IN DECISIONS ON ENERGY, NEW ZEALAND IS AT A

UNCLAS SECTION 01 OF 03 WELLINGTON 000859

SIPDIS

STATE FOR EB/TPP, EAP/ANP AND EB/ESC/IEC
STATE PASS USTR-LCOEN
COMMERCE FOR ABENAISSA/4530/ITA/MAC/AP/OSAO

E.O. 12958: N/A
TAGS: ECON PREL NZ ENGR ETRC
SUBJECT: IN DECISIONS ON ENERGY, NEW ZEALAND IS AT A
CROSSROADS

REF: A. WELLINGTON 849

B. WELLINGTON 603

C. 2004 WELLINGTON 291

(U) Sensitive but unclassified -- please protect accordingly.

Summary
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1. (SBU) With the days of abundant and cheap electric power
over, New Zealand faces critical decisions on how to ensure
its energy supplies keep pace with future demand. The task
is complicated by years of under-investment, regulatory
uncertainties and uneven government policies. New Zealand's
obligations under the Kyoto Protocol and its anti-nuclear
policy constrain the government's choices. More than a
decade after the initial alarms were sounded on a future
energy shortfall, no solution is evident. Energy issues were
largely ignored during the country's recent election
campaign, aside from the Green Party's calls for energy
conservation coupled with increased reliance on renewable
power sources. With a new Labour-led government in place and
electricity prices rising rapidly, the stage is set for
serious debate on how New Zealand can secure future energy
supplies.

Demand outstripping supply
--------------

2. (U) New Zealand no longer can look to dam another river to
meet electricity demand, which is rising about 2 percent a
year. Hydro supplies about 64 percent of the nation's
electricity, but there are virtually no more politically
acceptable sites available for large hydropower plants.
Domestic natural gas, now the second-largest source for
electric generation with a 16 percent share, is also tapping
out. The Maui gas field, which provides 64 percent of the
nation's natural gas, is expected to run dry by 2007. New
electric generating capacity is not coming on line fast
enough to meet expected load growth and to replace old
thermal plants by 2025, according to Brian Leyland, an energy
consultant.

Investment hurdles
--------------

3. (SBU) Years of under-investment in the utility sector --
caused in large part by regulatory delays and uncertainties
-- have left New Zealand faced with the prospect of
widespread power brown-outs in the event of a single dry
year. Government policies and the industry's structure have
failed to promote competition and discouraged private
investment.


4. (U) Much of the uncertainty hanging over needed new power
plants comes from the Resource Management Act (RMA) of 1991,
which requires local review of major resource uses. Meridian
Energy in March 2004 cited uncertainty over obtaining
resource consents under the RMA as one reason why it pulled
the plug on a planned NZ $1.2 billion (US $837 million)
hydropower project, which alone would have provided about 8
percent of the country's energy needs. Scrapping what would
have been the third-largest hydro plant probably spelled the
end to large-scale hydropower projects. The RMA has quashed
other energy investment decisions, such as Genesis Energy's
plan for a 19-turbine wind farm. A local council objected to
the project's potential impact on the visual environment,
equestrian events and cultural values of the indigenous
Maori. Transpower, the state-owned monopoly that owns and
operates the national transmission grid, wants to complete a
NZ $1.5 billion (US $1 billion) upgrade, but would need
separate resource consents from many local councils and
dozens of landowners -- a process it claims could take years
to complete. Parliament in August 2005 amended the RMA,
which may speed up approvals for energy projects.


5. (SBU) The sector's public-private ownership structure has
stymied competition and failed to stimulate adequate
investment in new generating capacity. Five companies, three
of which are state-owned enterprises, supply 92 percent of
the country's electricity needs. Each of the five is
vertically integrated, with a hand in both generating
electricity and retailing it to consumers. The supposed
rival companies have swapped customer bases to assemble
dominant regional power blocs. That in turn has dissuaded
new competitors. Furthermore, the companies see no advantage
in building additional generating capacity far ahead of their
customers' demand.


6. (SBU) Government policy also has skewed the sector's
choices away from its most cost-efficient option: domestic
coal. The Labour government, with a tip of the hat to its
Green Party allies, wants expanded investment in renewable
sources of electricity generation and continues to support
New Zealand's participation in the Kyoto Protocol. (The
government in June announced that New Zealand would likely
miss its emissions allocation target and have to buy carbon
credits; ref B.) Yet, New Zealand's largest and most readily
available energy source is coal, which now generates 9.7
percent of the country's electricity. Even with the added
costs of a NZ $15-per-ton carbon dioxide tax, coal could be
the cheapest source of additional energy.


7. (SBU) By signaling a willingness to fund some new
generating capacity, the government risks crowding out
private investment. It built and is paying the operating
costs of a 155 megawatt oil-fired reserve plant that opened
in June 2005. It also has underwritten a new 365 MW
gas-fired power station, which is scheduled to go on line in
2006 and is owned by state-owned enterprise Genesis Power.
The head of the Electricity Commission, Roy Hemmingway --
formerly chair of the Oregon Public Utility Commission --
criticized the government's guarantee as a possible
deterrence to private investment.

The answer is blowing in the wind?
--------------

8. (SBU) The Electricity Commission set up shop in late 2003
in hopes of resolving some of the industry's marketing and
structural problems. Established to regulate the industry
after the companies failed at self-governance, the Commission
is charged with ensuring security of supply and reserve
generation, investment in the transmission grid, promotion of
retail competition and energy conservation. The Commission
spent its first two years developing a work program and
planning for reserve energy, but has yet to make any tough
decisions. Its first major challenge could be deciding how
to fund the upgrade of the national grid, which was largely
built in the 1950s and has been expanded but never
overhauled. A proposal to install new transmission lines to
feed power to the country's largest city, Auckland, has
aroused fierce resistance from farmers and other landowners.


9. (SBU) New Zealand faces questions with no easy answers on
how to secure future electricity supplies. Genesis and
Contact Energy are pushing for importation of liquefied
natural gas (LNG) if no new gas discoveries are made in the
next couple of years. With LNG prices tracking the rise in
oil prices, critics say LNG would be expensive and put New
Zealand at the mercy of a price-volatile commodity. In
addition, the oil and gas industry contends that competition
from LNG would deter exploration for domestic gas supplies.
Genesis has proposed building three natural gas-fired
stations, including the 365 MW gas-fired plant. However, it
has put future projects on hold until new domestic gas
supplies to replace the Maui field are assured. Mighty River
has proposed converting a mothballed power plant to run on
coal, but Labour and the Greens are opposed to new
carbon-emitting plants. New Zealand's continued reliance on
hydropower makes it vulnerable to drought-induced electricity
shortages, such as those that occurred during dry spells in
2001 and 2003. A nuclear power option is off the table in a
country that takes pride in a "green" reputation and an
anti-nuclear policy that has become part of a national
identity.


10. (SBU) Almost by default, New Zealand is turning
incrementally to wind power. Although costly to build on a
unit-cost basis and unlikely to meet all of New Zealand's
future demand, it can be added in smaller amounts with
smaller price tags than large traditional power plants.
Over-reliance on wind would require an expensive backup plant
to supply electricity during calm periods. Wind farms also
have faced local opposition. Meridian and TrustPower have
plans for NZ $2 billion (US $1.4 billion) in investment in
wind farms totaling 1000 MW of capacity over the next decade.
In just one year, to March 2005, wind power's share of New
Zealand's electricity generation rose from 0.4 percent to 1.1
percent.

Comment: Firing up public debate
--------------

11. (SBU) In contrast to the Labour government's strong
commitment to the Kyoto Protocol and promotion of renewable
energy, the opposition National Party has said it would
consider increased use of coal to meet the country's energy
needs. National wants to review New Zealand's participation
in the Protocol and opposes Labour's carbon tax. The
government faces increasing complaints over electric power
prices. Traditionally low by first-world standards and
steady because of New Zealand's large stake in
hydroelectricity, electricity prices jumped in a range of 7.6
to 10.4 percent during the year ended June 2004. Recent
price hikes raised the cost of electricity an additional 8.1
to 10.1 percent in 2005.


12. (SBU) A consensus has not yet emerged on how New Zealand
will feed its growing appetite for electricity. No one type
of generation has won an edge as cost-effective, sustainable
or politically popular. It is clear, however, that New
Zealand will rely in the future on more varied and costly
sources of electric power.
Burnett