The future for gasEnergy
Address to the Gas Industry Company conference
10.30am, 8 August 2008, Te Papa, Wellington
Good morning. I’d like first to offer my thanks to the Gas Industry Company for inviting me to speak to you today.
I intend to start by discussing the role of gas in the broader energy context, before talking in more detail about the Government’s objectives for the gas sector and our expectations for the Gas Industry Company and gas industry participants in meeting these objectives.
New Zealand Energy Strategy
As you know, the government released the New Zealand Energy Strategy last October. This Strategy sets out the government’s vision for a reliable and affordable energy system which provides sustainable, low emissions energy.
The world now accepts the need to reduce greenhouse gas emissions. New Zealand must play its part too.
As part of the Energy Strategy we have set a target to have 90 percent of our electricity coming from renewable sources by 2025. Our view is that all new generation should be renewable, except to the extend needed to ensure security of supply. New Zealand has plentiful supplies of geothermal and wind which makes this both achievable and affordable.
The government however does not favour substantial increases in the use of gas (or coal) for electricity generation until technologies such as Carbon Capture and Storage (or CCS) can provide low emissions supplies of energy from fossil-fuelled electricity generation.
We intend to reach our renewables target with a mixture of policies both to incentivise and to regulate.
Emissions Trading Scheme
To create incentives to invest in low-emissions alternatives, we are introducing the emissions trading scheme.
Put simply, the ETS will make it more expensive to behave in ways that increase emissions and make it relatively cheaper to behave in ways that don’t. Increases in emissions will cost and decreases are rewarded.
Price changes will influence investment decisions and the purchase decisions of producers and consumers across the economy, driving emission reductions and expansion of more environmentally friendly alternatives.
The scheme will include every sector of the economy, starting with forestry and followed by stationary energy and industrial processes in 2010, liquid fuels – primarily transport – in 2011, and agriculture, waste and other sectors in 2013.
10-year restriction on new baseload thermal generation
The Emissions Trading Scheme, as you know, is now before the House.
The Bill includes provisions to amend the Electricity Act to limit new baseload fossil fuel generation over the next ten years.
It creates a 10-year restriction on the construction of fossil fuel thermal generation above 10 MW whose fuel source contains more than 20 percent fossil fuels.
Exemptions to the restriction will be allowed under specific criteria.
The Emissions Trading Scheme by itself would not have precluded growth in fossil fuelled thermal.
For instance, if gas prices led to electricity prices marginally below the cost of renewables, because of our size it would only have taken a handful of new gas plants to take us along a largely non-renewable path.
This path would lead to higher emissions and would not result in significantly lower electricity prices.
We consider that investment in a major new fossil-fuelled plant during the next ten years would not be consistent with our vision of transitioning to a sustainable low emissions energy system.
The pricing of emissions, together with the renewables preference, will give a strong signal to investors that they should build renewables rather than more gas or coal-fired stations.
Currently, over 400 megawatts of generation is under construction – all of it renewable. Over the next five years we are expecting around 1400 megawatts of new generation. Over half of it is geothermal and almost all of it is renewable.
Not doom and gloom
Of course the flip side of a greater focus on renewables in electricity generation is a lesser focus on fossil fuels.
So what does this mean for the petroleum sector? It clearly does not mean ‘doom and gloom’.
Industrial demand has already increased, with Methanex having substantially increased their New Zealand production.
Fossil fuels, especially gas, will continue to have a critical role for some time to come.
They provide security, versatility and stability in the delivery of electricity.
The gas sector has an important role to play in achieving the government’s objective of maintaining security of energy supply at competitive prices as the country makes the transition to a sustainable energy future.
Contact Energy is intending to build a 200 megawatt peaking plant at New Plymouth. E3P and other gas-fired plants have a continuing need for gas. Huntly could use more.
Gas will continue to play an important role in the industrial, commercial and residential sectors where the direct use of gas can offer advantages in terms of lower greenhouse gas emissions and reducing the load on the country’s electricity supply.
There is still considerable opportunity for gas, and the relative economics of gas against coal will improve under the Emissions Trading Scheme.
Gas supply / demand balance
The world is beginning a transition away from the domination of fossil fuels to other energy sources, however that transition will take decades.
There is still going to be a demand for gas for domestic, industrial and commercial use, as well as for gas-fired electricity generation needs.
The government continues to support and stimulate exploration for oil and gas reserves. Our recent successes in this area will help to ensure that we can use our indigenous resources, rather than imports.
In the short to medium term we have sufficient supplies of gas for New Zealand’s needs. Of course the longer the projection period, the less certain the supply/ demand balance is, as a consequence of the wider possible range of future demand and supply.
We have the Pohokura field, which is less than a third the size of Maui, and the Kupe field is planned to be producing sometime in 2009.
According to current projections, sometime between mid way of the next decade and 2025, more gas supplies will be needed.
Should new gas supplies be found outside the Taranaki basin, the issue of moment then becomes delivery or export infrastructure. It seems likely that gas will be found as a by-product of oil. If found in quantity, it remains to be seen whether it will be most profitably used in New Zealand or whether in future it is exported by developers.
Gas infrastructure is concentrated in the Taranaki region simply because that is where gas resources have historically been seriously explored for and developed with existing processing and pipeline facilities.
The Government’s current Onshore Taranaki Blocks Offer is structured to maximise the chances of new gas being brought to market in a timely manner. I am advised that the results of this Blocks offer are due to be released shortly.
Government Policy Statement on Gas Governance (GPS)
The government has outlined its objectives for the governance of the gas sector in the revised Government Policy Statement released in April this year.
This revised GPS was updated to take into account the New Zealand Energy Strategy and the updated New Zealand Energy Efficiency and Conservation Strategy and also to reflect general changes that have taken place since the last GPS was published in October 2004.
The key challenges for the gas industry, however, remain similar to those in 2004. Namely the need to improve gas transmission and wholesale arrangements to ensure that our gas transmission and distribution networks can handle the transition from a long-term, stable gas supply to a more diverse supply.
I note Contact Energy’s announcement to develop gas storage at the depleted Tariki/Ahuroa field. This would be the first gas storage facility in New Zealand and is a timely development which will provide much needed flexibility to the market.
Another major challenge for the gas industry is to meet consumer expectations in light of ever increasing energy costs. Many of the objectives in the GPS aim to ensure consumers get a fair deal.
- Contractual arrangements between gas retailers and small consumers to adequately protect the long-term interests of small consumers
- Greater clarity on the type of consumer complaints resolution system the Government is seeking
- An efficient market structure for the provision of gas metering, pipeline and energy services
- The respective roles of gas metering, pipeline and gas retail participants are able to be clearly understood.
In addition, the revised GPS seeks advice on the extent to which policies to enhance the direct use of gas in industrial, commercial and residential applications could mitigate greenhouse gas emissions and the likely costs of implementing those policies.
The co-regulatory model to date
The co-regulatory arrangement commenced with the established of the Gas Industry Company in 2004. As the approved industry body, the Gas Industry Company sought to draw on industry expertise while providing appropriate government oversight.
As a relatively young organisation I am pleased with the progress Gas Industry Company has made to date and I thank the Chair, Board members and CEO in particular for their efforts. Rules have been developed and approved to govern gas processing facilities, downstream reconciliation, and switching arrangements between retailers.
Regulations providing for an enforcement regime to promote compliance with the three sets of rules outlined above and for the effective management of critical gas contingencies have been recommended to me and are being processed as we speak.
I have also approved the Gas Industry Company’s recommendation for the commissioning of an electronic matching platform for short-term wholesale gas trades. I am advised that the Gas Industry Company is very close to commissioning this platform and making it available to industry participants.
All of this is commendable and I would like to also thank industry participants for the amount of work completed to date.
However the job is not yet finished. The rules and recommendations that have been approved need to be implemented. It is only then that we will be able to determine whether the government’s objectives are being satisfactorily met.
Likewise, significant work remains to be done with regards to transmission and distribution arrangements, consumer outcomes and retail arrangements, and examining whether policies to enhance the direct use of gas would mitigate greenhouse gas emissions.
To take just one area of work, I am aware of the various governance, interconnection, balancing and capacity trading issues related to transmission access arrangements. Each of these issues is highly technical and may prove quite contentious given the commercial interests at stake.
For the co-regulatory regime to succeed it will require ongoing industry buy-in, the Gas Industry Company to listen and remain cognisant of industry concerns and the timely consideration of recommendations by relevant government agencies.
In summary, fossil fuels are going to play an important role in the world’s economy for some time to come. New Zealand has valuable resources which will continue to be profitable.
Thank you once again for the invitation to speak to you today. I trust you will have an interesting conference.