As part of its wider consultation on New Zealand’s energy strategy, the Ministry of Business, Innovation and Employment (MBIE) has released a consultation paper seeking feedback on the design and implementation of a ban on new fossil-fuel baseload electricity generation (Paper).

The Paper is a companion to MBIE’s paper consulting on measures for transitioning to an expanded and highly renewable energy system - our separate article on which can be found here.

The Government has already committed to ban new fossil-fuelled baseload generation (but not fossil-fuelled “peaking” plants) in its first Emissions Reduction Plan (ERP). Consequently, the Paper seeks feedback on how best to design and implement the policy.  

Simpson Grierson has provided analysis on all five consultation documents, available on our website (links below).

Submissions on the consultation close on 2 November 2023, with full details and documents available at MBIE’s website.

Consultation questions on development of the ban

The Paper consults on 11 questions in total, with one question relating to the likelihood of new fossil-fuel baseload generation being built, and ten questions relating to the design and implementation of the scheme.

Below we have summarised the consultation questions raised by MBIE on the points that in our view are most likely to be crucial to the ban’s success:

• How can we make it clear that fossil-fuel non-baseload or peaking generation is not included in scope of the ban?

MBIE described the term “baseload” as referring to generators that:

• run continuously at up to maximum capacity;
• run at a constant load and do not follow the daily load curve; or
• whose electricity output is tied to the co-production of industrial heat (known as co-generation).

In contrast, “peakers” generate only for minutes or hours each day during the sharpest demand peaks.

As has been recognised by MBIE (see our legal update on the Gas Transition Plan (link below), fast start peaking generation is likely to provide an increasingly critical role as renewable electricity makes up a greater percentage of New Zealand’s electricity supply.

The Paper expressed a preference for defining and banning fossil fuel baseload rather than banning all new fossil fuel generation, allowing an exemption for peakers. This is intended to make sure the ban does not inadvertently send the wrong investment signals to prospective developers of peakers.

Getting the distinction right between baseload, non-baseload or peaking generation will be a key ingredient to the success of the ban, and an aspect on which we consider industry feedback to be critical.

• Do you think that there should be an exemption for new fossil fuelled co-generation plants?

MBIE describes co-generation as an industrial process in which electricity and another useful by-product such as thermal energy from steam (which would otherwise be discarded) is re-used to improve the overall efficiency of the process. This re-use of waste steam is more efficient than powering the entire process through electrical energy.

The Government is consulting on whether new fossil fuelled co-generation plants that would be captured by the definition of baseload should be exempted from the ban.

Our observations are that the Paper does not include any evidence regarding the extent of baseload electricity that is currently provided from co-generation plants, any forecasts of co-generation plants that may be developed, or any modelling regarding existing (or forecast future) emissions that may be reduced through the imposition of, or exemption from, the ban.

While this question is likely to be of interest to industry participants that would be directly affected by the ban, either as owners of co-generation plants or as users (or potential users) of co-generation plants, this may not be a material consideration for other participants in the electricity sector.

• Do you think that there should be an exemption for new fossil fuel baseload electricity generation plant with carbon capture, usage and storage technology (CCUS)?

CCUS technology is discussed in more detail in our FYI on the Gas Transition Plan Issues Paper (link below), but in summary, CCUS involves the capture of CO₂ from large point sources (including power generation) that use fossil fuels or biomass as a fuel, or from upstream natural gas facilities.

The Paper mentions that there are a number of ways that CCUS can contribute to the energy transition which are being explored through MBIE’s work on the Gas Transition Plan.

MBIE is seeking feedback on whether an exclusion for CCUS from the fossil fuel baseload generation ban should supplement this work.

• Do we need an exceptions regime for security of supply purposes?

The Paper consults on two possible exemptions related to maintaining security of supply:

• firstly, for the regulator to relax running hours limitations of non-baseload natural gas power plants where there is a security of supply event (ie for new gas peaking plants built after the imposition of the ban to be used for baseload generation); and
• secondly, for the responsible Minister to grant exemptions to the restriction on new baseload natural gas power plants where there is a security of supply event, on the recommendation of the regulator (ie for a new plant to be commissioned after the date of the ban due to a security of supply event).

MBIE considered that the case for the first exemption was stronger than the second. The first exemption would allow gas-fired peaking plants built in the future to be run in a baseload-like manner for as long as necessary to respond to a security of supply event. In contrast, the second exemption would only be required in extreme circumstances where a new plant was required for long-term security of supply, and would be very unlikely to be needed given the increased availability of renewable generation options.

• Risks of implementing the ban - Investment signals

There is a currently a risk that underinvestment in natural gas production leads to New Zealand having an insufficient supply of gas required to support the transition to net zero (see our legal update on the Gas Transition Paper for more details, link below).

Approximately 30% of New Zealand’s natural gas consumption is used to make electricity. There is a risk, acknowledged by MBIE, that implementation of the ban may send investment signals that exacerbate the existing risk.

MBIE was not prepared to take a firm view on the extent of this risk in the Paper, flagging that it was difficult to assess the size of the risk given that the electricity generation market is only one factor, and that the economics of building new gas-fired baseload power plants are already unfavourable.

If the ban is implemented, it will be essential that it only applies to new fossil-fuel baseload generation, and does not inadvertently limit the development of new fossil-fuel peaking generation, where that development is economic and is undertaken in a manner that is consistent with New Zealand’s energy strategy (including the development of increased renewable energy capacity).

A ban that is too broadly cast may have the effect of deterring investment in New Zealand’s gas supply. This has the potential to cause significant issues for New Zealand’s energy system reliability and security in the medium to long term.

If you wish to discuss any of the issues arising from MBIE’s energy market consultation, or would like assistance in developing submissions, please contact any of our experts.

Simpson Grierson Energy System Consultation Series:

MBIE consults on New Zealand's Energy system #1: Gas Transition Plan Issues Paper

MBIE consults on New Zealand’s energy system #2: Interim Hydrogen Roadmap

MBIE consults on New Zealand’s energy system #3: Measures for Transition to an Expanded and Highly Renewable Electricity System

MBIE consults on New Zealand’s energy system #4: Developing a regulatory framework for offshore renewable energy