The BusinessNZ Energy Council and its members wish to see a more diverse and low carbon energy system across all sectors of the economy.
Energy investment that helps reduce New Zealand’s Greenhouse Gas (GHG) emissions and protects against dry-year risks can assist in future-proofing our energy system, stabilise prices and enhance sustainability.
On Sunday, the government announced it will spend $30 million to investigate a pumped hydro scheme at Lake Onslow, Central Otago to reduce the need for coal and gas-fired generation in dry years. This bold move could lead to the employment of thousands of temporary workers, but with a $4 billion price tag.
Last year, the Interim Climate Change Committee recommended further investigation into pumped hydro storage, but also recommended giving greater priority to the accelerated electrification of transport and process heat because this could result in greater greenhouse gas emissions savings while keeping electricity prices affordable.
Electricity generation accounts for about 4 per cent of New Zealand’s emissions – but transport and process heat combined produce almost 30 per cent.
We must be wary of betting the house on any given technology and focus on what will drive the lowest carbon outcome for New Zealand.
The question is not what the business case looks like for pumped hydro, but rather should government consider more expenditure on South Island dairy electrification, or further support the uptake of electric vehicles instead?
How do we assess if pumped hydro is the best target for investment in our energy system, or if this investment would be better spent on other ways to mitigate net GHG emissions, particularly accelerated electrification of transport and process heat as the ICCC also recommended?
The energy trilemma
Any decision must consider the Energy trilemma – energy security, energy equity (accessibility and affordability) and environmental sustainability.
Pumped hydro could deliver 100 per cent renewable electricity, but also comes with its own adverse long-term environmental consequences and it might not make energy more affordable.
Lake Onslow is an option for dry-year risk but would be very expensive.
The cost-benefit of a move to a pumped hydro scheme looks weak as it comes at very high capital cost, at very high risk, offers no additional reduction to net GHG emissions over more direct approaches, and makes little contribution to overall additional supply, particularly when compared with other options.
Transmission building is costly and – particularly under the new transmission pricing methodology – the risk and costs will fall on existing consumers and generators.
Consider other options
There may be more feasible options for energy storage that are more affordable and less environmentally invasive. Options that are more closely located to demand, less exposed to fuel availability, a tighter fit to market scale and require less grid investment.
While the ICCC has recommended further investigation into pumped hydro storage, it has given no consideration to reusing the existing gas infrastructure (both distribution and generation) using clean fuels (for example, biomethane), or demand-side response, or using alternative fuels outside the electricity system.
Reuse of existing capital plant should be the first thing considered in a capital-intensive industry.
More work must be done on the available options.
Spending of this magnitude could much better be directed to higher priority energy issues. To put this in perspective, the $30 million allocated to the pumped hydro business case is more than the government committed to the National New Energy Development Centre in Taranaki.
We must also consider how pumped hydro will operate in the wholesale market for electricity. We must avoid distortions that will undermine investment in the renewables the country will need to 2050 and beyond.
Maintain a viable market
Achieving a balance in the energy trilemma will require co-operation between government and private partners, financial institutions and the whole energy sector.
Together, these players must create a policy environment that encourages investment and minimises risk in a market that is seeing increasing competition and complexity.
Policy and investment decision-making have always been complex and are even more so today.
The prospect of increasing complexity in energy markets suggests caution is needed while new business opportunities are emerging.
An open-minded, balanced debate on the best investments to reduce GHGs that carefully considers the energy trilemma will position us well for transitioning to a low-carbon future.
The recently reformed emission trading scheme is one mechanism for addressing climate change and sending market signals in favour of decarbonisation. But complementary mechanisms are still needed to accelerate the development of zero-carbon energy sources. These should provide the investment security required to encourage widespread decarbonisation.
Government intervention to alter competitive market signals should be undertaken with caution.
Any intervention should ensure competitive outcomes.
The principle of supplier and technology neutrality is paramount.