KEY POINTS:
The Prime Minister's vision of making New Zealand a carbon-neutral society set the stage for the recently released energy strategy and proposals for a carbon emissions trading scheme. Both should be the subject of intense scrutiny.
For example, Energy Minister David Parker's restriction on building new gas- and coal-fired power stations for the next 10 years is a daft decision. What was he thinking? Was he pressured by the Green Party to make this populist concession?
I cannot imagine that officials at the Ministry of Economic Development came up with the idea. Parker clearly didn't want to expose the idea to scrutiny in advance of making the decision, or we would have seen it canvassed in the draft strategy. I look forward to the minister explaining the logic for it.
If he had faith in the emissions trading scheme as a market instrument the best strategy would have allowed the market to determine the optimum mix of electricity generation (type, location) and consumption reflecting real world considerations such as supply, demand, cost-benefit and energy security.
Parker has thrown the gas industry a bone by stating that gas can be used to fire "peaking stations" for electricity generation. He appears to believe gas production can be put on hold or supplied on a drip-feed basis as and when needed for thermal generation.
This is based on a misunderstanding of the nature of the gas industry. Having made an investment, gas explorers need a return on investment, otherwise that investment will cease (in production and maintenance of infrastructure).
The idea that base load plants can be throttled back or kept on standby to act as peaking plants is simply wrong. If gas is to be stored in reserve to power thermal peaking stations this implies that someone will be paying gas producers not to sell their gas, at a significant cost to power prices.
It is apparent from ministerial statements that there are also misconceptions around the extent of gas reserves, which could be influencing Government thinking. The Minister of Energy has said he assumes there is not enough gas, and therefore in the future it will come from liquefied natural gas (LNG).
The current position is that at the very least there is 15 years of proven gas supply. Ministry of Economic Development modelling assumes 35PJ (petajoules) a year through new discoveries. There have been some encouraging discoveries of gas and a good prospect of more.
All of this adds up to a valuable indigenous energy resource which, if used judiciously and in "clean-burning" energy-efficient applications, should play a valuable role in our short- to medium-term energy mix. The gas resource has major strategic significance.
It makes sense to use gas for base load electricity generation to ensure security of supply when lakes are low and the wind isn't blowing. A second issue that deserves greater scrutiny is the emissions trading scheme, where there is no provision for a safety valve in the form of capping the price the Government expects industry to pay to buy emissions permits on the international market. There is significant international uncertainty about the future actions of other countries, the future of any Kyoto agreement post-2012, and the future price of carbon permits.
In such an environment we consider it to be irresponsible for the Government to be a world leader on this issue. We support the New Zealand Institute view that we should be a "fast follower". It is hard to get away from the idea that it is precipitous to act in advance of our trading partners.
There is a huge assumption that New Zealand companies will be able to adjust easily and cheaply to a carbon-constrained world. The figures often quoted by ministers cherry- pick the assumptions which show a low cost to both industry and consumers.
Westpac Bank recently released data which indicated that at expected carbon prices of $50 a ton we could expect electricity prices to increase by 20 per cent between 2008 and 2011. That's more than $10 a week for most homes in New Zealand. The impact on exporting companies may be significant.
No one expects environmental sustainability in the form of addressing climate change to come at zero cost. I just doubt whether the public has actually stopped to consider what the real cost to them of the Government's plans will be.
It is fashionable to support renewable energy and hybrid cars; accept estimates that "peak oil" is around the corner; and to believe that if Al Gore says the sky is falling this must be the case. I'd like to see us have a more meaningful debate on these matters before we adopt a path to the vision that is unsustainable.
* John Pfahlert is executive officer of the Petroleum Exploration and Production Association of New Zealand.
