KEY POINTS:
Power prices will climb and security of electricity supply will be compromised, we are told, if the Government's energy strategy is allowed to proceed.
The twin planks of the strategy are a target of deriving 90 per cent of the country's electricity from renewable sources - hydro, wind
and geothermal steam - by 2025, and a 10-year ban on the construction of any more gas- or coal-fired baseload power stations.
The Centre for Advanced Engineering, in a report commissioned by the Petroleum Exploration and Production Association, concludes that electricity prices will be more volatile and higher if the Government has its way.
How much higher? "By at least 15 per cent, excluding the additional costs of transmission, with increases in excess of 40 to 50 per cent in real terms within 15 to 20 years being plausible." If they are right this is great news for consumers.
It suggests the rate of power price inflation is going to fall markedly from what we have become used to.
Over the past five years retail electricity prices, as measured by Statistics New Zealand for its Consumers Price Index, have risen by a whopping 41.3 per cent, nearly three times as fast as general inflation.
In real terms power prices have risen by 5.5 per cent a year over the past five years.
As roughly half of a consumer's bill is the cost of getting the power to them, rather than generating it in the first place, and the transmission and distribution sectors are regulated monopolies, it is fair to conclude that real wholesale electricity prices have been rising at an even faster rate. So CAE's conclusion that they might rise by as much as 3 per cent a year over the next 15 or 20 years looks more inviting than apocalyptic.
Energy Minister David Parker has no doubt what has driven the rise in power prices. It is the rising cost of gas and coal for thermal generators.
"To suggest that New Zealand gas prices will buck that recent history and the overseas trend of increasing oil and gas prices is optimistic and wishful thinking from a lobby group whose interest lies in selling more gas," he said.
However, the bulk of the CAE report is about security of supply rather than prices.
We can't just assume that greater reliance on renewables reduces security of supply, whereas more reliance on gas would increase it.
After all, the bird in the hand here is renewables.
We can be a lot more confident that snow and rain will continue to fall, and the wind will continue to blow, and the Earth's core will remain hot, than we can be that the oil and gas industry will continue to find new sources of gas - provided it is worth its while to keep looking.
But that is not the point. The question is whether we can afford to allow a situation to develop where there is no incentive for the industry to go looking for more gas.
That was the situation when there was an abundance of ridiculously cheap gas available from the giant Maui field.
It is only the impending exhaustion of Maui that has seen other fields developed - and gas prices soar.
CAE estimates current gas reserves at a little over 2000 petajoules, equivalent to 15 times 2006's production.
It argues that without a secure, and preferably growing, long-term market supplying thermal generators "exploration companies face a period of 10 to 15 years without an outlet for new discoveries until the output of existing fields starts to decline".
As it usually takes five to 10 years to bring significant new gas discoveries to market, this creates a window within which discoveries must be made, CAE says. Discoveries before that time will be premature and will lie idle before development, which costs money, while later discoveries are at risk of being pre-empted by a market switch to other energy resources.
The crucial time for exploration is the next five to 10 years, it says. The impact of sending the wrong policy signals now will not be felt in energy markets until well into the next decade, but then it will be too late to fix the problem.
They would say that, wouldn't they? But that does not mean they don't have a point.
The problem is, that while there may be enough renewable resources to cope with growing demand and the early retirement from a baseload role of coal-gobbling Huntly in years of normal hydrology, there is a lot of variability around that normal line - as farmers can attest right now.
It's called dry-year risk and it is a structural feature of the New Zealand electricity industry.
The ban on new thermal plant has an exemption for plant needed to preserve security of supply.
Some uncertainty remains about how that is defined, but the intention seems to be to allow plants like a 300MW one Contact Energy plans. They have low capital costs and high fuel costs compared with the more elaborate combined cycle gas-turbine plants built in recent years, which need to run much more of the time to be economic.
CAE says the 90 per cent renewables policy requires increased thermal generation on a standby basis.
"But there is no business case for standalone, intermittent, standby gas production," it says. "Holding gas on standby is only possible if it is associated with a base minimum gas flow to provided minimum revenue to the supplier."
So it seems we have a dilemma. Energy policy should not preclude exploration for gas, but it should not rely on it succeeding either.
Both are risky. And the risk with relying on gas is not only future supply but future carbon prices.
There is a middle way, however. It is called a market.
It is ironic that the moratorium on building more baseload thermal generation is part of legislation to establish an emissions trading market.
The entire point of carbon trading is for the Government to set a target for emissions reduction and then let the market, through its risk-taking participants, discover the lowest-cost way of meeting it.
Provided the market is well designed and the rules around certifying offsets are environmentally robust, that ought to be the most efficient means of meeting the objective.
After all, in Europe, the heartland of carbon trading, the switch from coal to gas-fired generation it has encouraged is held up as a gain for the planet.
It is hard not to see the ban on new thermal power stations as a vote of no confidence in the carbon market by the very Government that is setting it up.
