Speech to Contact Energy event at ParliamentEnergy and Resources
It’s great to be here to celebrate Contact Energy’s new 580 million dollar geothermal power station to be built on the Tauhara field near Taupō.
I would like to congratulate Contact on this project, which will see a 152 megawatt power station operating 24 hours a day, 7 days a week, from mid-2023. And it won’t be reliant on the weather.
It will help support New Zealand’s transition to a low carbon economy by displacing baseload fossil fuel generation from the national grid.
I would also like to congratulate Contact on its review of its thermal generation assets in New Zealand.
84 per cent of Contact’s generation is renewable today, and Contact is committed to further rapid decarbonisation of its generation. Contact has current gas generation in Taranaki and Waikato, and diesel generation in Hawkes Bay (Whirinaki).
With Contact investment in Tauhara geothermal coming on stream in mid-2023 and a pipeline of other renewable investment, the review will assess thermal’s ongoing role in its generation portfolio.
Contact wants to go further, faster.
You will all be aware of the Climate Change Commission’s draft advice on the first three emissions budgets. It confirms the reality of the climate change response we must all make.
The proposed emissions reductions pathways, are ambitious, but they also recognise what is technologically and economically realistic, and they consider the impact the pathways will have on people.
Encouragingly, the draft report shows we have the tools and technologies available today to make big strides towards an affordable and sustainable economy that provides future focused jobs in a low emissions world.
Already we can see how industry is reacting positively to our policy direction, with a number of businesses demonstrating leadership by making renewable energy investment decisions.
Labour’s 2020 election pledge brought forward our target of 100 per cent renewable electricity from 2035 to 2030 to decarbonise our electricity system faster.
And while I am mindful of the big challenges we face, I believe a fully renewable electricity system is achievable and will help us to decarbonise other parts of our economy.
The New Zealand Battery project has been set up to address the lack of dry year storage in our electricity system. Dry years, like the one we are experiencing now, with stressed wholesale electricity pricing driven by low hydro-lake storage and tight gas supplies, are costly. And while we are still far from the need for a conservation campaign the situation shows why we must think seriously about ‘dry year’ energy storage, particularly in a future with 100% renewable electricity.
The $30 million initial study will investigate pumped hydro against other technological possibilities to eliminate the need for fossil fuels in our electricity system. It will provide comprehensive advice on the technical, environmental and commercial feasibility of a grid-level, renewable energy storage solution.
Pumped hydro at Lake Onslow, as well as other smaller scale pumped hydro options, are the focus of the study, with other technologies being assessed as comparators. The first phase of this project is on track to report back in late 2021.
The second phase involves business case development and is expected to be completed in late 2023 or early 2024.
In parallel to this work I have been clear that I am concerned about at the prospect of rising power prices, something that households and businesses can ill-afford, especially those still recovering from the impact of Covid-19.
This is why I have asked officials for advice on current wholesale price levels and trends.
Regarding the outlook for this winter and the current lake storage levels, I am closely monitoring the situation to ensure that demand continues to be met and that the market is responding in an efficient and appropriate way. Additionally, my officials at the Ministry of Business, Innovation and Employment are working with Transpower, the Electricity Authority, and the Gas Industry Company to establish systems and processes to enable a coordinated whole-of-sector response.
As many of you know, I have been asking questions about the high electricity spot prices recorded in recent months.
The advice I’m receiving reflects what many in the industry have been saying, which is that relatively high spot prices are a consequence of short term supply scarcity. This is a design feature of the spot market. In our market model, high spot prices at times of scarcity provide incentives to manage supply risks and encourage actions that help bring supply and demand into balance without resorting to conservation campaigns and rolling power cuts.
The scarcity, this year, as we all know is attributable to low hydro inflows and low hydro storage leading into winter combined with tightness in the supply of natural gas. And the tight gas supply is due to the unexpectedly rapid decline in production from the Pohokura Gas Field.
Both causes of scarcity are expected to be temporary. If past history is any guide, the hydro lakes will be recharged by inflows later this year.
Encouragingly, there has been some recent rain and Transpower is reporting today that storage levels are now unlikely to cross the 1% curve in the near term. Similarly, rates of gas production should recover somewhat following planned investment in the next year or so. Spot prices should also soften when committed investment in new electricity generation comes on stream in coming years.
However, I understand that uncertainty and risk aversion also play a role in pricing decisions. There is uncertainty over precisely when the gas supply tightness might ease, and this is reflected in forward contract prices that are higher than they were in the recent past. I have heard reports of businesses rolling off 3 year contracts and onto new 3 year contracts at almost twice the previous price.
The NZ Battery Project is looking at how large scale pumped hydro storage or other options might, in the future, help manage short term supply scarcity and associated price volatility.
But in the near term, I urge the industry to do all it can to ensure supply risks are managed as well as they can be, so that prices can be stabilised sooner rather than later.
I know the industry is adept at putting in place commercial arrangements to manage supply security and spot price risk. Some arrangements are well-signalled to the market, such as Meridian Energy’s ‘smelter demand response’ option. I encourage the industry to continue exploring more transparent commercial risk management arrangements, to help the market assess risks and price them accurately.
While on the subject of transparency, I am asking the Electricity Authority to ensure electricity market participants have good information to evaluate supply risks, and also to make more information about market performance accessible by the public..
You will all be aware of the Climate Change Commission’s draft advice on the first three emissions budgets.
It confirms the reality of the climate change response New Zealand must make.
The proposed emissions reductions pathways, aimed at meeting the net-zero carbon target by 2050, are ambitious. They recognise what is technologically and economically realistic, and they consider the impact the pathways will have on people.
Encouragingly, the draft report shows we have the tools and technologies available today to make big strides towards a clean and productive industrial sector.
New Zealand exporters rely on our clean green brand and there will be new opportunities for our industries as we transition to a zero carbon economy.
In the energy sector, most of the Commission’s recommendations align well with actions the Government is already taking, or is getting underway, which assures us that we are on the right track.
The Government will make decisions on emissions budgets by the end of the year, once we see the Commission’s final report that is due at the end of May.
In the meantime, I look forward to hearing insights from this sector on how it intends to seize opportunities to transition toward decarbonisation.
Getting to 100 per cent renewable electricity, as well as decarbonising the wider energy system by having cleaner transport and industrial heat, requires major change and investment in modern technologies.
Removing fossil fuels from our electricity system, while we also increase electricity demand will be challenging, so we are getting on with the task of finding a solution.
There has been plenty of positive discussion following our recently announced first tranche of successful applicants from our $70 million Government Investment in Decarbonising Industry (GIDI) Fund, which is a great example of how we are investing in a more sustainable economy.
The decarbonisation fund provides crucial financial support to business and industry to help them switch from boilers run on coal and gas to cleaner electricity and biomass options. This helps create jobs in the clean energy sector, and future-proofs our economy.
In total 14 companies will receive $22.88m in co-funding to help their businesses transition away from fossil fuels. This will achieve up to 10 percent of the gross long lived emission reductions required from the Climate Commission’s first draft carbon budget - the same as taking 49,000 cars off the road.
Making the cuts in industrial energy emissions, which the Climate Change Commission highlights are both feasible and necessary to meet our 2050 target, calls on us to accelerate and expand our work. As the most carbon-intensive fossil fuel, we need to look at coal as a priority.
That is why this Government is committed to the phase out fossil fuels in process heat by preventing the installation of new low and medium-temperature coal-fired boilers.
The Climate Change Commission’s draft report also contains a recommendation about stopping new natural gas and LPG connections from 2025.
Residential and commercial consumption of gas makes up a small proportion of our overall gas demand – approximately nine per cent in 2019. The phase-out of natural gas from our energy system is a complex issue and the Commission has made clear that it has a use-by-date in New Zealand.
The question for the Government is how we can best support this phase-out, while ensuring that consumers can still access the energy they need. This will include considering what the most efficient emissions reductions areas may be within the market.
For example, our current gas distribution infrastructure provides many opportunities for alternative lower emissions fuels to be used, including biogas and hydrogen.
These are all matters the Government will need to consider before making recommendations about the future of natural gas use in commercial and residential applications over the next thirty or so years.
As we transition, our natural gas market will need to continue to provide secure and affordable energy for our electricity system, and keep some of our major manufacturing companies operating.
The current market, commercial, and regulatory settings must be fit-for-purpose to support decarbonisation.
This is why I have asked the Gas Industry Company, the GIC, to investigate the current settings in the natural gas market around contractual arrangements and how these affect the overall availability and flexibility of natural gas.
This investigation has no predetermined outcomes and is not about changing upstream settings to unlock more gas reserves; it is about ensuring that the market continues to efficiently allocate gas to its highest value uses.
I have asked the GIC to focus on two areas.
The first area is how our settings in the gas market support security of electricity – particularly during periods of heightened demand, and whether these are fit for purpose for supporting thermal generation during the transition.
The second area is around whether the current settings provide sufficient certainty and transparency about gas supply.
I expect to receive the GIC’s report by the middle of this year following a consultation process
Meanwhile, we are amending the Gas Act to provide clear regulatory powers for information disclosure issues that may have significant downstream impacts, such as on electricity markets, or create risks for security of supply.
The Bill also increases the maximum penalties under the Act to align with the Electricity Industry Act, and is an important step to enhancing confidence in our energy markets, ensuring transparency and helping them to operate efficiently.
I am also pleased that the Electricity Authority will be placing new obligations on electricity sector participants to disclose information about thermal fuel availability. This will no doubt help inform the market, especially in times of hydro stress.
Another clean and versatile fuel source that the Government will continue to focus on through 2021 is green hydrogen, which can fulfill a role similar to today’s hydrocarbons.
Green hydrogen can help reduce global emissions, reduce New Zealand’s dependence on overseas energy sources, create significant export revenue, and create new jobs.
In that regard, I would also like to congratulate Contact Energy on its recently announced plans to co-fund with Meridian Energy a 2 million dollar feasibility study on the potential of a large scale, renewable hydrogen production facility in the lower South Island.
I look forward to the imminent release of the first stage of this study.
New Zealand has a strategically important comparative advantage if we use our abundance of renewable energy to produce hydrogen without using fossil fuels.
To fully develop hydrogen’s potential however, we need to ensure a coordinated approach both locally and internationally.
This is why the Government is continuing to develop relationships with other countries interested in hydrogen’s potential, including Japan, South Korea, Singapore and Germany.
It is also why the next step in our hydrogen strategy is to develop a roadmap that will help chart the path towards a more renewable energy system and outline how hydrogen can play a role in decarbonisation and energy resilience.
I hope we can continue to collaborate successfully with each other in 2021, I believe this is fundamental for our transition to a low carbon economy that will benefit all New Zealanders.
Thank you everyone, for being here to celebrate this occasion with Contact, and I look forward to hearing about your exciting decarbonisation projects this year.