2 Executive Summary
Purpose of the paper
This discussion paper seeks feedback on the development of measures that could be implemented in the stationary energy sector over the next decade to meet the government’s objective of moving towards low emissions stationary energy supply, and to facilitate a transition to greenhouse gas pricing in the future.
The paper is part of the draft New Zealand Energy Strategy (NZES), Powering our Future, which sets out a vision for New Zealand’s energy future of a reliable and resilient system delivering New Zealand sustainable, low emissions energy. The measures discussed here would contribute to the objectives of the draft NZES. The government plans to publish the final strategy in mid 2007, and to introduce the strategy’s actions in 2007 and 2008.
The paper is a product of the climate change work programme on energy which is tasked with addressing incentives for renewable energy and disincentives for fossil fuel-based electricity generation. However, the paper also takes a broader approach to help meet wider NZES and climate change policy objectives.
Sectoral greenhouse gas emissions
Between 1990 and 2005, greenhouse gas emissions from stationary energy generation and industrial energy use rose by approximately 50 percent. Of this total, emissions from electricity generation increased by approximately 105 percent, while emissions from industrial energy use increased by approximately seven percent.
Energy models currently forecast that under a ‘business as usual’ (BAU) scenario greenhouse gas emissions from stationary energy generation and industrial energy use will increase by approximately 18 percent between 2005 and 2015. Emissions from electricity generation sector are forecast to account for approximately 30 percent of this increase.
The policy context
The objectives of the draft NZES include: maximising the proportion of energy which comes from our abundant renewable energy resources; reducing our greenhouse gas emissions; promoting environmentally-sustainable technologies; and maximising how efficiently we use our energy to safeguard affordability, economic productivity and our environment.
The draft NZES recognises that energy suppliers (and other sources) will increasingly be required to face a cost of greenhouse gas emissions. This is expected to make it more expensive to combust fossil fuels, and will act as an incentive to develop technologies that either eliminate greenhouse gas emissions or make the process more efficient. The draft NZES also recognises that policy measures to reduce greenhouse gas emissions from the stationary energy sector will need to provide investment certainty and not detract from economic development.
Climate change policy objectives are fundamental to the design of future energy policies. The government is developing a series of “whole of government” work programmes on climate policy. One of these work programmes is an assessment of broad (cross sectoral) measures to reduce New Zealand’s greenhouse gas emissions post 2012. These policy options are discussed in a separate discussion paper, Measures to Reduce Greenhouse Gas Emissions in New Zealand Post-2012. In contrast, this paper examines measures that can be applied prior to 2012 to encourage low emissions energy supply and to facilitate the transition to greenhouse gas pricing in the future. For the purposes of the evaluation of options in this paper, a time period of 2007–2015 is assumed.
Although no decisions have been made, the government has a positive view on the use of economically efficient price-based measures applied broadly across key sectors of the economy in the longer term (i.e. Post-2012), provided such measures are consistent with New Zealand’s economic and sustainable development objectives and the longer-term international climate change policy framework.
Scope
This paper focuses primarily on stationary energy supply. Demand-side issues, such as measures to improve the energy efficiency of homes, are discussed in the National Energy Efficiency and Conservation Strategy (NEECS) and are not considered in this paper. However, some of the options addressed in this paper, such as price-based measures, would also influence demand.
More specifically, the sector focus is on electricity generation and industrial heat and power. Industrial process emissions (non-energy process emissions) do not fall within the scope of this discussion paper (as they are not covered in the scope of the draft NZES). However, many of the options discussed in this paper could feasibly be extended to cover industrial process emissions (these opportunities are identified in the summary section).
Method
While transitional measures should be seen as part of long term strategy, there should be sound arguments for implementing them on their own merits. Transitional measures should also meet criteria for the design of good policy. Criteria used in this discussion paper include:
- environmental effectiveness
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cost effectiveness
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impact on energy prices
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ease of implementation (including regulatory and administrative issues)
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compatibility with a long-term price on greenhouse gas emissions.
Other issues that should be considered include: stimulation of innovation; treatment of new entrants; regional and technological diversity, and applicability to the New Zealand energy sector.
The intent of this discussion paper is to provide a descriptive summary and brief evaluation of the different options. The evaluation is largely qualitative and comparative, so it does not provide a comprehensive cost-benefit evaluation of each intervention.
Options
The categories of policy measures considered in this discussion paper include:
- emissions trading
- a CO2 charge (narrow based)
- renewable obligations
- incentives / subsidies
- project based measures
- direct regulatory options
- voluntary measures.
Each group has a potentially wide number of options, depending on design decisions. One key design choice is whether a measure is to apply to electricity only, or to electricity and industrial heat and power. Another choice is whether a measure should apply to all existing capacity or production, or focus only on new capacity or investment.
Key questions
The various measures presented in this paper all have their respective strengths and weaknesses (see Table 3 in section 6) and ultimately the choice of measures will depend on the weighting given to various objectives of energy and climate policy. There will inevitably be trade-offs to be made between different criteria, such as cost effectiveness, impact on energy prices and diversity of supply. Other key questions are:
- Who should bear the costs of the measures: emitters, consumers or the government?
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What impacts on energy prices are acceptable?
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Is certainty of price impact or certainty of outcome more important?
No one measure is likely to be sufficient to meet the draft NZES’s overall objectives. A combination of measures may be necessary, as well as supporting policies such as providing information and encouraging innovation.
Principles guiding choice of measure
In the draft NZES, the government proposes a number of principles that could guide the choice of transitional measures. These are:
a) Measures should be compatible with, and enable a transition to, longer-term policy options where the cost of greenhouse gas emissions is reflected in the relative cost of the fuels that produce greenhouse gas emissions.
b) Investors in new generation should face a price signal that reflects the value of greenhouse gas emissions avoided for renewables relative to fossil fuels, either immediately or over a transitional period.
c) Owners of existing fossil fuel generation should follow a transitional path to facing the full cost on greenhouse gas emissions.
d) On electricity prices, the effect of any transitional measures on electricity prices should be gradual.
Based on the above principles, the government is attracted to measures which would support the early development of emissions trading in the sector.
