Key Messages

  1. A changing society and economy
    In both scenarios, society and the economy looks considerably different to today as there is less reliance on primary produce and greater emphasis on service industries. Policymakers, investors and consumers all have important roles in shaping how this future might look as we strive to sell our good and services to the rest of the world. Energy will be an enabler of this new society and economy, and not a cause of it.
  2. Renewables are the greatest opportunity to decarbonise, but it’s not exclusively an electricity story
    The biggest opportunity to decarbonise is to leverage New Zealand’s significant renewable electricity resources and convert much of the transport fleet and industrial heat to electricity but other opportunities exist.
  3. Energy security becomes more important in a renewable world
    Careful investment in the resilience of our electricity system is required to ensure the wider reach of electricity is not compromised by the very problem it is trying to fix.  The conversation is now about renewable energy resilience in addition to cost competitiveness.
  4. A technology race ensues
    The race for technology is finely balanced, and we must be wary of “betting the house” on a given technology. Robust trialling, piloting, and clear policy frameworks will level the playing the field for technology development.
  5. More forward-thinking solutions are needed
    Global and domestic innovation and R&D will be a critical part of finding commercial solutions for decarbonisation. Aviation and marine solutions to decarbonisation are not obvious or easy.
  6. The dangers of siloed thinking demands better information
    Siloed thinking risks unintended consequences and poorly allocated resources. Interconnectivity between electricity and transport markets will emerge very soon, and throughout the economy the carbon price is binding decisions together.  This drives greater complexity than the historical siloed approach. A greater degree of transparency is required.
  7. Balance is required between stable policy and investment frameworks and adaptive ones
    Over the next 40 years, hundreds of billions of dollars will be expended on capital, operating and fuel costs in both scenarios across the energy sector. Governments need to strike a balance between making long-term policy and investment decisions, and decisions that are resilient and adaptive to the rapidly moving energy system.
  8. Quicker insights are required
    The pace at which innovation and the development and execution of new business models in the energy sector is occurring has never been faster.  As a result, large scale, infrequent scenario development processes rapidly lose their relevance, especially as the costs of new and emerging technologies fall.  Policy makers, businesses and consumers need more timely analysis and delivery of insights.

The New Zealand Context

1. New Zealand’s place in the world

The confluence of falling costs for new technologies, disruption arising from non-traditional players and a shift in focus to greenhouse gas (GHG) emissions from energy use have created a level of uncertainty about future energy systems in every country around the globe. The same trends apply to New Zealand even though it is ranked in the top four developed countries in the world for electricity produced from high levels of renewable sources. New Zealand’s geography, economy and resources create a unique set of uncertainties and trade-offs for New Zealanders.

World Energy Council (WEC) produces the World Energy Issues Monitor each year through a global survey of energy leaders. It assesses 42 issues and highlights critical uncertainties and action priorities. Critical uncertainties have high uncertainty and high impact, while action priorities are those with high impact and low uncertainty.[1]

Figure 1 below highlights the critical uncertainties and action priorities in New Zealand, the major issues include climate change, emerging technologies, energy efficiency and electric storage. Uses for Artificial Intelligence, Internet of Things and Block Chain in the energy sector were highlighted in the Energy Issues Monitor. These innovations will further disrupt the energy sector and are increasingly in the spotlight ways to increase energy efficiency.[2]

Figure 1 – New Zealand Energy Issues Monitor 2019

figure 1
Source: World Energy Council

In order to explore the key uncertainties identified such as climate change, changing technologies and political uncertainty, we consider below the current economic landscape and key domestic drivers for energy from a supply and demand perspective. In developing the BEC2060 scenarios narratives, it is important to understand the specific features of the New Zealand economy in the context of its competitiveness and key factors affecting the energy industry.

1.1 Economic growth

New Zealand’s economic growth is currently in a challenging phase, with slower population growth and some sectors that helped the economy get to the peak in the cycle in 2016, construction and tourism, currently at capacity. Figure 2 below shows New Zealand’s GDP growth from 1994 to 2018.

Figure 2 – New Zealand GDP growth (1994 to 2018)

The largest risk to growth outlook comes from offshore. The global economy has a large influence on New Zealand and our country must not be looked at in isolation. New Zealand’s close proximity to Asia along with the rise of the middle class in emerging economies and the ongoing shift towards consumption-driven growth in China means that Asia represents a significant opportunity to New Zealand. However, the recent widely reported froideur between Wellington and Beijing, and concerns over a slowing in Chinese economic growth represent a threat to this opportunity.

The world also faces the potential for growing economic, political and security uncertainty. Any of these factors could cause serious disruption to the energy sector, through shortage in resources, slower technological advances or decreased economic growth, which could reduce our demand for energy.

Climate change and over allocation of natural resources are already impacting political and social tensions such as protectionist policies aiming to increase self-sufficiency and defend threatened industries. These tensions and policies may weaken ties between nations and could start to reverse globalisation. This trend is expected to continue.

1.2 Economic structure

A significant part of GDP in New Zealand comes from the tertiary industry, with approximately 23% of total GDP coming from business, property and finance services. The primary industry contributes approximately 8% to GDP, with over half of this coming from agriculture which makes up 4.0% of total GDP. Electricity, gas and water supply currently contributes to 3% of national GDP. A further breakdown of New Zealand’s GDP is shown in Figure 3.

The tertiary industry is expected to grow reasonably consistently over the next 10 to 20 years. Primary industries are expected to have low growth and then continue to grow faster into the future, while secondary industries are expected to decline before returning to a level of slow growth. Agriculture is expected to continue with reasonably strong growth over this period of almost 2% annually.

Figure 3 – Industry shares of GDP (September 2018)

Source: Deloitte analysis based on NZIER data

1.3 Demographics

High standards of living, natural environment, economic opportunities and work life balance continue to be driving factors for migration to New Zealand. New Zealand was ranked first in the world for quality of life in HSBC’s 2017 Expat Explorer Survey.

New Zealand’s net migration remains at record levels, but has continued to ease over the last year. Figure 4 shows the dip in net migration which has occurred in the 12 months to September 2018. This is the result of both decreases in arrivals to New Zealand, and increases in the number of departures to other countries. It is worth noting that while the total decrease in migration was highest in Auckland, both Wellington and Christchurch had higher percentage decreases. This indicates that the decrease has been relatively consistent across larger cities.

There are a range of factors which have influenced the number of arrivals to New Zealand. For example, in August 2018, changes to the post study work visa were announced which limits or removes the ability for overseas tertiary students to enter New Zealand to study, and to remain to work after finishing their education. This is expected to reduce the number of students entering New Zealand, particularly for qualifications below the degree level. There have also been increases to remuneration thresholds for essential skills and skill migrant visas, and changes to work visas which limit or prevent workers from bringing family to New Zealand. One of the biggest declines in arrivals has been from China, with both student visas and Chinese residency down.

Figure 4 – Annual Population Growth versus Net Migration (Annual September, 1994 to 2018)

1.4 Climate change

Climate change is a serious threat to New Zealand, and the rest of the world. Earth’s temperature has already increased more than 1°C over the average temperature in 1900. A 2°C temperature increase over the 1900 average is the point at which scientists have concluded the risk of abrupt and seriously harmful climate change reaches 50%. Another 0.6°C increase is committed from emissions already in the atmosphere further exacerbates the risk that, we are rapidly heading towards the risky 2°C limit.

The Paris Agreement marked a landmark deal in the two-decade old global climate effort. Core elements of the Paris Agreement include commitments on emissions, adaption, finance and transparency, and steps to promote carbon trading. The participating countries agreed on a long-term mitigation goal of keeping global warming well below 2°C. Countries will cooperate on enhancing adaptive capacity, strengthening resilience, and reducing vulnerability to climate change. Sharing information, good practices, experiences, and lessons learned in relation to adaption actions. The pact is approved by 195 countries and will take effect from 2020. Figure 5 below shows an overview of the Paris Agreement.

The United Nations Intergovernmental Panel on Climate Change (IPCC) released its Special Report on Global Warming in October 2018. The report investigated what it would take to achieve the ambitious Paris Agreement target of limiting global warming to 1.5°C and what the consequences would be if it were missed.

The report delivered a number of sobering conclusions. Chief among these was that the 1.5°C target is possible, but would require deep emissions reductions, including global emissions in 2030 to be 45% below 2010 levels and reach net zero by 2050. These drastic cuts would require "rapid, far-reaching and unprecedented changes in all aspects of society".

Figure 5 - Paris Agreement Overview

Source: Deloitte analysis

New Zealand’s climate policy is expected to continue to advance. GHG emission reduction targets are currently being translated into climate policy and central government is sending strong signals that it will takes a vigorous approach to emissions reductions and mitigating climate change. The Government’s commitment to 100% renewable energy by 2035 and to have a net zero emissions economy by 2050, set bold expectations for the energy sector and implies ambitious measures must be taken by the energy sector to lower its emissions intensity.

The Interim Climate Change Committee (ICCC) is developing an evidence base and analysis on key issues for climate change policy. The Committee will hand over its research and evidence base to the Climate Change Commission (CCC), which will ensure future governments remain on track to meet the emissions reduction commitments and will advise the government on climate change issues, in particular the inclusion of agriculture in the Emissions Trading Scheme (ETS) and the pathway to transitioning to 100% renewable energy by 2035.[3]

Another key initiative is the Government has established an Electricity Efficiency and Conservation Authority (EECA) contestable fund (EV fund) to encourage innovation and investment to accelerate the uptake of electric and low emission vehicles in New Zealand, which might not otherwise occur.

Transport is responsible for 45% of New Zealand’s energy related emissions. One of the most effective ways to reduce emissions is by transitioning a fossil-fuelled transport fleet to run on clean, renewable electricity. The EV fund is a way for the Government to help accelerate the uptake of environmentally friendly vehicles. The EV fund offers up to $7 million a year to co-fund projects with private and public sector partners in areas where commercial returns are not yet strong enough to justify private investment. The fund is one of several government activities paid for via a levy on petrol and engine fuels and is administered by EECA.

Growing climate awareness domestically and globally is expected to drive the development of new technologies aimed at reducing emissions and slowing climate change.

1.5 Energy services demand

Figure 6 shows the industrial, commercial and primary sectors account for 50% of energy demand and the domestic transport sector accounts for 39% of energy use.[4]

Figure 6 – Energy Demand by Sector (2017)

Source: Ministry of Business, Innovation & Employment (MBIE)

Figure 7 sets out the historical demand per installation control point (ICP) in the residential sector where annual average demand peaked at circa 7,800 kWh in 2009 and has steadily reduced through to circa 7,100 kWh in 2017. Figure 7 also illustrates the continued reduction around energy intensity of the residential sector; i.e. increase in the number of ICPs against the annual average demand.

Figure 7 – Annual Electricity Consumption (Residential)

EECA is charged with promoting energy efficiency, energy conservation and renewable energy. EECA runs many programmes which aim to encourage people and businesses to become more energy efficient. In the future there will be more focus on efficient use of energy and utilising innovative technologies as they emerge, with the help of the EECA and other market-led influences, energy efficiency in New Zealand can be expected to increase.

The New Zealand electricity market is in a period of change after a long period of gradual to flat demand. It is obvious that technology will change the way New Zealand views and consumes energy. Key technologies driving this change include, for example, distributed and grid electricity storage, distributed electricity generation including solar photovoltaic (PV) and wind, electric vehicles, and home automation systems. These new technologies will affect consumers, the industry and the country in different ways, especially as New Zealand moves to a low carbon future.

From a demand perspective, while there are differing views, Transpower is strongly of the view that the New Zealand electricity grid will continue to be needed and used by most consumers to satisfy their various energy requirements. However, the way those consumers use the grid, and in particular the distribution network, will evolve and change.

In future models consumers are expected to move towards being prosumers (producers and consumers of energy) through the use of small scale generation (solar, wind and other and battery storage). This may be shared with other consumers via peer to peer trading or sale back to the grid. As technology advances and becomes more readily available consumers will have more control over their consumption as they access small scale generation.

Deloitte research shows there is also a growing desire for energy self-sufficiency among residential and commercial and industrial customers. This desire has fuelled behind-the-meter markets suggesting that the motivations for purchasing storage systems are not purely financial.[5] The strength and pervasiveness of the desire for clean energy among all types of electricity customers is growing. This means that factors that are important to consumers such as environmental sustainability and energy independence from traditional retailers are being included in the decision making process rather than just return on investment and risk. As businesses and individual consumers make decisions about electric vehicles, small scale generation and battery storage, they have the power to shift demand dramatically. These kinds of trends in decision making will change the emission profile along with increased investment in renewable generation.[6]

1.6 A Diverse Energy Mix

The energy sector sits on the verge of a historic transformation, driven by technological progress and evolving political, economic and environmental issues. Solar photovoltaic, wind energy, energy storage, unconventional oil and gas resources, and the electrification of transport are now realities that are changing the energy sector. Energy technology innovation is playing a central role in the transformation of the energy sector. As a result of cost reductions and improvements in technology, we are now seeing new business models and regulatory responses evolve.

In 2017, New Zealand had the fourth highest proportion of renewable energy in the Organisation for Economic Co-operation and Development (OECD) countries after Iceland, Norway and Sweden. 52% of New Zealand’s indigenous energy production comes from hydro, geothermal and other renewables and 85% of New Zealand’s electricity generation comes renewables sources.[7]

Currently, 60% of the New Zealand’s total primary energy requirements are met by oil and gas and 4% by coal (as shown in Figure 8). New Zealand imports the majority of its oil needs, while coal and gas demands are meet entirely through indigenous production. Renewables, such as geothermal and hydro, contribute 32% to our total energy supply with the majority of this used to generate electricity.

Figure 8 – New Zealand’s Energy Supply (2017)

While New Zealand currently generates a high proportion of our energy through renewables, when we look forward we expect this to increase further. There is general consensus that coal generation will decrease, alongside gas (though gas is seen as a longer term transition fuel), while wind, geothermal and solar will increase. As the mix changes from fossil fuel based/thermal plant generation to more sustainable energy sources there will be corresponding decline in emissions.

In today’s world, there are now various investment signals, including oil, multiple regional gas prices, carbon prices and collapsing solar and battery technology prices. The most obvious observation on this is the declining costs and improved performance, particularly relating to lithium-ion batteries. Bloomberg New Energy Finance (BNEF) found that the levelised cost of electricity (LCOE) for lithium-ion batteries, being the most common technology used for solar power storage, had fallen 35% to $187 per MWh since the first half of 2018. This decline is dramatic in comparison to the declining LCOE for solar PV and wind energy.

Figure 9 shows the decline in battery storage noting that this is for utility scale lithium-ion batteries. We note that the price behaviour of this is different to the likes of consumer batteries which seem to have pricing which is more.

Figure 9 - Levelised cost of battery storage and solar are falling (real USD, 2018)

It is uncertain to what the extent the declining trend in cost would flow through to New Zealand because most of the technologies are and would be imported to New Zealand, and uptake would also shape the cost in New Zealand.

Figure 10 shows how consumer energy demand might increase as we electrify, while grid demand might fall due to uptake of alternative technologies such as solar. Grid capacity demand could potentially fall faster as batteries flatten peaks and storage may eventually allow daily rather than real-time balancing.[8]

Figure 10 – Potential effect of technology on demand

Source: Sapere Research Group

As a result of emerging technologies, distributors may need to make big investments and reinvent business practices, and this could help distributors to manage their networks better and contain (and even potentially lower) their costs. Many businesses have enough land or rooftop space to install panels to make themselves self-sufficient – or at least during sunny, daytime hours when they need power most. At other times, they can draw from batteries. In the future, hydrogen or biofuel technologies may be commercially viable in competition against large-scale batteries.[9]

Some commentators predict today’s centralised, coordinated, one-way model will eventually be replaced by a decentralised, diffused, two-way model run. As explained in the Electricity Price Review report, today’s ‘top down’ market will need to fit into a ‘bottom-up’ market. Much of this change will depend on access to consumer and consumption data.[10]: Advances in solar panels and batteries will eventually turn today’s one-way flow of electricity

Development of new technologies is a game changer for the energy sector, they have the ability to increase energy efficiency through use of renewable energy sources, moving us away from reliance on fossil fuels and decreasing greenhouse gas emissions.

1.7 Energy trilemma

WEC has developed the Energy Trilemma Index Tool which ranks countries on their ability to provide sustainable energy through three dimensions: energy security, energy equity (accessibility and affordability) and environmental sustainability, as shown in Figure 11. New Zealand ranked number eight of 125 countries ranked in 2018.

Figure 11 – Energy Trilemma

Source: World Energy Council

Energy equity

In New Zealand, energy security, grid reliability and customer affordability are at the forefront of electricity system expectations. Policy measures to address customer affordability are leading policy changes in the New Zealand energy system.

Relative to other countries, New Zealand’s energy affordability ranking (as measured by the WEC) has deteriorated over recent years. Energy affordability is an increasing concern for the most socially vulnerable who feel the impact of rising energy costs as a proportion of disposable income. Residential electricity retail prices have increased over the last circa 30 years. The recent Electricity Price Review Report found that large increases in electricity prices for residential customers have not been matched by increases in electricity prices for other consumer types, shown in Figure 12.

Since 1990, residential prices rose steeply, while commercial prices kept falling, and industrial prices stayed relatively flat. The Electricity Price Review report noted specifically:

  • Residential consumer prices rose at an average rate of 2.1% a year, and by 2018 were 79% higher than in 1990. Since 2015 they have been relatively flat.
  • Commercial prices dropped at an average rate of 1% a year, and by 2018 were 24% lower than in 1990.
  • Industrial prices rose at an average rate of 0.6%, and by 2018 were 18% higher than in 1990.
  • Some of the price divergence is due to cost differences. For example, residential consumers require more infrastructure to get electricity to their homes, and they tend to use proportionately more electricity at peak times. By comparison, 46% of industrial demand is met by direct connection to the transmission grid and therefore does not incur any distribution charges.
  • Electricity Price Review Report found that as new technology continues to develop which offers consumers choices, there is an increasing chance they will look to disconnect from the grid.

Figure 12 – Average electricity prices (1990 to 2018)

Source: Electricity Price Review – First Report

Energy sustainability

As discussed, sustainability is a growing concern around the world and the reduction of carbon emissions has climbed as a priority globally. The Government aims to reach 100%, in a normal hydrological year, by 2035 and also to have a zero carbon economy by 2050 – a goal that new technologies will play an important role in helping to achieve, although this technology will need to be introduced carefully to avoid any risk to the electricity system’s reliability and resilience.

Energy security

Energy security comes at a price and must be carefully managed and coordinated by sector participants and government agencies. Wind, solar and hydro are all intermittent sources of energy, which means they are not continuously available (weather dependent). Over a quarter New Zealand’s electricity supply comes from hydro, leaving us vulnerable to adverse conditions such as low rainfall and climate change and the vast majority of our liquid fuels come from overseas, meaning reliance on global markets and trade agreements. At the moment thermal generation can be used to bridge the gap in supply when required and helps New Zealand reduce the variability in generation as it is not weather dependent. Security of supply is of interest, especially as we focus more on renewable energies. Exposure to uncertainty is likely to grow as our energy sources become more sustainable and we rely more on intermittent sources, and less on more stable sources like thermal.

Balancing the energy trilemma means making difficult choices.

[1] WEC – World Issues Monitor, 2019

[2] WEC – World Issues Monitor, 2019

[3] ICCC – Minister’s Announcement, 2018

[4] MBIE – Energy in New Zealand, 2018

[5] Deloitte Center for Energy Solutions, Supercharged: Challenges and opportunities in global battery storage markets, 2018

[6] Sapere Research Group – Transitioning to zero net emissions by 2050: moving to a very low-emissions electricity system in New Zealand, 2018

[7] MBIE – Energy in New Zealand, 2018

[8] Sapere Research Group – Transitioning to zero net emissions by 2050: moving to a very low-emissions electricity system in New Zealand, 2018

[9] MBIE – Electricity Price Review First Report for discussion, 2018

[10] MBIE – Electricity Price Review First Report for discussion, 2018