Analysts from the world’s foremost economic forum have rebuked the Government’s plans to import liquefied gas and spark a renaissance in domestic fossil fuel production.
In its annual economic survey of New Zealand released last week, the Organisation for Economic Co-operation and Development (OECD) warned many of the Government’s energy policies were unlikely to achieve their desired effect.
While the criticism of the planned liquefied natural gas (LNG) import terminal garnered headlines, the analysts urged for a far greater rethink of the electricity system, saying any reliance on long-term fossil fuel use was imprudent.
“Gas supply could be increased through domestic production and the Government’s decision to contract for an LNG import facility intended to backstop dry‑year risk. However, a prudent strategy under high uncertainty is to reduce electricity’s structural dependence on gas by progressively replacing gas peaking with batteries and expanding non‑gas seasonal firming generation (eg pumped hydro), supported by greater demand‑side flexibility,” the analysts wrote.
Instead of positioning energy security, affordability and sustainability as the traditional “trilemma” – each tugging in a different direction from the other – the OECD said New Zealand could achieve stable supply and lower prices by getting off fossil fuels.
“Affordability will remain elusive without breaking the gas–electricity price link by scaling non‑gas long‑duration firming, expanding demand response and strengthening competition,” the forum found.
It said the major problem in the electricity system was the lack of new firm generation (power stations that can switch on or off when needed).
After several decades of stagnant growth in power demand and supply, New Zealand has recently begun building large amounts of new solar and wind. At the same time, gas reserves have begun to run dry far earlier than expected.
The confluence of the two means there is less gas available to firm “lumpy” generation from renewable sources that rely on wind, sun or rain.
These are not new observations – they were identified in last year’s Frontier review of the power sector and have long been the standard industry understanding. The Government and opposition alike broadly agree on this diagnosis of the problem.
Where the OECD has diverged from the Government’s view, and that widely held in some parts of the energy sector, is in identifying that new fossil fuels are not the answer.
LNG, it found, should be used, if used at all, as a short-term transition tool to meet dry-year seasonal firming needs only.
“Public sponsorship of LNG risks locking‑in fossil dependence and weakening incentives for alternatives such as biomass, pumped hydro and demand response. The conflict in the Middle East underlines that introducing reliance on LNG would exacerbate New Zealand’s already high vulnerability to imported liquid fuels shortages. In addition, it would create a single-point-of-failure risk because there is only one viable port of entry in Taranaki.”
In theory, the Government wants to use LNG only as an interim measure, while new offshore oil and gas exploration gets underway – although this has been contested by the Parliamentary Commissioner for the Environment, who pointed to Cabinet papers describing wider use of LNG as a “spillover benefit” of the terminal.
Even that strategy is flawed, however, the OECD found. It made clear in its analysis that no great new domestic gas find is waiting around the corner.
“Given limited opportunities in Taranaki and high-risk prospects elsewhere, the likelihood of major new discoveries is low. Experience in New Zealand and OECD countries shows that large developments rely on foreign joint ventures, which are unlikely to return without compelling prospects,” the OECD reported.
In short: “Gas cannot remain the backbone of seasonal electricity firming.”
Instead, the OECD’s analysts pointed to biomass (used in Nordic countries to underpin hydro generation), demand response, more geothermal and retrofitting existing hydro schemes to allow for more storage as firming tools available right now.
In the medium term new pumped hydro and wind and solar overbuild would be on the table. In the long term, supercritical geothermal could unleash significant amounts of clean, domestic energy.
To incentivise that new firming, the OECD proposed a new market structure specifically for firming. This could reward investment and provision of short-duration peaking, such as batteries, as well as the sorts of options above for dry-year firming.
It also advised regulating for greater competition in the wholesale market – including, as a backstop, breaking up the gentailers.