New Zealand has a diversified energy mix, with significant production of both hydropower and geothermal. As the country embarks on an ambitious energy transition, it has many natural advantages, including an enviable renewable resource base. The key challenge will be to decarbonise end-use sectors through clean power and support investments in new technologies to achieve deeper emissions cuts across all sectors in the most economically efficient way.
New Zealand has set ambitious targets for reducing greenhouse gas (GHG) emissions, including achieving net zero emissions by 2050. New Zealand already has a low‑emissions electricity system, with over 80% of electricity coming from renewable sources in 2021. And this share could easily reach over 90% based on existing policies.
Elsewhere, the country has more work to do to decarbonise economic sectors beyond electricity. Notably, the transport sector accounts for the highest share of emissions and is almost entirely dependent on oil as a fuel source. Industry is also a major contributor to New Zealand’s GHG emissions and is heavily reliant on fossil fuels.
New Zealand has an attractive opportunity to leverage its clean electricity sector to advance electrification as a decarbonisation strategy in other sectors. This will require not only sizeable technological investments to support electrification in transport and industry but will also necessitate a sizeable buildout of additional renewables generation capacity to meet accelerated load growth, along with additional grid and storage investments. New Zealand should weigh its aspiration to achieve 100% renewable electricity by 2030 against the potentially considerable costs associated with achieving the last 2-5% of the target.
New Zealand does not yet have a long-term energy strategy in place. While work is underway on a strategy, it is not due for release until the end of 2024. A lack of clarity surrounding the pathways to meeting ambitious climate targets (including the roles that various fuels and technologies will play) creates an uncertain policy environment, hampering the significant investment required to meet the government’s 2030 targets.
Overall, New Zealand has the potential to reach its emissions reduction and energy targets based on its natural resources and policy levers. But the time frames to meet the targets are very ambitious. If the targets are to be met, the energy sector will need a viable policy road map as soon as possible. Delays in providing policy clarity will likely result in the targets being met much further into the future.
New Zealand’s updated climate target under the Paris Agreement is to reduce net GHG emissions by 50% from gross 2005 levels by 2030. The most recent domestic legislation is the Climate Change Response (Zero Carbon) Amendment Act 2019, which sets a net zero GHG emissions target (exempting biogenic methane, mostly from cattle) by 2050. It also includes a target to reduce biogenic methane emissions by 10% from 2017 levels by 2030 and by 25-47% by 2050.
The Act also established a Climate Change Commission to provide independent, evidence-based advice on the actions the government needs to take to address climate change. In addition, the Act requires emissions budgets and emissions reduction plans (along with national adaptation plans). New Zealand’s emissions budgets cover 5-year periods and are set 10-15 years in advance, after considering the recommendations of the Climate Change Commission. The first three emissions budgets were set in May 2022 for the periods 2022‑2025, 2026-2030 and 2031-2035.
Each emissions budget must be supported by an emissions reduction plan (ERP) that contains policies and strategies for meeting the emissions budget. New Zealand’s first ERP was published in May 2022.
The country’s primary emissions pricing tool is the New Zealand Emissions Trading Scheme (NZ ETS). The point of obligation is upstream, so the impact is mainly felt through fuel prices. The government will align the NZ ETS cap with decreasing emissions budgets. The NZ ETS has comprehensive coverage across the entire economy, except for the agricultural sector and a portion of the waste sector. To address carbon leakage, free allocation of allowances is provided to eligible industries that are emissions-intensive and trade-exposed. These allocations are planned to be phased out in the coming decades.
New Zealand does not have a long-term energy strategy. In its May 2022 ERP, the government committed to developing such a strategy to achieve its vision for the energy and industry sectors. The energy strategy will drive New Zealand’s pathways away from fossil fuels and towards greater levels of renewable electricity and other low‑emissions alternatives. A scoping of what the new Energy Strategy could look like is underway. The government is working with energy system stakeholders to develop the Energy Strategy by the end of 2024.
Simultaneously, the government is developing several sectoral strategies that will serve as key inputs to the long-term Energy Strategy. These include: a Gas Transition Plan (GTP), expected to be completed by the end of 2023, which will establish the pathway for phasing out natural gas in New Zealand’s energy system in line with climate targets; an updated New Zealand Energy Efficiency and Conservation Strategy to replace the existing strategy (that expired in mid-2022) and better align with the government’s climate goals; and a renewable energy work programme, which will establish plans for expanding the role of renewables in New Zealand’s energy system.
New Zealand’s electricity system is the cornerstone of the government’s strategy for decarbonising the energy sector. The government plans to promote the electrification of end-use sectors such as buildings, transport and industry, leveraging a renewables-based electricity system.
The New Zealand Energy Strategy 2011-2021 set a target for 90% renewable electricity by 2025. Subsequently, the government set an aspirational goal of 100% renewable electricity by 2030. Moreover, the first ERP built on the government’s aspirational goal in electricity and set a target of 50% of total final energy consumption from renewables by 2035. Making the electricity system fit-for-purpose is a top priority for the government.
New Zealand is fortunate to already have a high proportion of renewable electricity, which is currently over 80% of electricity production. However, due to the electricity system's heavy reliance on hydropower, its key challenge is coping with a “dry year”, when hydro inflows are low. When a “dry year” occurs, and existing hydropower catchments do not receive enough rainfall, backup is currently provided by fossil fuel generation. This issue will become increasingly salient as the country strives to achieve a 100% renewables-based power grid and relies more on electricity to meet its decarbonisation targets.
In response, the government launched the NZ Battery Project in 2020. The project will provide comprehensive advice on the technical, environmental and commercial feasibility of potential energy storage projects, including, but not limited to, the Lake Onslow pumped hydro project. Feasibility studies for the project are expected to be completed early in 2023 and solutions to be in place in the 2030s.
Reaching the aspirational 100% target for renewables in electricity by 2030 and the 50% economy-wide renewables target by 2035 will require a massive buildout of new renewables generation capacity. Given limited options for large new hydro capacity and modest volumes of economically feasible geothermal, a sizeable share of the required new capacity will need to come from wind and solar.
In New Zealand, the Resource Management Act 1991 (RMA) plays a major role in determining the type of electricity generation that gets consented. While the RMA sets national direction on avoiding, remedying and mitigating the adverse effects of activities on the environment, it allows communities to decide how to manage their own environment through regional and district resource management plans. The government plans to repeal the RMA and replace it with three new pieces of legislation. The objectives of this reform are to better meet environmental protections, climate adaptation needs and Māori protections while also improving the efficiency of siting and reducing permitting complexity. Following public consultations, the aim is for the main reforms to be passed into law before the 2023 central government election.
There is considerable potential in other areas of renewables development, like offshore wind electricity generation. There is currently no targeted regulatory framework for offshore wind, and the country does not yet have any offshore wind sites or developments. However, a specific offshore energy regulatory regime is under development and is expected to be in place by 2024. Offshore energy development will be considered as part of the 2022-2024 process of creating a long-term Energy Strategy.
As a step towards addressing climate change and creating a sustainable future for New Zealand, in April 2018, the government announced that no additional offshore oil and gas exploration permits would be granted.
New Zealand’s more ambitious climate targets will require lower emissions from fossil fuels driven by substantial declines in consumption. Emissions reductions are likely to occur through both reduced demand (for example, greater energy efficiency and electrification) and lower carbon intensity (for example, blending in renewable gases or biofuels).
A major part of this strategy will be enacted through the Government Investment in Decarbonising Industry (GIDI) Fund, which was established in 2020 as part of the government’s Covid Response and Recovery Fund. The aim was to accelerate the decarbonisation of industrial process heat and contribute to the Covid-19 recovery by stimulating the domestic economy and supporting employment. In addition to the previous GIDI Fund targeted at industrial process heat projects, funding will now also include support for replacing inefficient industrial and commercial equipment and help replace fossil fuels in commercial space and water heating with renewable energy.
The government is especially working to reduce the demand for coal for process heat and electricity generation. In addition to GIDI-backed projects, this includes investigating options to manage the dry-year risk through the New Zealand Battery Project (to displace backup fossil generation), a proposed ban on new low- and medium-temperature coal boilers, as well as phasing out all existing coal boilers by 2037.
Currently, natural gas plays an important role in the electricity sector alongside coal-fired generation in firming or backing up hydro and variable renewable generation. The pace for phasing out natural gas and the “end-state” of the electricity sector is currently uncertain. They are dependent on a range of factors, such as emissions pricing, technological adaptation and other economic factors. The GTP will help to establish transition pathways for decarbonising the gas sector in line with the first three emissions budgets defined in the ERP.
To address oil demand, New Zealand also has a number of policies to increase vehicle efficiency and promote the penetration of electric vehicles (EVs) into its transport mix.
The government of New Zealand should:
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