6 Summary for Discussion
The previous sections presented a range of options to enable the stationary energy sector to move towards a low emissions energy supply and to enable a transition to greenhouse gas pricing. Each of the options would contribute to these broad objectives. They differ in a number of important aspects, including their likely effectiveness, cost efficiency and who would bear the costs of the change in behaviour – the taxpayer, the emitter or the electricity consumer. A summary of these effects is presented in table 3. The attempt at ranking options against the different criteria is indicative and provided only as a means of summarising previous discussion.
Key questions
Three key questions need to be asked to determine a preferred option or mix of options.
1. What key objectives should steer the choice of transitional measures in the stationary energy supply sector?
The draft NZES identifies a number of objectives, including making greater use of our abundant renewable energy resources, reducing our greenhouse gas emissions, promoting cost-effective environmentally sustainable technologies, and maintaining high levels of security and reliability at competitive prices. While these objectives are in general complementary, there may be some trade-off decisions to be made.
Perhaps the most relevant examples are whether the focus in the near term could be to increase the proportion of energy supply from renewable sources, or to achieve low emissions energy supply at least cost. In the case of the former, the most effective policy options may well be incentives or renewable obligation options. In the case of the latter, price-based measures such as emissions trading and CO2 charges could be more appropriate.
Price-based measures such as emissions trading and CO2 charges are technology neutral. They set a price and let the market determine the most cost effective mix of energy supply based on this additional cost. A disadvantage of price-based measures is that you cannot be sure of the outcome. With price based measures for example, there is no certainty that there will be no new investments in coal fired power stations (although it is a less likely outcome than if there was no price-based measure). Incentive measures, targeting specific technologies, or direct regulatory approaches can potentially give greater assurance about the sources of future energy supply, but are less likely to be cost effective and may end up imposing higher costs on consumers.
2. Who should bear the costs of the measures – emitters, consumers or the government?
The power generation sector can and generally will pass on costs to consumers through higher energy prices. Industrial sources of heat and power may be more constrained in passing on costs.
In keeping with the “polluter pays” principle and the concept of economic efficiency, those responsible for emissions should pay for them. However, there may be reasons why the government wants to step in and give financial support for initiatives. In the case of the electricity sector, this may be justified to avoid any substantial increases in energy prices for consumers and/or industrial users. Subsidies for renewable programmes would be likely to reduce overall energy costs.
3. Certainty of price or certainty of outcome?
Some measures give greater certainty about the level of price impacts, whereas others give greater certainty about the outcome for emissions. A CO2 charge, for example, gives emitters certainty about the cost of greenhouse gases, but the level of emissions abatement is uncertain. A cap and trade system gives relative certainty about how much emissions will be reduced by, but less certainty about the cost of greenhouse gases to emitters. Renewable obligations can give relative certainty about how much more investment will be made in renewable energy, but costs remain uncertain.
Table 3 presents a summary of options presented in this paper (with the exception of voluntary measures).
Table 3: Summary of Effects (1 is least positive and 3 is most positive)
View summary of effects (large table)
Principles for deciding on options
In the draft NZES, the government proposes a number of principles to 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.
Further issues for consideration
Competitiveness issues
Generation of electricity in New Zealand is characterised by high levels of renewable energy sources. As a result, the emissions intensity of New Zealand grid electricity is low compared to electricity consumed in many major trading partner countries. This reasoning implies that a price on emissions from electricity generation would potentially have a relatively low impact on the wholesale price of electricity supplied in New Zealand, although the extent of the impact depends on whether the price on emissions is applied to marginal or absolute emissions, and whether the wholesale clearing price of electricity is determined by fossil fuel or renewable generation.
Treatment of industrial process emissions
Industrial 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, as illustrated in Table 3, many of the options discussed in this paper could be extended to cover industrial process emissions, which could be desirable in terms of climate change policy and efficiency.
Market power issues
As a relatively small island economy with no electrical connections to other countries, New Zealand can avoid some of the implementation complexities that would be encountered elsewhere. However, the small size of the New Zealand market, combined with the relatively small number of market players, make market power a critical issue for consideration when any transitional measures are designed. For example, the electricity generation market is dominated by only five companies. Careful attention will need to be given to the design of market rules to assure that these measures foster competitive behaviour.
Taking account of other existing or proposed policies
Any mechanism that gives electricity and industrial emitters an incentive to use renewable energy should take any other existing or proposed policies into account. As an example, the government is developing a biofuels sales obligation that penalises oil companies if they do not sell a proportion of biofuels. The level of biofuels that is used to meet this obligation, or contribute beyond this obligation, might be affected by any future incentives/disincentives to use the biofuel in industrial heat or electricity production.
