New Zealand’s electricity system works. Electricity here is reliable and more affordable than in most other OECD countries. But what sets New Zealand apart is that 83% of its electricity is produced from renewable sources, mainly hydro, geothermal and wind, the third-highest share of renewables in the OECD. Just 3% of our electricity comes from emissions intensive coal. Over the next 20 years, renewables will increase their share to between 90% and 97%. Renewables work in New Zealand.
Electricity’s impressive record in New Zealand has largely been achieved without subsidies or direction from policymakers. Despite remaining in majority public ownership, businesses and regulators in the electricity sector operate independently of elected governments. For 30 years, government’s relationship with electricity has been mostly conducted through overarching environmental and competition legislation, rather than ministerial direction.
Until now, that is. The 2017 Labour-Green coalition agreement has set a target: By 2035, 100% of New Zealand’s electricity will be generated from renewable energy, excluding dry years. It is an expensive policy. By one estimate, it could add more than $800 million to the annual cost of electricity. More importantly, it is a needlessly expensive way to reduce carbon dioxide emissions: the cost of more than $1,000 per tonne is 40 times the current price of emissions units on New Zealand’s Emissions Trading Scheme (ETS). Worse, the 100% renewables policy could actually raise emissions if the higher cost of electricity delays the anticipated transition of transport and industry off fossil fuels on to electricity.
The first 95% of the government’s renewables target is expected to happen without any help from policy – renewables make sense in New Zealand with its vast natural resources. But there is no feasible combination of hydro, wind, solar or geothermal that can supply the last 5%. When policy forces electricity demand to be met using the wrong technologies, the main way to correct for the technology mismatch is by overbuilding. Alternatives such as demand response and battery storage have potential but look expensive.
Other countries have aggressively supported renewables to pursue their emissions targets. Unlike New Zealand, the electricity sectors in Australia, Germany and the UK operate more or less under the direct control of elected governments. These governments have directed investments worth hundreds of billions of dollars into solar and wind generation. The result? Substantial increases in the cost of electricity in those countries for only limited cuts in emissions.
This does not reflect any problem with renewable technologies. The problem is policies that force renewables into roles within electricity systems for which they are a poor fit. It is one thing to build renewable generation, but quite another for that generation to find a productive home within an electricity system where it is actually used. It is no coincidence that affordable, clean electricity has emerged in one of the few countries, perhaps the only country in the OECD, where investment in electricity generation is determined not by policy and subsidies but by competition between technologies on a level playing field beyond the reach of politics. If electricity is to be affordable and clean, technologies must each find their own level within an electricity system.