally explorers had looked for oil and treated gas finds as a sort of consolation prize. But now Contact Energy and Mighty Rover Power had formed a joint venture to go drilling for deep gas onshore.

Hodgson said it was for industry to decide whether to import liquefied natural gas and if so through which port.

The Ministry of Economic Development estimates electricity from imported LNG would cost about half as much again as that from South Island coal, even with a carbon tax of $15 a tonne of carbon dioxide.

The seven billion tonnes of Southland lignite represent an energy resource equivalent to about 30 Maui gas fields.

But it is low-grade coal at the wrong end of a national grid, which is on average 40 years old, and overshadowed by the prospects of a carbon tax from 2007.

That tax is a central plank of the Government's policy to give effect to its commitment to the Kyoto Protocol, the international treaty intended to begin curbing emission of "greenhouse" gases.

The Government has set a ceiling on the tax of $25 a tonne of CO2 for Kyoto's first commitment period, 2008 to 2012.

The life of a new thermal power station could extend across six five-year commitment periods of the Kyoto Protocol, Hodgson said. "Five of those international negotiations have yet to be held. So to some extent business is looking for certainty that cannot exist."

All of that assumes Kyoto will come into force, but that will happen only if Russia ratifies it.

Environmental concerns of a more local character are also an impediment to generation investment.

Meridian's proposed 570MW Project Aqua hydro scheme on the lower Waitaki has encountered fierce resistance, prompting a special bill, now before Parliament, to amend the Resource Management Act.

Genesis Power chief executive Murray Jackson cited RMA issues as one reason Genesis has not yet committed to a new gas-fired combined cycle plant alongside its existing plant at Huntly.

There were also unresolved issues about access to the Maui gas pipeline, he said. Until they were sorted out Genesis could not tell what the delivered price of the gas at Huntly would be.

It will not be ordering any turbines in the meantime.

Meanwhile, Hodgson has pushed through an amendment to the RMA, writing the need for renewable energy into its guiding principles.

The amendment gives councils a legislative mandate to give greater weight to a national interest in renewable energy when considering resource consents for projects such as wind farms.

Meridian's wind farm at Te Apiti, now under construction in the Taihape district, encountered no RMA difficulties but that owed a lot to the fact that it is in a part of the country where the trail has been blazed by TrustPower.

Another area of uncertainty is whether the country's largest electricity consumer, Comalco's Tiwai Point aluminium smelter, will be there after its contract expires in 2012.

It represents about 15 per cent of the existing demand for electricity.

The smelter has to renegotiate its power supply contract with Meridian next year.

The chances of this or any future Government offering to subsidise Comalco's electricity as in the 1960s were remote.

Hodgson said he had inherited the market model which meant that the Government was only one participant, albeit a significant one.

"Listing a long list of uncertainties and then saying, 'What are you going to do about it?' is not that helpful. I'm not sitting back and washing my hands of this. I'm a relatively activist minister, but I am not going to wear uncertainties that we can't, or shouldn't, easily fix."

Views from industry

MAC BEGGS, GEOSPHERE: "Panic is appropriate ... there's been a lot of unjustified reliance on other people taking risks to the point that no one's taken them and we're all in the same poo."

RICHARD TWEEDIE, TODD ENERGY: "It is business as usual, not cause for panic ... The horror stories of running out of gas before 2010 are mischievous."

CHRIS STONE, MCDOUALL STUART: "Maui has moved from being a blessing to New Zealand to being a curse." What was "once a challenge, is now a crisis."

CONTACT ENERGY: "There is too much uncertainty about what fuel sources can viably be found to allow New Zealand to meet its energy - and specifically electricity - needs towards the end of this decade."

RALPH WATERS, FLETCHER BUILDING: I just hope people haven't already forgotten that we did run out of power in two years out of three."