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Contact, Trustpower caution against subsidies, incentives in renewable policy

Tuesday 5th March 2019

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Politicians and regulators risk adding cost and complexity to the country’s emission reduction efforts if they start favouring technologies or fix on a particular view of the future, Contact Energy chief executive Dennis Barnes says.

If the country holds true to its 2050 emissions reduction target, and investors and customers receive the right price signals, capital will flow into lower-carbon generation and the technologies that will facilitate emissions reduction in transport and industry, he said.

New Zealand has an “excellent opportunity” to make that transition in a very low-cost way. The challenge is to look at that across the entire economy and resist the temptation to try to move faster in some areas, or to try to incentivise technologies or systems that “on the face of it look good” but may be less positive long-term.

He cited the example of Australia, where state and federal incentives programmes had in fact created instability for investors. In the UK, just six years ago, solar was being incentivised at a cost of $1000 a megawatt-hour, he said.

“What happens with people worrying about the future, I think, and trying to solve it before the market solves it, is that you get undue cost and complexity into the system,” Barnes said in a panel discussion at the Downstream electricity and gas sector conference in Auckland today.

“That is my fear: that a lot of advisory panels and multiple, disconnected government agencies don’t create that joined up thinking,” he said.

“Markets are really good at working out that joined up thinking, with the right commercial incentives.”

Barnes was speaking with other sector chief executives and regulators on a panel that canvassed the country’s renewable energy targets, the recent electricity price review and the challenge and opportunities that new technologies will present.

The government is currently trying to win cross-party support for legislation to establish an independent Climate Change Commission to advise future governments on meeting the 2050 climate change target. The Labour-led coalition favours a 2035 target for 100 percent renewable electricity generation and has also provided some early funding for hydrogen research.

But the Independent Climate Change Committee – ICCC - formed last year to help drive early climate policy development, has already signalled it favours an economy-wide renewable energy target and believes the government’s electricity target may be unaffordable and distracting. Analysts have also questioned the utility of hydrogen except in niche roles in transport and industry.

Trustpower chief executive Vince Hawksworth said the New Zealand energy industry has changed markedly in the past 25 years and will continue to evolve. New technologies are opening up opportunities for solar and electric transport and new retailers are helping bring new services and business models to the sector.

He said the future will be volatile and it’s important the industry and policymakers avoid “barking at every dog that goes past.”

Joined-up thinking is key and the work of the ICCC will be important in providing that longer-term framework for investment, whether that be in large-scale generation, transmission or “behind-the-meter” solar panels and batteries, he said.

Irrespective of the technology, “there is still a lot of money that is going to have to be spent” and households and investors have to have the confidence to make that investment.

“Because ultimately it will be those deployers of capital who need confidence in what that world will look like and that they can get a return on that,” Hawksworth said.

“Subsidies or point solutions generally end up with big winners and losers, or unintended consequences and that’s what we want to avoid.”

Panellists were challenged on how the sector would maintain public confidence in their ability to manage the transition to newer technologies, absorb higher carbon costs, while also maintaining reliability and affordability of supply.

Barnes said the consumer advocate panel proposed by the electricity price review could be really useful in providing politicians an independent and objective view of the sector’s performance, although the devil would be in the detail.

He noted that Contact had already shut its gas-fired Otahuhu power station in 2015. The industry as a whole during the past 20 years had become more reliable, more renewable, while power prices had largely stayed flat.

“So be careful what you wish for.”


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