Energy Industry

According to the Ministry of Economic Development, in 2011, 77% of New Zealand’s electricity generation came from renewable sources (Energy Data File, 2012). This is the second highest ranking for countries in the OECD for the contribution that renewable energy makes to electricity. Natural gas has a more favourable impact on the environment than coal and for the New Zealand dairy industry there are advantages in substituting natural gas for coal when it can reduce the level of CO2 emissions by between 40% and 60% depending largely on factors such as age and efficiency of coal units. There have been recent breakthroughs in natural gas extraction which underline changes and a shift away from New Zealand’s reliance on oil and coal extraction to cheaper and relatively clean sources like natural gas to power economic growth and improve living standards.

It will be imperative for governments to develop long-term initiatives together with industry leaders to ensure the sustainability and reduction in carbon emissions over the next 20 to 40 years. New technologies particularly associated with gas extraction have been receiving a great deal of attention in recent times. Hydraulic fracturing or

“fracking” for example, involves the release and extraction of natural gas from shale rock deep below the ground. This is achieved through a process of fracturing the shale rock by drilling and injecting a combination of water, quartz sand, and chemicals into the ground at high pressure. The associated pressure build-up causes natural gas to flow into the well through a series of fissures or cracks in the shale rock. In some respects the ability to obtain natural gas from shale rock has undermined the case for renewable energy as a source for electricity. But this practice is not without its critics. Likewise coal seam gas (CSG) which is methane gas found in coal seams, is another controversial area that the coal industry is exploring as a means of utilizing to counter the effects of peak oil.

Dr M King Hubbert, a renowned geophysicist and expert in the field of estimating energy resources, accurately predicted in 1956 that United States oil production would peak in the early 1970’s. Around 1980 the world began to produce more oil than what was being discovered. Today, about four barrels of oil are consumed for every one barrel that is found. With the help of Hubbert’s peak model and other methodologies, it is predicted that world oil and liquid gas will peak around 2030 (http://en.wikipedia.org/wiki/Peak_oil). According to the World Energy Outlook of 2010, the International Energy Agency (IEA) stated that conventional crude oil production “never regains its all-time peak of 70 million barrels per day reached in

2006” (http://www.energybulletin.net) Oil producing countries already in decline include the United States (1970), Indonesia (1997), Australia (2000), United Kingdom (1999), Norway (2001), and Mexico (2004). An interesting debate about such developments as tapping shale deposits and CSG exploration has been taking place in recent months. “One argument is that the environmental movement is really less concerned with immediate environmental impacts and more concerned about fracking (and deep-sea oil extraction) sounding the death-knell on the “peak oil” theory. In other words, if lobbying and scare tactics can keep major new oil and gas sources in the ground, then peak oil might just come true” (NZ Energy & Environment Business Week, 2012). It could be argued that this is a rather cynical view that plays into the hands of oil and gas multinationals bent on promoting fossil fuel development over wind and solar. All stakeholders in the energy industry, including governments, must step back and consider the role that the public and private sector have in creating a level playing field for developing a sustainable and secure low carbon energy future. Most would agree an element of initial start-up support by governments for new technologies is a good way to create confidence and attract private sector investors in new energy initiatives that would otherwise not occur.

But after they become profitable and support is no longer necessary, the question is whether governments that continue to subsidize fossil fuels and renewable energy development simply create a false reality and delay the real task of addressing energy reform? Alongside the tax breaks to big oil companies over many decades, agricultural lobby groups also share an element of responsibility through their promotion, for example, of multi-billion dollar subsidies for corn ethanol.

“Corn ethanol generated more carbon dioxide than gasoline after taking into account the emissions caused when new land was cleared to replace the food lost to fuel production”

(The New York Times, 2012). The fluidity of global trade patterns, increased reliance on bilateral and regional trade agreements around the world, and changing forms of energy use created by a combination of supply and demand constraints is bringing about important discourse on the future of energy. In the United Kingdom, the energy secretary, Ed Davey, published a draft bill setting out the framework for investment in new power stations. Central to Mr Davey’s plan is a regime that involves the state setting minimum prices for power generated from different sources. “The idea is to let the government set the power mix – so much to come from renewables; so much from nuclear and gas and so on – and hence achieve its overall desire for more electricity to come from cleaner technologies” (Financial Times, July 2012). George Osborne, Chancellor of the Exchequer wants to cut incentives for renewables. Mr Osborne believes wind could crowd out future investment in gas-fired stations and saddle the consumer with excessive costs.

Such debates are proceeding in New Zealand with a similar point of reference. The Tiwai Point aluminium smelter near Invercargill at the bottom of the South Island, for example, “employs nearly 1,000 workers and uses one-seventh (14.29%) of New Zealand’s electricity to produce more than 250,000 tonnes of aluminium annually” (The National Business Review, 2012). Analysts say that if it closes or greatly reduces its power usage, national power prices will fall significantly, impacting on the value of the three state-owned energy companies (including Meridian its electricity supplier) scheduled for partial privatization in early 2013.

“Trade unions and Southland community leaders have called on the government to step in as owner of Meridian and enable the smelter to keep operating at full capacity”

(Executive News Service, September 2012). Rio Tinto owns 79% of the Tiwai Point aluminium smelter (the balance is owned by Sumitomo Chemical) and must honour its current power price contract without distorting the electricity supply market to benefit its own commercial gains at the expense of taxpayer funded incentives. In the energy sector it could be argued that venture capital should remain the responsibility of the private not public sector and the folly of governments that view their responsibilities in this role exacerbate delays in addressing necessary regulations on carbon and air pollution. Comparable with the debate underway in the UK, incentives in the form of tax breaks and other subsidies result in long-term additional costs for consumers and a distortion of actual costs relative to the actual value provided by some technologies. If governments concentrate on setting the benchmark on reducing GHG emissions then it should follow that the market will develop the best clean or renewable technology to shoulder the electricity load.