Debate on Crown Entities, Public Organisations,and State Enterprises — Meridian Energy Ltd

The year under review was the second full year of the operations of the Energy Efficiency and Conservation Authority since it was set up on a statutory basis as a result of my Energy Efficiency and Conservation Bill, which was passed in 2000. The year under review was also the first full year of the implementation of the National Energy Efficiency and Conservation Strategy. The Local Government and Environment Committee was pleased to learn that, to the extent that one can tell with only 1 year’s data, the Energy Efficiency and Conservation Authority is on track to meet its target for energy efficiency and renewable energy.

The authority has been laying the groundwork, across an extraordinarily wide range of activities, for a more energy-efficient future in all energy-using sectors. There are a bewildering range of activities, including minimum energy performance standards for appliances, grants for energy audits in industry, an electricity demand exchange to cope with dry winters, ethanol blends with petrol, bio-diesel, travel demand plans, home energy retrofits, and a great deal more. The authority has a mere $8.5 million for this work, and it is spread very thinly across a wide range of activities. Therefore progress in all those areas has been quite slow, because the authority has tried to work across a range of areas.

I want to talk about two areas where I believe the authority could go further, faster, and also where it needs more funding. Both concern domestic energy use, which is one-third of our electricity consumption. I believe if we are going to change the culture of our society towards a more energy-efficient culture, then we need to pay some attention to households, even though they are many and small, because households are where people’s attitudes can be changed and where people learn about the kind of society we need to build for the future.

The first area concerns the use of direct solar energy to replace electricity, and also to give us greater security of supply in dry winters, as well as build some capacity. It would be like a whole lot of little power stations on people’s roofs, all around the country. The Energy Efficiency and Conservation Authority is working towards a target of installing 10,000 solar water heaters each year, but that is less than half the number of new houses being built every year. So the authority is not even proposing to keep up with the rate of expansion of the housing stock. At present it gives a grant for about 1 year’s worth of interest to a householder who has to borrow to install a solar water heater.

💬 Hon Pete Hodgson: 2 years.

The Minister says it is 2 years’ interest. Jolly good! But people who would like to put their savings into this technology, rather than in the money market, because the return is quite good, cannot get any help. The grant of 2 years’ worth of interest is not really enough to encourage a lot of people to want to take it up. Yet I get letters all the time from people who would like to adopt this technology but find it too expensive.

The one big obstacle standing in the way of widespread use of solar water-heating in New Zealand is the small-scale nature of the industry. There is a terrible lack of capacity—

Sitting suspended from 6 p.m. to 7.30 p.m.

I had been saying that the lack of capacity in the solar water-heating industry and the installing industry was an obstacle preventing this technology from making any really significant contribution to New Zealand’s electricity security and sustainability. That lack of capacity will not be solved by giving out a few quite small grants to individual householders so they can buy a solar water heater. What we need is a bold programme of Government leadership whereby all Government buildings are audited, then all buildings where solar water-heating would be cost-effective are put out to tender over 5 years for a programme to solarise all suitable Government buildings.

Over that 5 years the industry would have a chance to gear up its manufacturing and its installation capacity. It would know it had an assured market. The price would come down through competitive tendering. At the end of that 5 years there would be a lot of operating experience, capacity would be built in the industry, and the price would be a lot lower for ordinary New Zealanders wanting to solarise their homes. That is what I think the Government ought to be doing in the Budget on Thursday. That is the way to go if we want to get solar water-heating off the ground. I will keep on saying that, and I have been saying that for a few years now.

I want to make a brief mention of household energy retrofits. In the year under review 1,500 retrofits were done and there are 700,000 to 800,000 pre-1978 homes left to do. We need to speed this up.

If I may I will preface my remarks with the observation that after sitting here for several hours I cannot help but note that many members, especially Government members but also the odd speaker from this side of the Chamber, seem to think that if the Government ran all the services in this country, everything would be sweet. The health service is in a mess. The education service is in a mess. The fact that the odd service does work well, like Landcorp for example, seems to imply that if the Government ran everything, everything in the country would be wonderful. However, nothing could be further from the truth, as is typified by the energy sector in this country.

The electricity sector, despite what some in this Chamber might say, is heading for a crisis. We are not in that situation yet, as I am sure the Minister would happily point out, but the general consensus seems to be that that is exactly where we are heading. The energy sector is absolutely vital in this country, and I want to include in my comments the role of Meridian Energy in that sector.

Essentially, all that this Government has generated in the electricity industry and the generation industry is uncertainty. Major upheavals occurred under Max Bradford. This Government has done nothing but add to the problem that was created when private property rights were taken from small generators—like the one I have some experience of, Pioneer Generation in Central Otago. It was a marvellous little company owned by the populace of that region until it was forcibly sold. We were very unhappy with that.

I now want to focus on the role of Meridian Energy, especially as an Otago MP. I look forward to hearing a speech from David Parker on the very subject of Meridian Energy. As he is the constituent MP, I am sure he will be taking a call on this most vital of industries, especially in the south. Meridian Energy is not what the Government seems to paint it to be. I see that the financial review of Meridian Energy states that the company suffered significant losses on hedge contracts as a result of increased spot prices, and is also experiencing increasing difficulty financing costs arising out of a $500 million bridging loan used for the acquisition of Southern Hydro—in Australia, not in New Zealand. It is as if New Zealand does not have energy problems or a need for energy capacity. Well, we all know that that is exactly what is needed in this country. We must have increased generation, and we need it rapidly.

Meridian Energy has stated that opportunities for company growth are limited within New Zealand and it has expanded into Australia. Who in his or her right mind would suggest that opportunities for growth in the energy industry are limited? Gracious me, we are heading for a major shortage! We really should identify the impediments to growth in the industry.

I suppose some might call the exercise that Meridian Energy went through over Project Aqua a futile exercise. However, it is an example of what we really should be focusing on and the problems that were faced. Almost $100 million was spent by Meridian Energy on Project Aqua. A large portion of that $100 million is now totally wasted money. About $45 million was spent on the Resource Management Act process, which is an outrageously large amount, despite the fact that it was a $1.2 to $1.3 billion project. To have to spend $45 million on that process is, in my view, excessive. Meridian Energy spent the balance of that $100 million on acquiring land. Meridian Energy has now spent $100 million that it has had no particular use from. No private company could have afforded to do anything along those lines. Meridian Energy said: “Well, look here, we are being supported by the Government, it doesn’t really matter.”

Perhaps the decision by Meridian Energy a couple of months ago to pull the plug on its proposed $1.2 billion Project Aqua will be seen as the biggest call made by any State-owned enterprise in 2004. We had foreseen Project Aqua making a huge contribution to the electricity supply shortage facing New Zealand from around 2007 onwards. So Meridian’s decision not to proceed sent all the other State-owned enterprises involved in the sector, such as Genesis, Mighty River, and Solid Energy, back to the drawing board for a major rethink of their future plans. Meridian itself, of course, is in the same situation, but in addition it has to grapple with the reality of a significant write-off in relation to the preliminary work undertaken on Project Aqua. Of the $95 million spent on the project, $50 million was spent on assets such as land, some of which will now be put back on the market. So the write-off will be at least $45 million, and I predict it will be somewhat more than that.

I recommend to the Government tonight that, in view of those circumstances, we collectively insist that a post-cancellation audit should be undertaken by the company in relation to both the costs arising and the procedures followed in relation to this abortive project. That would be in line with international best practice.

Unless a post-cancellation audit is undertaken, both the company and its shareholders—the taxpayers of New Zealand—are left with a whole range of unanswered questions. For example, should Meridian have been able to foresee earlier that the project was doomed, having regard to items such as the consents process under the Resource Management Act, the difficulties and costs associated with the acquisition of the land, the geological and technical issues arising from the design and scale of the project, the accuracy or otherwise of the announced $1.2 billion price tag, risk evaluations in relation to water consents, river flows, storage, and rates of return on investment, etc.? I believe that both prudence and good management dictate the necessity to undertake this work. Are there lessons that the company could learn for the future? Are there lessons that the Government itself, on behalf of the people of New Zealand, can learn for the future, particularly in relation to matters such as water allocation and the Resource Management Act processes?

The other item that I wish to draw to the attention of members today concerns Genesis Power and the decision of the Environment Court, announced yesterday, to limit the diversion of Whanganui River water into the company’s Tongariro hydro scheme to only 10 years, instead of the 35 years sought by the State-owned enterprise to ensure ongoing security of supply. I urge the Government to consider, and consider very carefully, the ramifications of this important decision, both for Genesis itself and for the wider implications that arise in relation to other existing and potential future hydro schemes within New Zealand. I ask whether this case is some kind of precedent concerning the duration of water consents; if so, it is a serious matter.

It needs to be remembered that vast sums of money are required to build hydro dams, and if the cost outlay and an adequate return on investment are to be assured, then the owners of the project—in this case, again, the taxpayers of New Zealand—must be assured of long-term water consents. Clearly, a 10-year consent period would in most circumstances be totally inadequate, meaning that new dam projects will be rendered uneconomic. This is hugely important, given the nation’s looming electricity shortage.

A decision such as this could quickly scare off potential new investors, whether or not State-owned enterprises or privately owned, or New Zealand - based or overseas-based. Coupled with the cancellation of Project Aqua, which I mentioned earlier, on the face of it the Environment Court decision creates further uncertainty at a time when not only electricity generation investors, but also the commercial and domestic consumers of electricity, seek reassurance concerning both supply and price. In these circumstances, I believe that the Government must leave no stone unturned, including the possibility of new legislation, should it be required.

Reports noted.

Foundation for Research, Science and Technology

Crown Research Institutes