IEA Commends New Zealand Energy Policy, but Points to Mixed Objectives in Electricity Reform

(Paris) — 11 July 2001

Robert Priddle, Executive Director of the International Energy Agency, today released the IEA’s new in-depth review of the energy policies of New Zealand. "New Zealand has been very active in all areas of energy policy", Mr Priddle said. "It has demonstrated that electricity market liberalisation can succeed in a small country. The review team focused on progress with electricity deregulation, and on policies to reduce greenhouse gas emissions." "The review team noted that it will be important for New Zealand to maintain a balance between environmental and economic objectives in energy policy, and recommended against using energy policy to achieve social goals", Mr Priddle added. "Gas supply depletion and the experience of the 1998 Auckland power failure are reminders of the fundamental importance of energy security."

The review was conducted by an international team of energy experts from the Member countries of the IEA. Energy Security The Maui field accounts for 70% of New Zealand’s oil production. The Maui field and the nearby Kapuni field account for 90% of gas production. The Maui field is expected to be depleted by 2005. If gas reserves are not replaced, there will be major consequences for New Zealand. Higher gas prices are expected to lead to the closure of New Zealand’s petrochemicals plants, and will affect the economics of gas-fired electricity generation. Coal-fired power has a share of only 5% at present, but coal could be an economic replacement for gas, if gas supplies are depleted. Explorers and major consumers are confident that new gas reserves will be found. Exploration activity is at a record high, and broadly spread. Eighteen exploration wells were drilled in 2000 compared to five in 1999. Industry sources consider that even more exploration could be carried out if the government encouraged exploration in remote and hostile areas. The review team did not try to assess these claims, but did recommend that they be discussed by government and industry.

The report of the inquiry into the cables failure in Auckland offers some valuable lessons concerning the importance of security of supply as a broad objective of energy policy. The inquiry argues that security of supply can be achieved through the free operation of markets, provided governments impose a regulatory requirement that is supported by expert monitoring of performance. Energy and the Environment New Zealand is working towards ratifying the Kyoto Protocol by mid-2002. New Zealand is the only OECD country outside the European Union to make such a commitment. Unlike most other IEA countries, agriculture is the main contributor to greenhouse gas emissions in New Zealand, but reducing emissions from agriculture is an uncertain area of knowledge. New Zealand does not expect the transport sector to respond readily, at least in the short-term, to price measures such as a carbon charge. There is also concern about the cost of forcing a rapid change in demand. For these reasons, pressure may well be placed on the energy sector to contribute significantly and quickly to meeting New Zealand’s Kyoto commitment. Care will be necessary to ensure an equitable and efficient outcome for the economy as a whole.

Electricity generation in fact contributes very little to greenhouse gases because of the high proportion of generation from hydro and geothermal sources. The review team considered that attention should be focused on agriculture and transport. New Zealand could probably achieve its Kyoto target using emissions trading and credits for sinks alone. These are issues where international discussions are making slow progress. The outcome will be crucial for New Zealand’s approach. The report was prepared before the country’s draft National Energy Efficiency and Conservation Strategy was released. This strategy will be an important element in the government’s action on climate change. The review team stressed the need for the strategy to be practical and concrete, as the Parliament requires. The review team argues that the strategy should promote incremental change that works in harmony with regulatory reform and with policies to maintain economic growth.

New Zealand needs to give attention to improving energy efficiency in transport. Care needs to be taken that residential energy consumption does not grow too fast as the economy recovers. The problem of data on energy efficiency needs to be addressed. Regulatory Reform Since the last IEA review in 1997, transmission and distribution have been successfully separated from generation and retailing. The previously dominant generator, the Electricity Corporation of New Zealand, has been split into three new companies. Government shareholdings in generation and retailing nevertheless remain high, and the government owns Transpower, the transmission and system operator. Wholesale prices have been reduced by the reforms. Further reforms were introduced in October 2000 in the Power Package to strengthen industry self-governance, to bring the benefits of market reform to the retail market, and to address weaknesses in information disclosure as a tool for industry regulation. The industry appears to have responded positively to the government’s proposals. New Zealand’s approach to energy sector regulation is unique. The latest reforms strengthen the role of the government’s Commerce Commission, and establish a new Electricity Governance Board, and an electricity ombudsman. The report discusses the decisions the government has made. It concludes that an independent industry-specific regulatory office might well be the better option.

The review team also comments on measures to meet environmental and social objectives. The requirement for distribution companies to offer consumers at least one tariff with limited fixed charges could force the re-introduction of cross-subsidies between consumers. It might also cause a reduction in service to affected consumers to offset the loss incurred by the artificially low price. The requirement to keep changes in rural tariffs in line with changes in urban tariffs needs to be clarified, to ensure that the cost of delivery to remote areas is not subsidised by urban consumers. In principle, tariffs should reflect costs. The cap on fixed charges and the requirement to keep changes in rural and urban tariffs in line are both potential impediments to the free market and may prevent clear market signals for investment. Competition is likely to be a more effective means of delivering lower prices to consumers than market intervention. The balance between environmental, social and economic objectives is a general theme of the report. Regulatory reform throughout the economy has been an important element in bringing about economic recovery in New Zealand. The present government is trying to address consumer concerns about past change, to give prominence to environmental objectives. For energy policy, this has meant an overall shift away from regulatory reform to environmental and energy-efficiency objectives. The report questions some of the specific means towards this end, but not the overall goal. It is nonetheless important to ensure that energy policy aims at economic efficiency objectives, as well as environmental objectives, and that all agencies involved work towards common goals.

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