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4.1.2 Energy

RELEASED UNDER THE OFFICIAL INFORMATION ACT

Summary

This section assesses the “economic potential” for emissions reductions in the energy sector in the medium term through:

  • reducing overall demand for energy in the residential, commercial and industrial sectors
  • reducing the emissions intensity of the energy supply mix; ie, growing the proportion of renewable energy in New Zealand’s energy supply
  • adopting technologies to sequester energy-sector emissions.

It concludes that:

  • there are substantial and worthwhile gains available from energy-efficiency improvements in the residential, commercial and industrial sectors, based on EECA’s assessments of “economic potential”
  • in each of these sectors, general trends are pushing up overall demand for energy. Improvements in energy efficiency may therefore be likely to achieve reduced growth in energy demand, rather than an absolute reduction in energy use
  • substantial changes to the emissions intensity of the supply mix appear unlikely, given the already high proportion of renewable energy used in electricity generation and the fact that many major hydro generation opportunities have already been taken up. Some further renewable energy, including small-scale plants, can nevertheless be developed economically in the medium term
  • carbon sequestration and hydrogen technologies offer potential for neutralising emissions from the energy sector in the longer term, although significant impacts are not expected to occur by 2020.

As noted in 3.1.3, New Zealand’s energy intensity is relatively high compared with other OECD countries, due to low energy prices resulting in a historical comparative advantage in energy-intensive manufacturing industries. However, as a result of New Zealand’s reliance on renewable energy (particularly for electricity generation [In the year to March 2005, close to three-quarters of electricity generated was from renewable sources, predominantly hydro.]), this has not translated to a commensurately high greenhouse gas emissions intensity.

Total energy (non-transport) emissions in 2004 were 17.3Mt CO2e, approximately a quarter of New Zealand’s overall emissions. Recent SADEM projections by the MED indicate that energy emissions will grow to 22.2Mt CO2e in 2020, although this may be reduced to 20.9Mt CO2e with a range of climate change and energy-efficiency measures in place. A sub-sectoral breakdown of emissions from the non-transport energy sector is displayed below.

Figure 27 - Emission of Greenhouse Gases from the Energy (Non-transport) Sector 2004, by Sub-sector

Thermal electricity generation: 36%; Other transformation: 6%; Industry: 29%; Other sectors: 20%; Fugitive: 9%.

Source: MED, New Zealand Greenhouse Gas Emissions 1990-2004

This section will examine the potential to achieve emissions reductions from the energy sector in the medium term (to 2020) and, where possible, draw on information on the relative cost at which emissions reductions are achieved. It will explore, in turn, the potential to reduce energy emissions through:

  • reducing the overall level of demand for energy; eg, through energy-efficiency and conservation measures
  • reducing the emissions intensity of the energy supply mix
  • sequestering emissions from the energy sector; ie, carbon sequestration.

Reducing demand for energy

Total demand for energy in New Zealand has a range of determinants:

  • population and demographics
  • climate and weather
  • structural composition of the economy
  • economic growth
  • technology development
  • uptake of energy-efficiency measures.

Population, demographics and the climate are exogenous to the energy system and outside a reasonable scope for climate change policies. [Although, ultimately, influencing changes to the climate is the key aim of climate change policies.]

In the longer term, the structural composition of the economy has a significant influence on energy use and emissions, although it would be inappropriate to directly target structural change solely for the purposes of emissions reductions. Rather, changes to the structure of the economy are likely to result from the incorporation of a domestic carbon price. For example, a carbon price may slightly increase the profitability of investing in service-sector industries relative to energy-intensive manufacturing industries, although it is likely a carbon price would need to be set at a high rate for noticeable structural shifts to occur.

Although the economy has diversified over recent years, [A decomposition of the decrease in the energy intensity of the New Zealand economy between 1993 and 2000 has shown it was partially attributable to a shift away from energy-intensive industries.] a sudden or substantial structural shift to the less energy-intensive services sector is considered unlikely – any change will continue to be gradual. Substantial reduction in energy use from structural change therefore looks to be unlikely (certainly in the medium term).

Economic growth is a key determinant of energy use. In many countries, a strong historical linking between economic growth and energy demand is evident, although the relationship is more complex. As Section 3.1.3 discusses, during periods of poor economic performance, investment growth can slow, limiting the rate of improvements in energy efficiency from new, more energy-efficient capital. Poor economic performance can also lead to decreased capacity utilisation, resulting in fixed energy requirements representing a higher proportion of total inputs, thereby increasing energy intensity.

The application of more energy-efficient technologies, on both the supply side and the demand side, can also have a significant impact on total energy use. New Zealand is largely a taker of international technologies in this area (public funding for research into mitigating greenhouse gas emissions in the energy sector is relatively limited, at approximately $1.8 million per annum (Ministry for the Environment, 2004e)), making international linkages and collaboration key activities. The development of new technologies and their impact on New Zealand’s energy emissions is therefore difficult to influence (at least until the technology is available to New Zealand at a commercial cost).

The focus of policies seeking to reduce demand for energy is therefore on energy efficiency and conservation. Energy-efficiency gains will not necessarily translate proportionally to energy-emissions reductions. This is particularly noticeable for electricity use, where up to 75% of New Zealand’s generation comes from renewable sources.

In the short term, emissions savings from reduced electricity use will depend on the marginal existing generation; ie, the generation plant that will be the first to cease or reduce generating capacity in response to reduced demand. In the case that the marginal generation is based on fossil fuels, energy-efficiency gains would have a significant effect on emissions.

In the longer term, emissions savings will depend on the marginal new generation; ie, the new generation plant that will be delayed as a result of improved economy-wide efficiency. MED modelling suggests this will be mainly renewable in the short term (up to 10 years out) and coal thereafter. Sustained, economy-wide improvements in energy efficiency will ultimately assist in reducing energy-sector emissions, although the extent and timing depend on the cost and viability of coal and gas in comparison with renewables.

It is also important to be cautious of potential “rebound effects” from energy-efficiency improvements. For example, energy-efficiency gains can decrease the cost of producing goods, making them cheaper, increasing real income and thereby increasing demand. The end result may be some offset of the gains in improved efficiency (although, clearly, significant benefits of energy efficiency still exist).

Potential energy-efficiency improvements in the residential, commercial and industrial sector will now be explored. Note that these sectoral classifications vary to those displayed in Figure 27 above.

Residential

EECA estimates there is scope to save 18% of current residential energy use by 2012 through energy-efficiency measures, a savings of around 10 PJ per annum [Energy use in the residential sector refers to the energy used by people living in five major types of dwellings: private homes, rented homes, apartments, flats and mobile homes. It does not include the energy used in commercial accommodation such as hotels, nor does it include energy used for transport purposes.]. A further breakdown of potential residential energy savings is displayed below. EECA’s estimates indicate that improving the efficiency of appliances provides significant potential for energy savings.

Figure 28 - Residential Energy-efficiency Potentials in 2012 (Compared with 2002 Energy Use) [Estimates displayed in these graphs are based on the “economic potential” of energy-efficiency improvements, indicating the gains from all cost-effective opportunities available with current technology, rather than the opportunities that will be taken up. Economic potential is derived using an engineering-economic analysis. Realising these potentials will depend on overcoming market barriers and failures. Note that the assumptions and results of the economic potential estimates are to be reviewed under the review of the NEECS currently taking place.]

This graph is summarised in the text above.

Source: EECA

New Zealand’s current residential energy use per capita is the lowest in the OECD, thought to be caused by New Zealand’s temperate climate and a tendency not to heat entire homes (or to heat them to less-than-adequate temperatures). This results in relatively low amounts of energy used for space heating. Some potential for a “rebound effect” from energy-efficiency gains in space heating is thought to exist, ie, as the cost of heating homes decreases due to improved efficiency, homes will be heated more.

Gains in residential energy efficiency will have to contend with broader trends pushing up overall residential energy use, including continued population growth and trends towards smaller households (in terms of occupants) and larger houses (in terms of floor area). Therefore, improved efficiency may be more likely to lead to a curbing of energy growth rather than absolute reductions in energy demand (and therefore emissions).

Commercial

EECA estimates that 26% of 2002 commercial energy use could be saved by 2012 through energy-efficiency measures [Energy use in the commercial sector comprises all activities not commonly classified as residential, farming, industrial or commercial transportation. It includes activities related to trade, finance, government and local government services, health, education, real estate, commercial services and tourism.]. This represents the greatest proportional savings of any sector, and an absolute saving of around 11 PJ per annum. A further breakdown of potential commercial energy savings is displayed below. Heating and air-conditioning are shown to represent the greatest potential savings.

Figure 29 - Commercial Energy-efficiency Potentials in 2012 (Compared with 2002 Energy Use)

This graph is summarised in the text above.

Source: EECA

Again, gains achieved through energy efficiency will contend with overall growth in energy demand in this sector, including growth in overall building space as well as demand for higher-quality accommodation, which may entail greater energy requirements. Energy-efficiency improvements may therefore curb demand growth, rather than achieving absolute reductions in the medium term.

Industrial

EECA estimates the industrial sector could save 6% of 2002 energy use by 2012 through improvements in energy efficiency [Energy use in the industrial sector comprisestextiles; publishing and printing; wood, pulp, paper and printing; energy supply; basic metals and non-metals; chemicals, construction, etc. Enterprises like food processing, mining and meat processing are also included in this sector.]. Although this is the smallest proportional savings of any sector, total potential savings equal 11 PJ, due to high total energy use by industry. Improving the efficiency of motor drive systems is thought to present the greatest potential energy savings.

Figure 30 - Industrial Energy-efficiency Potentials in 2012 (Compared with 2002 Energy Use)  

This graph is summarised in the text above.

Source: EECA

Changes to the efficiency of industrial energy are normally gradual, given the sector’s reliance on large capital investments with relatively slow turnover. Incremental rather than radical improvements in energy efficiency can therefore be expected.

A significant proportion of industrial energy use comes from non-electricity sources, such as direct use of coal and gas for process heat. This form of energy is directly relevant to industries such as dairying, meat and wool, forestry, minerals and food processing. Non-electricity industrial energy generates emissions almost as great as those from electricity generation in New Zealand.

Castalia (2005) notes that industries such as dairying have undertaken major technological improvements in recent times, resulting in more efficient energy use, while other sectors continue to have potential for improvement. However, it is noted that while greater efficiencies per unit of energy may continue to be achieved, overall growth in demand for energy in processing industries is likely to continue, given output expansions in these sectors.

Overall

An overall sectoral comparison of energy-efficiency potential is shown below.

Figure 31 - Sectoral Energy-efficiency Potentials in 2012 (Compared with 2002 Energy Use)

Industry: 6% potential economic savings. Residential: 18% potential economic savings. Commercial: 26% economic savings.

Source: EECA

EECA’s current estimates demonstrate that there is potential to improve energy efficiency in each sector. The industrial sector has the highest energy requirements overall, although opportunities to achieve absolute energy reductions between sectors are thought to be roughly equal (such as 10 to 11 PJ). Energy-efficiency improvements are ultimately likely only to help curb New Zealand’s energy emissions, rather than to achieve gross energy and emissions reductions.

While explicit cost estimates have not been made of achieving the energy savings outlined above, opportunities are based on the principle of “economic potential”; ie, the gains from all cost-effective opportunities available with current technology, assessed using an engineering-economic analysis. However, various market barriers prevent these economic opportunities being taken up. A suite of government programmes aims to address market barriers to energy efficiency, and these are described and assessed in Section 4.4.

Reducing the emissions intensity of the energy supply mix

Restricting future emissions from the energy sector can be achieved by altering (proportionally) the emissions intensity of the energy mix. This will involve shifting from more intensive to less intensive fossil fuels (ie, coal to gas) or shifting from fossil fuels to renewable energy. In 2004, New Zealand’s primary energy supply totalled 766 PJ (including transport energy), of which around 240 PJ was based on renewable fuels. Main determinants of the energy mix are the availability of resources and the cost at which they can be converted to energy.

In early 2005, East Harbour Management Services estimated the potential additional renewable resource available to New Zealand to 2015. Results are displayed in the table below. Note that renewable transport fuels were not considered as part of this assessment.

Table 6 - Potential Renewable Energy Available to New Zealand to 2015

Resource PJ per year [Based on medium confidence and at a cost of less than 16c/kWh for electricity and $25/GJ for heat.]
Hydro 32
Geothermal 82
Wind 45
Woody biomass 21
Landfill gas biomass 0.4
Solar 0.9
Total 181.3

Source: East Harbour Management Services (2005) “Availabilities and costs of renewable sources of energy for generating electricity and heat.”

Some significant renewable energy opportunities evidently remain, particularly in relation to geothermal energy. However, the cost of renewable energy sources will ultimately determine to what extent they are taken up relative to fossil fuel energy over this time period. The diagram below illustrates the estimated generation cost at which new renewable electricity opportunities will be taken up. In comparison, the current marginal price of generation in New Zealand is around 5 to 7 cents per kWh. The supply curve indicates there are likely to be strong, cost-effective opportunities for developing significant wind and some hydro resource by 2015. Those opportunities at the higher end of the cost curve (12 to 16 cents per kWh) are less likely to be developed.

Figure 32 - 2015 Electricity Cost Supply Curve by Technology

This diagram is summarised in the text above.

Source: East Harbour Management Services (2005) “Availabilities and Costs of Renewable Sources of Energy for Generating Electricity and Heat.”

In the electricity sector, renewable energy currently accounts for a significant proportion of generation (in the year to March 2005, 74% of New Zealand’s electricity supply was from renewable energy). A summary of projected electricity generation through to 2020, based on recent SADEM modelling by the MED, is displayed below, with renewable energy shaded.

Table 7 - SADEM Projections of New Electricity Generation to 2020

  Level of generation (TWh) % of generation
  2005 2020 2005 2020
Hydro (renewable) 24.95 24.95 63 50
Geothermal (renewable) 2.77 5.47 7 11
Wind (renewable) 0.71 4.90 2 10
Coal 4.31 7.06 11 14
Cogeneration 1.07 3.33 3 7
Gas combined cycle 5.64 4.07 14 8
TOTAL 39.51 49.8 100 100

Source: MED

A roughly steady proportion of renewable energy in the total electricity mix is projected through to 2020 (from 72% of the total mix in 2005 to 71% in 2020). No new hydro generation is projected, although this is offset by growth in geothermal and wind energy.

Castalia (2005) estimates the onset of new electricity generation plant to 2012 below. The table indicates that roughly equal contributions from renewable and fossil fuel energy might be expected in new generation plant in the next seven years.

Table 8 - Castalia Projections of Possible New Generation Plant in New Zealand to 2012

Plant name Type MW GWh Date
Manapouri Hydro 25 158 2004
Te Apiti Wind 90 355 2004
Wairakei Extension Geothermal 14 118 2005
Manapouri II Hydro 16 105 2005
Kiwi Cogen Gas 15 100 2006
Huntly e3p Gas 365 2,560 2007
Invercargill Wind 180 550 2008
Marsden Cogen Gas 84 690 2008
Makara Wind Farm Wind 24 95 2008
Coal - WC Rail to Chch Coal 50 130 2009
Canterbury Wind Farm Wind 50 150 2009
East Coast Wind Farm Wind 75 275 2009
Lower Waitaki Hydro 260 1,500 2009
Stockton Coal Plant Coal 150 985 2009
Tararua Expansion Wind 100 395 2009
Kawerau Geothermal 150 1,200 2010
Marsden Coal Coal 320 2,000 2011
Mokai III Geothermal 100 800 2011
Rotokawa II Geothermal 150 1,200 2011
Belmont Wind Farm Wind 120 473 2012
Dobson Hydro 60 270 2012
Southland Lignite Coal 380 2,650 2012
Wairakei Geothermal Geothermal 180 1,400 2012

Source: Castalia (2005) “Greenhouse gas emission policies: Is there a way forward?”

Neither the SADEM or Castalia projections anticipate a significant change in the proportional contribution of renewable energy to New Zealand’s electricity supply (although it should be noted that small differences in the cost of generation types make any modelled projections sensitive to price and cost changes). This is most likely due to the already large proportion of renewable energy and the fact that many of the available hydro generation opportunities have been taken up. The intermittent nature of renewable electricity (on an hourly, daily and seasonal basis) is considered to apply some level of technical constraint on the electricity system, and requires an accompanying baseload provided by fossil fuels to provide security of supply [A 2005 report on wind energy integration in New Zealand found that technical constraints were somewhat less than previously thought and wind energy had the technical potential to provide between 20% and 48% of electricity to the national grid. This assessment did not take into account the economics of wind generation.]. Coal is also projected to play an increasingly important role in both projections, making improvements in the energy intensity of electricity generation through to 2020 an unlikely prospect.

Greater exploitation of small-scale, off-grid, renewable generation (ie, distributed generation) may be an option to continue to grow the contribution of renewable energy to overall electricity supply and EECA is targeting the barriers to realising these opportunities in a number of its programmes.

In the longer term, the creation of hydrogen using renewable energy presents some potential to replace fossil fuel use in a diverse range of energy services, including electricity, process heat and transport. Clean hydrogen could also be produced using coal if it were combined with carbon sequestration technologies, which are discussed further below. While some limited trial use of hydrogen may be expected in the short term, it is not anticipated that hydrogen will have widespread use by 2020.

Sequestering emissions from the energy sector

Carbon dioxide capture and storage (CCS) is a process consisting of separating carbon dioxide from industrial and energy-related sources, transporting it to a storage location and isolating it long term from the atmosphere (IPCC, 2005b). CCS can be applied to major point sources of carbon emissions, including fossil fuel energy facilities. In this sense, CCS can limit the ultimate release of carbon dioxide to the atmosphere and therefore its contribution to global warming. In the long term, CCS is considered to have potential to significantly reduce global emissions of carbon dioxide.

Carbon sequestration is currently feasible, [The IPCC special report on carbon capture and storage notes three industrial-scale storage projects are in operation: the Sleipner project in an offshore saline formation in Norway, the Weyburn EOR project in Canada, and the In Salah project in a gas field in Algeria.] although the costs are high, particularly at the “capture” stage of the process. The recent IPCC special report on carbon capture and storage found that CCS is estimated to increase the cost of electricity production by between 2 cents and 7 cents per kWh, depending on the fuel, the specific technology, the location, and the national circumstances. This compares with the current marginal price of generation in New Zealand of around 5 to 7 cents per kWh. The current cost of offsetting one tonne of carbon dioxide using CCS technology in a pulverised coal plant is estimated to be between $45 and $100, well above New Zealand’s current carbon tax rate of $15 per tonne of CO2. These cost estimates indicate CCS technology is likely to be some way off commercial adoption in New Zealand. The viability of the technology will also depend on whether geologically suitable sites can be found for storage and whether the general public considers this approach environmentally acceptable.

Prospects of emissions reductions in New Zealand in the medium term as a result of carbon capture and storage are therefore considered low, although longer term, the potential of the technology may be significant.

Conclusion

EECA’s estimates indicate there are substantial and worthwhile gains available from energy-efficiency improvements in the residential, commercial and industrial sectors, based on assessments of “economic potential”. Among these sectors the total economic potential for energy efficiency improvements, based on EECA estimates, totals 32 PJ per annum at 2012. The incorporation of a carbon price signal into the economy and the development and commercialisation of more energy-efficient technologies would further increase the level of economic opportunities available. However, an “efficiency gap” traditionally exists between those opportunities that are judged economic and those that are actually taken up. The efficiency gap arises as a result of various information, financial, incentive and other barriers. Government policies have a role in addressing these barriers to uptake, and this role is assessed further in Section 4.4.

In each of the residential, commercial and industrial sectors, however, general trends (including household size, higher-quality commercial buildings, and industry expansion) are pushing up overall demand for energy services. Improvements in energy efficiency may therefore be more likely to achieve reduced growth in energy demand, rather than an absolute reduction in energy use. Some potential also arises for “rebound effects” from energy-efficiency gains, most significantly in the residential sector.

Substantial changes to the emissions intensity of the energy mix appear unlikely, given the already high proportion of renewable energy used in electricity generation and the fact that many of New Zealand’s major hydro generation opportunities have already been developed. Growth in geothermal, wind and some hydro generation is expected, but coal development is also expected (although the development of coal generation is perhaps the most sensitive to the introduction of a carbon price). Small-scale renewables provide further potential to continue developing renewable energy.

Carbon sequestration and hydrogen technologies offer significant potential for neutralising emissions from the energy sector, although the technologies require more development before the prospect of widespread commercial adoption is known. Significant gains from these technologies are therefore not assumed to occur by 2020, although they will be key technologies for New Zealand to track.

Overall, the key prospects to achieving emissions reductions in the energy sector lie in further encouraging the uptake of energy-efficiency technologies and practices, and encouraging the development of available renewable energy opportunities. Ensuring there are strong international research and development linkages will be important for allowing the adoption of more energy-efficiency and renewable-energy technologies.