Mercury NZ : 2021 Draft Advice for Consultation Emissions Budgets

Climate Change Commission

Via online form submission

26 March 2021

2021 Draft Advice for Consultation Emissions Budgets

Mercury welcomes and supports the Climate Change Commissions landmark draft advice which builds on the important work of its predecessor the Interim Climate Change Committee (ICCC). The draft advice sets a clear pathway for emissions reductions and re-establishes Aotearoa New Zealand ambition to take meaningful action to meet its international commitments. Mercury commends the Commissions analysis which has challenged all sectors of the community, the economy and government to consider how to both realise the ambition, and to transition to a low carbon future that is inclusive, that supports the most vulnerable in society and recognises the

unique perspectives of .

Aotearoa New Zealand must focus on material opportunities for decarbonisation

The draft advice highlights the critical role the renewable electricity sector will play in ensuring Aotearoa New Zealand transitions to a low carbon future. Demand for renewable electricity generation is expected to double in the period to 2050 as fossil fuels are replaced within the wider energy mix. Mercury strongly supports the Commissions view that an overarching energy strategy and renewable energy target is required. As the analysis notes, demand for renewable electricity will see very high levels of renewable electricity achieved while ensuring prices remain efficient and generally affordable and security of supply is maintained.

Mercury supports the recommendation for a national energy strategy and renewable energy target that focuses on ensuring that Aotearoa New Zealand maintains its world leading performance in managing the energy trilemma1. Critically an energy strategy needs to include multiple sectors and decision makers and deliver effective alignment across key policy mechanisms such as resource planning, local government decision making for renewables investment and support for long-term market signals across multiple political cycles.

Mercury fully supports the Commission's view that the most material opportunities for decarbonisation are in the substitution away from fossil fuels in the transport and process heat sectors. Households with an electric vehicle for example are estimated to save around $1000 per year on household energy costs. However, the major impediment to uptake remans the higher upfront capital costs of electric vehicles. To address this barrier, Mercury has invested in a flexible leasing program called Drive which enables households and businesses to benefit from the much lower running costs of electric vehicles.

Mercury supports complementary measures to the Emissions Trading Scheme (ETS) to support electric vehicle uptake, particularly around ensuring Aotearoa New Zealand has effective emission standards. Mercury endorses the recommendations from the recent Concept Consulting / Reytna report on measures to accelerated low emission vehicle uptake2 and considers the design of any incentives needs careful consideration to ensure they are truly complimentary and do not result in regressive outcomes for consumers.

• https://www.worldenergy.org/publications/entry/world-energy-trilemma-index-2020

2 Shifting gear How New Zealand can accelerate the uptake of low emissions vehicles (27 January 2021)

`	The Mercury Building, 33 Broadway, Newmarket 1023	PHONE: + 64 9 308 8200	mercury.co.nz
	PO Box 90399, Auckland 1142	FAX: + 64 9 308 8209

We must act with urgency, not wait for further analysis

Since the draft report has been released there has been significant debate around the assumptions and the ability to make the necessary changes within the budget periods. While there has been concerns around the pace and rate of change, there has been no rejection of the urgent need for action. Invariably any modeling exercise will contain assumptions and information that in hindsight prove to be different from a future state. However, this should not prevent action as the science is clear - the more we delay the more expensive and difficult the transition will be in future. We must act with urgency and not delay by calling for further analysis which will only serve to increase the challenge ahead.

Markets are inherently well suited to dealing with complexity and uncertainty around future states of the world. Electricity market participants for example must evaluate a diverse range of signals and uncertain information when considering new investments including electricity market prices, government policy, technology costs, future market structures, planning and environmental frameworks, the needs of the wide range of stakeholders within relevant communities and the ability to attract capital and deliver long-term sustainable outcomes.

Despite flat electricity demand, analysis from the ICCC in 2019 was a material factor alongside the decreasing

costs of wind generation, in Mercury announcing it would build Aotearoa s largest wind farm at Turitea, near Palmerston North. The clear signal from the ICCC analysis was that significant investment in new renewable generation would be required to to decarbonise the economy. Further clarity around the future of the Tiwai aluminum smelter has led to additional investments across the sector being announced. Currently investments equivalent to 8% of Aotearoa New Zealand's annual generation have either been commissioned or are in the process of commitment representing a value of around $1.8bn with a further 1.3bn awaiting financial close (see Box 1).

Box 1: Recent renewable generation investment made in New Zealand

Company

Project

Capacity /

Investment

Notes

Energy

Tilt (Genesis

Waipipi (Wind)

133 MW

$277m

Commissioned Nov

PPA)1

2020

Top Energy2

Ngawha OEC4 (Geothermal)

Extra 32 MW

$185m

Commissioned Dec

2020

Mercury3

Turitea (Wind)

222 MW

$464m

In construction

Contact4

Tauhara stage 1 (Geothermal)

153 MW

$580m

Committed,

expected mid-2023

Meridian5

Harapaki (Wind)

176 MW

$395m

Committed,

expected 2024

TOTAL COMMISIONED AND COMMITTED:

~ 700 MW

~ $1.8b

Other projects awaiting financial close

MainPower6

Mt Cass (Wind)

93 MW

$200m

Preliminary works

underway

Contact7

Wairakei replacement and

Extra 70 MW

$700m

Upgrade of existing

expansion (Geothermal)

geothermal station

Tilt Renewables8

Tararua repowering (Wind)

Extra 72 MW

$250m

Capacity upgrade of

existing windfarm

Top Energy9

Ngawha OEC5 (Geothermal)

Extra 32 MW

$185m (est.)

NEAR TERM POTENTIAL:

~ 260 MW

~ $1.3b (est.)

Sources:

• Tilt Renewables, Waipipi Wind Farm, available from www.tiltrenewables.com
  2 Top Energy Our New Geothermal Power Station Is Live! 27 January 2021

3

4

www.nzx.com www.nzx.com

• Meridian Energy, 2021 Interim Results Presentation, from www.nzx.com

• https://www.scoop.co.nz/stories/AK1912/S00472/work-to-start-on-mt-cass-wind- farm.htm
  7 Contact Energy, www.nzx.com
  8 - 18 February 2020

9

• Page 2 of 17

The outlook for further investment is highly positive with enough renewable generation consented to cover the demand from the entire light transport fleet. Figure 1 on the follow page details the current consented renewables pipeline with those developments that have been announced or are currently under construction.

Figure 1: Consented and Commissioned Generation Development

Total available renewable generation (consented and committed) is enough to meet demand from the entire light vehicle fleet.

The market is delivering new renewable generation equivalent to 8% of annual demand

Source: Electricity Authority Electricity Market Information, Mercury

Mercury's has further wind development options in its Puketoi windfarm with consent for a further 53 turbines and the recent acquisition of the domestic assets from Tilt Renewables (subject to Tilt shareholder and regulatory approvals) includes a development pipeline equivalent to a further ~4% of national demand. In addition to large scale generation investment, innovation is flourishing with new business models emerging in areas such as distributed storage and generation, alternative transport technologies and research into the potential future domestic applications for green hydrogen and e-fuels.

The electricity sector will deliver emissions reductions with the right policy settings

Mercury considers that the current electricity market policy settings are sending the right signals for investment in new renewable electricity generation.

The electricity market has already delivered Aotearoa . Figure 2 illustrates how electricity generation from thermal fuel has fallen significantly since its peak in 2008. This was primarily driven by significant investment in renewable geothermal generation which increased from around 7% in 2000 to 17% of generation in 2018 along with the retirement of relatively more expensive thermal generators and a quadrupling of the contribution from all other renewable sources (primarily wind).

• Page 3 of 17

Due to flat demand growth between 2006 to 2013 and the resulting reduction in wholesale prices, a rebalancing of supply occurred with the efficient retirement in 2015 of around 450MW of thermal gas-fired generation in Auckland by both Mercury and Contact Energy. This permanently removed 2 million tonnes per annum from New carbon emissions, equivalent to entire annual emissions of the aviation sector in Aotearoa New Zealand. Mercury is not aware of any larger contribution to reducing emissions from any sector over this period. Most importantly, this occurred through the market without the need for any government intervention and without any costs or risks to New Zealand tax payers.

The significant strength of the New Zealand electricity market has been the commitment by successive governments to avoid picking technological winners via distortionary interventions like subsidies or bans3. This has allowed New Zealand to develop a diverse and complimentary mix of renewable and non-renewable generation leading performance in balancing the energy trilemma.

Looking forward the main emissions reductions opportunities for Aotearoa New Zealand will not come directly from the electricity sector, which is already highly renewable, but rather from other sectors of the economy including transport and process heat. Mercury considers the most effective approach is to ensure that the current market settings are supported and targeted policies are implemented for these sectors to stimulate demand.

Mercury agrees with the Commission that in the future the electricity sector will need to fully decarbonise, but the timing and sequence of the transition is critical. The Commission's modeling shows that flexible gas supplies will be

required beyond the 2030 target for . Maintaining gas in the system is likely to be the least cost and most efficient way to deliver emissions abatement across the economy. Without an appropriately managed transition for fossil fuels from the electricity system Aotearoa New Zealand runs the risk of perversely increasing emissions to ensure security of supply (as is currently occurring with the increase in coal generation due to the shortage of gas supplies) or raising electricity prices and delaying the transition of the transport and process heat sectors to renewable electricity and alternative fuels.

Mercury acknowledges that as the penetration of renewable electricity generation increases there will be a need to ensure that the market continues to adapt and is flexible to change. This is particularly the case as the sector retires thermal generation which currently plays an important role in signaling the marginal cost of generation for future investment. This will include consideration of options for the managed transition for thermal fuels, how any dry year storage options may integrate into the market and the implications from any long-term increases in decentralised generation. Mercury supports the government, regulators, industry and consumer representatives working collaboratively to on any market adjustments that may be required.

Suggested actions to support the renewables development pipeline

To achieve electrification of the economy in the timelines contemplated by the Commission there will need to be strong government policy support. Legislative change is both contemplated and necessary to reform the Resource Management Act and replace it with a National and Built Environment Act (NBA) and create a new Strategic Planning Act. The NBA needs to expressly reference the climate system and its biophysical limits and outcomes and afford them priority over competing biophysical limits and outcomes. Without this high level prioritisation consenting and building the renewable electricity generation and transmission projects quickly enough to meet the

proposed emission budgets and plans will be challenged. We attach for the Commission Role of a Reformed

Electricity Sector Environment Group along with associated case studies. The paper contains suggestions drafting for the NBA.

Wind farm development and commissioning processes currently rely heavily on external contractors who operate in global markets. Commissioning expertise is generally not held domestically but operates on a -inFly- at key stages of the process. Given the long-term development pipeline for wind generation in Aotearoa New Zealand, there are opportunities to increase the skills and training in windfarm commissioning processes among the domestic workforce. Mercury supports the industry and government working collaboratively on an industry skills and training plan to provide future job opportunities to New Zealanders and support regional economic development. This should be progressed independently of the proposed national energy strategy as a priority but could usefully form part of that process as it is delivered.

• Referhttps://nzinitiative.org.nz/reports-and-media/reports/switched-on-achieving-a-green-affordable-and-reliable-energy-future/

• Page 4 of 17

Energy storage options should support market signals and long-term investment

Mercury supports the Commission's view that meeting Aotearoa New Zealand 2030 and 2050 emissions reductions targets requires a long-term view of investments and infrastructure developments. Investments being made now in new renewable generation and the refurbishing existing renewable generation will have asset lives that extend potentially even beyond 2050.

Given the size of the investment challenge in new renewable electricity it is imperative that the investment signals provided through the current market frameworks are maintained to give confidence to capital holders to continue to invest in the electricity sector. Ongoing uncertainty around the future of the Tiwai aluminium smelter for example and the impact that a disorderly exit would have on the market, has been a major impediment to renewables investment in the South Island and a major risk for institutions considering investment in Aotearoa New Zealand electricity sector.

Replacing the current role that fossil fuels play in providing dry year support in the electricity market during the transition to a low carbon economy is a key policy question currently under consideration by the government. The New Zealand Battery Project run by MBIE is considering the role particularly of pumped hydro storage options, including a large centralised scheme in the South Island at Lake Onslow estimated to cost around $4 billion.

Mercury agrees with the Commission that while a solution to the dry year challenge could enable the country to reach 100% renewable electricity, it could also cost taxpayers billions of dollars which would be better allocated to pursuing lower cost abatement options in other sectors. One key reason for the shift towards electricity market liberalisation was uneconomic generation investment outside of merit order by Government central planners. An investigation by Treasury in 1984 found unnecessary expenditure incurred on three power stations alone cost taxpayers up to $3 billion in 1983 dollars or the equivalent of more than $10 billion in three power stations were either not used at all (Marsden B) or only rarely (Whirinaki)4.

This type of economic wastage has been eliminated by the competitive generation market we have today in Aotearoa New Zealand. Further, a large scale pumped hydro scheme would be a major intervention into the electricity market creating significant uncertainty and risk during a period where capital attraction to the sector is highly important if the country is to meet its decarbonisation goals.

in the long-term to manage dry year risk. The New Zealand Battery Project will consider alternative options to a large scale centralised pumped storage option. This process will be critical to ensure that the least cost options are evaluated and that there is a credible assessment of the risks and opportunities from alternatives.

There are several North Island hydro storage options which could be developed that would not require pumping infrastructure and could integrate into the existing generation systems. These decentralised options could be developed relatively quickly as needed and at far lesser expense, reducing the risks to taxpayers and to existing market signals and investments. Developing storage in the North Island would also reduce the need for reserve generation to cover the risk of a potential failure of the interisland HVDC link. In addition to new storage, allowing greater range on existing hydro storage lakes to be used as contingent storage for dry year risk cover should be evaluated as a least cost option.

There is significant incentive on the wider electricity supply side of the industry to work collaboratively on a managed transition for fossil fuels out of the electricity sector. Energy security is the most important part of the energy trilemma and the critical success factor for the ongoing support of the current market arrangements. Cost sharing arrangements for the managed transition of existing thermal assets across market participants under a potential strategic reserve arrangement is just one example of an option that could be usefully explored under the Commission's proposed energy strategy and discussions could be facilitated by government under Commerce Act requirements.

4 NZ Treasur and Government, 1984

• Page 5 of 17