July update

The policy package was set to include:

- the draft Gas Transition Plan
- proposals relating to electricity market measures (e.g., a capacity market among others)
- the second tranche of consultation on regulatory settings for offshore renewable energy
- a draft hydrogen roadmap/strategy
- a draft Just Transitions strategy

But the long-awaited package never materialised.

A day later, BusinessDesk's Ian Llewellyn broke the news that the policies had been delayed. Llewellyn's sources gave varying accounts of what was responsible for the delay. Some said that the conclusions and options presented in the documents did not align with the Government's view of energy policy. Others said the Minister and her Government colleagues wanted more time to consider the complex policy issues involved.

The Ministry of Business, Innovation and Employment denied there had been a delay at all. But still we wait.

Whatever the reason for the delay (it could have been caused by the new dramatic natural gas reserves data [for more on this see below], or the recently announced proposals for a wholesale change to the way New Zealand's Emissions Trading Scheme operates [also more on this below]), firms in the energy sector are facing uncertainty from all sides.

It is little wonder that businesses are largely unwilling to commit to the large-scale generation projects required to fuel New Zealand's transition to a low emissions economy - the individual stakes are too high.

We’re hopeful about the proposals and their ability to strengthen our energy system resilience. They are a chance to chart a new practical, sensible course – one that sees us meet our climate targets without sacrificing reliable, affordable energy in a globally competitive economy. A chance to avoid the pitfalls seen in Europe, the UK, and Australia where incoherent policy settings have resulted in poor outcomes for businesses and households alike.

New Zealand's future prosperity depends upon it.
 

Energy security in peril

Almost ten percent of the electricity we use to heat our homes and keep businesses’ lights on comes from New Zealand’s domestically produced natural gas. It is a vital component in our energy mix and picks up the slack when weather-dependent renewables cannot get there on their own.

At the moment there is no affordable alternative renewable energy source at scale that can possibly fill the gap that is forecast to emerge in lass than 8 years' time.

In our press release in response to the data release, we called on the Government to restore investment confidence in the production of natural gas, and pointed to some of the recent statements made by Australian Labor Party Prime Minister Anthony Albanese that natural gas has a key role to play in guaranteeing their energy security.

Our commentary was picked up by Bloomberg, Newstalk ZB, Energy News, BusinessDesk and Interest.co.nz.
 

Fuel tax returns & higher costs on the horizon

Ahead of the increase, Z Energy’s Lindis Jones implored customers not to take their frustrations out upon his staff. In this opinion piece ahead of the increase he also noted that for each litre of petrol sold, retailers generally only make 1c of profit.

The fuel tax relief has been a welcome reprieve for households and businesses that have been doing it tough. But it has also got people thinking about what they are actually paying for when they fuel up.

As Jones states in his opinion piece:

“The reality of the situation is that 41% of the price you pay at the pump is made up of taxes – the fuel excise duty, ACC levies, the Emissions Trading Scheme, and of course GST. For those in Auckland, the regional fuel tax is additional to this.

The cost to purchase fuel on the international market, and then import it to our remote island nation represents about 50% of the petrol pump price.

The remaining 10% goes towards helping us to maintain a safe and reliable supply of fuel.”

Unfortunately, Kiwis ought to brace themselves for further price increases at the pump. The Government is currently in the process of imposing increased minimum stockholding requirements upon firms in the transport fuel sector.

These will require firms to hold the equivalent of 28 days of consumption for petrol, as well as 24 days for jet fuel and 21 for diesel. Currently firms have to hold about 20 days' worth for all three categories.

Building fuel storage facilities takes time and money. With margins for fuel so tight, these costs will undoubtedly have to be passed on to consumers through higher prices at the pump.

Government announces ETS review

The review is being undertaken because, as the Ministry for the Environment states:

"The NZ ETS in its current form may not be incentivising emissions reductions. This is because it is cheaper for most companies to pay for their emissions rather than invest in ways to reduce them."

The review will consider four options:

Option 1: Decrease the amount of emissions units so that the carbon price rises

Option 2: Increase the demand for emissions units by allowing the Government and/or overseas buyers to purchase them

Option 3: Restrictions or conditions are placed on removal activities

Option 4: Emitters will not be able to purchase NZUs from foresters to pay for their greenhouse gas emissions

It is telling that the Ministry has framed the proposed options as follows:

“Currently, the price of carbon is not high enough to drive decarbonisation changes in the energy, transport and waste sectors.”

Constant tinkering with the ETS and subsidised NZU demand destruction might provide the Ministry some leads in the pursuit of answers. Government failure looms as large a reason as market failure.

The ETS exists to get our economy to net zero emissions. The ‘net’ is important – it means there will always be overs and unders. The ETS has never sought to drive decarbonisation in particular sectors, but to reduce New Zealand’s overall emissions to net zero by 2050.

Our legislated goal is net zero emissions (excluding biogenic methane) by 2050. By redefining the goal toward gross emissions, the Government risks a higher‑cost transition. Further, by floating significant changes to the structure of the NZ ETS, market confidence in the mechanism has taken a big hit.

We’ve seen reports of concerns that foresters in particular are increasingly nervous that differential treatment of NZUs from forestry will undermine the value of investments made to date. At the very least, these concerns could be allayed by confirmation the Government will not act retrospectively, and retain the 1:1 fungibility of existing forestry NZUs with auctioned NZUs.

We think New Zealand would benefit from a long‑term view on our climate transition, with carefully considered decisions on ETS settings made along the way in line with this strategic view. Such a long-term view might involve establishing bipartisan agreement on the overall volumes of units to be made available over the coming decades, with forestry (and other removals) acting as a buffer for emissions prices, to re-establish long‑term investment confidence in support of a least cost transition. 

Submissions on the ETS Review close at midnight on Friday 11 August 2023. The Government has made clear that any recommendations from the consultation will not be ready to be enacted before the October General Election.

New members strengthen net zero advocacy

This week we are proud to announce two exciting new members that will help strengthen our advocacy for innovative technologies and market-led solutions to power the transition to a net zero emissions economy.

8 Rivers Capital, a firm specialising in clean energy, clean fuels and carbon capture technologies, has joined Energy Resources Aotearoa. The company has proven success overseas and sees potential in New Zealand for low-emissions energy projects and carbon capture.

Aotearoa Energy is a boutique brokerage that provides innovative services across the gas and electricity markets, including facilitating trades in New Zealand Units under the Emissions Trading Scheme.

Energy is changing, and as an organisation we have been changing too. Once upon a time we represented just one important subgroup of the energy sector. Now we are proud to represent it in its entirety - from producers of energy resources through to electricity generators, energy distributors, technology providers, producers of refined products, and energy market service providers.

The energy sector is increasingly integrated, and across the value chain there is a great emphasis on reducing emissions.

We are proud to be joined by two more innovative companies that will play important roles in facilitating New Zealand’s transition to net zero emissions.

More fuel changes coming?

The RUC exemption has existed since 2009 to encourage the uptake of EVs. But now, with EVs much more visible and prolific, both the Government and National believe that it is time for the policy to end.

And of course this is going to create a public policy problem.

One of the big problems they have encountered is how to treat hybrid vehicles. A lot of popular vehicles in the New Zealand market, including the vehicles such as the Mitsubishi Outlander PHEV, use both electricity and petrol. With a press of a button, the vehicle can run exclusively in EV mode.

It is near impossible to know whether kilometers are being driven on petrol, battery, or a combination of both. That means there is a very real risk that PHEV owners might find themselves paying petrol excise at the pump, but then also be stung for RUCs over and above their kilometers driven on battery alone.

The debate around how RUCs could be levied on hybrid vehicles shows the difficulties associated with maintaining adequate revenue for road maintenance when Kiwis' vehicles are changing to alternative fuels.

We can only expect this to become more complicated as hydrogen and other alternative fuels come online at scale.

The most straightforward solution would be to remove excise tax from the petrol pump and ensure all vehicles pay Road User Charges.

Member profile: Todd Energy

Today, the natural gas we produce helps to provide more than 20% of New Zealand’s primary energy supply, ensuring Kiwi households can enjoy instant heat, energy, and continuous hot water. That same natural gas is also used commercially, to heat and power businesses, as a feedstock for methanol and urea production, and to generate electricity in gas-fired power stations.

As a business, we contribute significantly to the local economy each year through employment, partnerships, and the use of local suppliers, and, like many others, we remain committed to doing what we can to make Taranaki a great place to live.

To find out more about Todd Energy’s role in powering our country’s homes and workplaces, visit toddenergy.co.nz.