New Zealand Energy Strategy

A strategy of energy abundance, economic growth and improved standards of living for all Kiwis.

Last week I posted Rudderless which highlighted that New Zealand does not have a cohesive energy strategy or anyone responsible and accountable to deliver it if we did. At the end of that piece I stated.

Talk is cheap and it’s easy to point to what is wrong, it’s much harder to fix it.

I have spent far too much time critiquing the system and too little time offering up possible solutions. Solutions that I can only hope may plant a seed with those who have sufficient influence to initiate change.

Watch this space in the coming weeks for a strategy offering that could steer New Zealand away from the rocks.

So here we are folks, I offer you my suggested pathway to a more secure and abundant energy future.

Disclaimer – This is something I have knocked up over the past week grabbing an hour or so here and there, between juggling work, family and farm life.

Is it comprehensive? not particularly.

Is it complete with detailed analysis? No.

Does it define the problem and provide a strategic template for response to the problem? Yes, I think so.

Ultimately, I hope it will help us to see the problem differently and to offer solutions that I feel are worthy of further and more detail analysis. Most of all I hope it generates some discussion and plants some seeds with those in a position of influence.

Executive Summary

Towards a Resilient and Abundant Energy Future for New Zealand

New Zealand faces a deepening energy crisis. Our economy is becoming increasingly energy-constrained, with declining net primary energy availability undermining industrial productivity, grid stability, and economic resilience. Current energy policy debates remain dominated by market design questions and climate targets, while failing to confront the physical and systemic constraints that ultimately govern energy system performance.

This paper proposes a strategic reframing of New Zealand’s energy future:
Energy is not simply a commodity to be traded, it is the master resource that underpins all productive activity and the functioning of society. Any energy strategy must be grounded first in physics and thermodynamics, not purely in market incentives.

Where do we currently find ourselves?

Before we can start to design a strategy, we first need to understand the situation we currently face. In medical parlance we need to triage the situation and staunch the bleeding. So, what are we presented with when we objectively assess our energy system.

• New Zealand’s economy is severely energy constrained. We are experiencing a decline in net primary energy. The implications of this are existential to New Zealand’s economy and by association standard of living. This issue is not well understood by those with the ability to set policy. Largely because they see energy as a commodity that is interchangeable in a market and not as the master resource that enables all others.

• Our manufacturing sector is de-industrialising due to the lack of natural gas which is also driving up both gas and electricity prices. It is also increasing grid fragility due to a reduction in both dispatchable firming capacity and inertia. A lack of natural gas is the most significant issue facing the country at the moment due to the scale of the issue, lack of time to response and current dependency on gas by major industries and the electrical grid.

• Much of our productivity issues are related to low utilisation of capital. This is because large industrial facilities can’t get the energy they need to operate at full capacity. Demand management worsens this situation as it lowers plant utilisation further without a comparative reduction in operating costs and therefore increases the unit cost of production. This is making our industries less competitive and disincentives investment.

• Our electrical generation market is too fractured and none of the big four generators has the capacity to invest at the scale required to provide internationally competitive wholesale electricity rates with the high levels of network reliability. This is what is needed to drive real economic growth in New Zealand. Furthermore, the market dynamics incentivise the main players to maintain a near scarcity situation. Creating high levels of energy surplus would significantly reduce electricity prices and in turn destroy shareholder value which company executives have a legal obligation to prevent. This is the primary reasons that I don’t think the market can solve the issues we have.

• To allow NZ industries to be internationally competitive and to facilitate the potential for a “value added” commodity products sector our energy input costs must also be internationally competitive. For electricity this would equate to ~$50/MWh and for gas this would be ~$5/GJ.

• Energy generation does not lend itself well to a “market” that incentivises investor return over building infrastructure with a future focus. The New Zealand market will build only in response to projected demand in a very gradual and incremental manner. The system should instead build at scale in advance of demand to achieve the lowest possible wholesale prices. Price settings should cover the cost of generation and build CAPEX reserves and/or service debt that are re-invested.

• Our energy markets have been dominated by large scale uncertainties. Will Methanex stay or go? Will Tiwai stay or go? Will we build the lake Onslow pumped hydro scheme? Will we have several GW of offshore wind? Any one of these this would be a massive shift in the NZ market and change the economics of existing and proposed projects significantly. This creates investment uncertainty.

• Accelerated depreciation of existing gas pipeline infrastructure is being pursued by the network operator signaling that we are at risk of losing the network due to under utilisation.

• We are at a critical juncture where we urgently need gas, or we will lose the market for gas as the industries that dependent on gas are forced to close and the transmission infrastructure becomes uneconomic to maintain. This is a national security issue that will have huge economic implications. Our primary sector industries need gas and do not have the time or a sufficiently viable alternative fuel options to switch to another source of energy. Electrification is also energy constrained in a dry year due to the same lack of domestic gas.

• Our liquid fuel supply is highly vulnerable to geopolitical tensions and international supply chain issues. Our transport systems are almost entirely dependent on imported diesel, kerosene and petrol.

• We have limited our ability to respond to all of these issues by artificially limiting our energy options through net zero targets. As a result, we are restricting ourselves largely to low energy density highly disperse forms of energy with intermittent generation profiles. These systems are fundamentally less productive than the systems they are intended to replace.

• Many of the technology alternatives proposed by the sector are either only conceptual or have too low an EROI when assessed at a total system level.

What is the goal?

When envisaging what we want from New Zealand’s energy system I would suggest that we want a system that provides an abundance of cheap reliable energy.

The energy system shall enables us to integrate value added manufacturing into our primary industries dominated commodity-based export economy.

We want an energy system that buffers us from geopolitical shocks and uncertainty.

We want an energy system that has as low as possible environmental footprint while simultaneous proving energy abundance.

It’s a physics problem.

In order to solve a problem, we must first define the problem.

New Zealand’s energy system, like all others, is fundamentally a physics problem.

In New Zealand we all too often see it as a market problem. We continuously debate market structures without realising that we are trying to solve for physics.

All energy can be expressed in joules, but not all joules have the same characteristics and as such they are not all directly interchangeable. We need to create a system with the right joules available at the right times.

The market structure considerations should be a very distant second to the physics problem. Simply put, no amount of incentivising tactics at odds with physics will work. Physics will be the ultimate arbiter of whether we grow, or we collapse.

Only once we appreciate the nature of the problem can we understand the constraints and develop a solution. This will inevitably involve a market structure different to the one we currently have.

Appreciating we need to prioritise the physics over a laissez-faire competitive market is in my opinion where so much of New Zealand’s energy policy gets things wrong. This has huge opportunity costs and leaves us increasingly vulnerable as existing infrastructure ages, reserves deplete and the lead times for solutions extend.

We are now in a place where we are under duress, which seldom leads to good decisions.

Defining the physics problem.

The fundamental physics problem presented in designing our future energy system can be defined as follows:

• Production is by definition the processing of materials using energy.

• Our energy demand will always increase. As we process energy and materials we are building more things. More infrastructure, more buildings, more roads, more equipment, etc. Simultaneously everything in our built world is accumulating entropy, or described differently, disorder. This means that all things need to be either replaced or maintained. Over time the energy to maintain always increases.

• In addition to maintenance we also need a surplus with which to enable growth. This surplus energy requirement also needs to grow relative to the size of the system.

• If we do not grow, the maintenance of the system becomes unsustainable, and our society will collapse.

• The principles above are most clearly represented by the concept of Lotka’s wheel.

• In order to grow we must increase the surplus energy available to society. This can only be achieved by increasing the aggregate EROI over time (Energy Return On energy Invested).

• EROI is closely related to energy density.

• Energy is not a commodity and should not be viewed as such. It is the master resource that enables labor and capital to produce products and commodities. As such its role in GDP is wildly underestimated.

• The global relationship between the change in GDP and the change in net primary energy is perfect. A very similar relationship will apply to New Zealand at a country level. This means that if we want to even grow our GDP modestly at a rate of approx. 2% per annum compounding, we will need to double our net primary energy within the next 30 years. This is across all forms meaning that we will require moving from 800PJ of net primary energy to around 1600PJ. The mix can change but not the total.

• Efficiency helps in the short term by reducing demand, but it inevitably leads to increased demand as we just produce more. This is Jevon’s paradox. Which is why I say the mix may change but not the total.

• Complexity increases both entropy (loses), and fragility. This is best expressed by Tainter’s law of diminishing returns on complexity.

Taking all of this into consideration, we can conclude that to solve the physics problem, and in doing so sustain our society, we need to deliver an energy system that:

1. Increases the aggregate EROI of the system. Meaning it generates increasing amounts of surplus energy to society over time.

2. Increases the amount of energy available to society with a compounding growth profile equivalent to the desired rate of GDP growth, with the energy growth leading GDP growth.

3. Is as simple as possible to minimise complexity and fragility.

These properties are necessary to both provide the energy to maintain, and to grow. The energy must be provided in advance of the demand, not in response to it. Simplicity minimises loses and increases efficiency. Efficiency supports increasing EROI.

So now that we understand the problem we are trying to solve we can develop a strategy for maintaining and improving society that we can encapsulate with the following mission statement:

Mission Statement

Energy is not a market commodity it is the master resource and fundamental infrastructure for society.

We must provide an energy system that delivers surplus energy to society. The system shall increase the surplus available over time by both increasing productivity and growing in advance of demand growth.

The system shall provide energy at internationally competitive prices to enable improvements to the standards of living for New Zealanders and enable a diverse range of economic activities.

Strategic Objectives

System level

• Staunch the economic bleeding as rapidly as possible with proven technologies that integrate easily with existing infrastructure.

• Research and develop new technologies and systems to increase the EROI of the NZ energy system.

Electricity

• Develop an energy mix that is highly reliable by maintaining dispatchable baseload and firming capacity in the order of at least 1 x peak demand.

• Adopt an energy mixture that provides high levels of grid stability (grid frequency support).

• Prioritise the deployment of proven technologies with high EROI that integrate well with a simple grid.

• Explore new technologies and approaches on an adopt only after proof of concept basis.

• Adopt a physics first, fuel agnostic approach to system expansion.

• Technologies deployed must increase the lifecycle aggregate EROI of the grid over time.

• Build with a view to increasing the capacity for electrification. As a domestically produced electricity buffers NZ from geopolitical tensions to some extent. Electrification is also highly efficient for a lot of industrial applications.

Gas

• Restore domestic natural gas production back to peak levels of ~220PJ per annum. This will facilitate full utilisation of existing industrial plant and increase productivity.

• Use domestic gas to displace imported coal.

• Provide secure long term contracts to underwrite exploration and development over longer periods.

• Provide adequate gas to support NZ industry at full capacity with excess supply readily available to attract further industrial development. This will improve productivity and increase the utilisation of capital.

• Explore alternatives gases and adopt after proof-of-concept basis.

Liquid Fuels

• Improve the resilience of New Zealand’s liquid fuel supply chain against geopolitical risk and oil shocks.

• Aim for a minimum of 25% of New Zealand’s liquid fuels to be refined locally.

• Re-establish refining capacity recognising that the global refining capacity is reducing and being consolidated in geopolitically unstable regions.

• Support refining capacity with domestic oil production.

• Explore liquid fuel alternatives on an adopt after proof of concept basis.

• Pursue further electrification of transport systems focusing on larger scale systems as the priority (bus and train networks).

Solid Fuels

• Retain coal generation capacity for energy security as long as necessary.

Tactics

The tactics we employ have to address the immediate situation we face and set a foundation for achieving our strategic objectives. They need to be specific and able to be operationalised.

Electricity Tactics

1. Redefine the language.

We need to reorientate our language towards the physics we should not talk about renewables and fossil fuels. We should be talking about intermittents and dispatchables.

Why:

This allows us to focus on the physical characteristics of the generation. Intermittency is expensive. It may not appear so at the point of generation but as percentage of intermittents in the grid increases firming, storage and curtailment mechanisms need to be incorporated. These add cost and complexity by increasing the asset base, while simultaneously lowering the utilisation. Dispatchables which include geothermal, and hydro should be recognised as superior quality generation due to their physical characteristics, ease of integration and ease of coordination. We also need to recognise that intermittents such as wind and solar are actually rebuildables with relatively short effective lifecycles.

2. Increase the % of dispatchables.

The immediate tactical solution is to maximise our geothermal generation capacity and to firm up our natural gas supplies (see below).

We also need to keep future capacity in mind. Recognising that at a minimum we will need to double our net primary energy within the next 30 years and that there is a large scope of electrification we need to restart a nuclear program. There have been significant advancements in both safety and technology since the days of Chernobyl and the time when New Zealand last considered this. This is now a mature safe and reliable technology. EPCM (Engineering, Procurement, Construction Management) contracts are available internationally. A partnership with South Korea for example could be very beneficial to the future of New Zealand. I appreciate that this is a hugely ambitious undertaking that faces very large social, political and regulatory hurdles. The lead time will be significant but we can learn a lot for the best in class and the sooner we start the process the better off we will be.

Why:

Geothermal is currently the fastest route to increasing high quality dispatchables in the system. It has scope for growth and is in the right location geographically to serve the North Island demand that is currently far from the majority of our generation sources.

There is also a place for intermittents in the system. They can be accommodated with ease at lower percentage levels without the need for complex support systems and infrastructure. Increasing dispatchable generation allows for more intermittent generation without the expensive overheads.

Dispatchables are generally associated with high energy density which in turn preserves the aggregate EROI of the grid. This is mission critical to avoid economic and societal collapse as it is the only way our overall system productivity can be increased.

Nuclear represents the highest energy density currently available, the assets have a very long lifecycle (in excess of 80 years) and high-capacity factors. It would provide high quality baseload generation and help to solve the dry year hydrology problem. It’s a big step for NZ Inc. but will inevitably be necessary. The sooner we start the better.

I recently read the Rewiring Aotearoa 2025 Electrification Policy Manifesto. It’s good and I like the ambition. Missing however was the generation required to power the scheme and an over reliance on batteries. The tactics above will allow the grid to meet this demand and for electrification to be grid supplied. This is the most efficient way to electrify.

3. Market reform.

We need a market that values the characteristics of the generation, does not price all power at the margin, and provides the right signals and capacity to achieve future growth. I have arrived at the conclusion that a single buyer market is likely to be the best vehicle to achieve this. I direct you to the work of Bryan Leyland for more detail.

Why:

Because the current market incentives can’t deliver the physical characteristics we need to future proof our grid. We need change. Undoing the Bradford reforms would be a difficult and expensive task. A single buyer market would achieve comparable outcomes but with a much easier to execute mechanism and less risk of unintended consequences. There are of course political risks associated with a consolidated market, but the current configuration is not working and will not allow us to solve for the physics. We have to make a change.

Gas Tactics

1. Bipartisan support for gas exploration and development.

Why:

The current government is making all the right moves to encourage increasing our domestic natural gas supplies. However, these initiatives are simply not enough without the support of the opposition. The most significant action to reduce the sovereign regulatory risk is for Labor to support the current governments initiatives.

2. Reinstate the block offer process.

Why:

This is already in the legislative pipeline and can’t come soon enough. This again demonstrates political support for those looking to take on large commercial risk and seeking political stable place to do so.

3. Market reform.

Single buyer long term contracting. This is a tool deployed in other jurisdictions such as the Northern Territories in Australia.

Why:

For oil and gas companies it means that they take the risk on exploration but if they find gas they have a guaranteed long-term buyer that allows them to much easier attract capital and significantly de-risk the development. In New Zealand this could be a specific buyer entity, or it could be a consortium of the MEUG (Major Energy Users Group).

Liquid Fuel Tactics

1. Recommission and modernise Marsden Point refinery.

Why:

Liquid fuels are critical to the New Zealand economy and will remain so for a long time. The global refining capacity has reduced overall and is consolidating regionally in Asia with a large expansion in China that now equals the capacity of the US. New Zealand has a very large exposure to oil shocks and geopolitical issues in an increasingly turbulent world. Refined product supply is more volatile than crude oil supply, due to the consolidating supply chain. Having some strategic refining capacity to supplement imported product gives us resilience.

This would be expensive but not when we consider some of the other mechanisms we have in place, for example the ETS it starts to look achievable. The ETS adds approximately 15c/L on diesel and 13c/L on petrol with the current carbon price of $54/T. This adds up to nearly $1 billion per year that could be reallocated to a refinery recommissioning project.

Once we have re-established some strategic refining capacity we can start to allocate some resources to alternative fuels that demonstrate themselves to be a good substitute and that have equivalent or better EROI to diesel.

Solid Fuel Tactics

1. Maintain a strategic coal reserve at Huntly until we can either phase it out with gas or with nuclear.

Why:

Because we need both Huntly’s firming capacity, dry year buffer and inertia indefinitely until it can be adequately replaced.

Why Urgent Action is Required:

Energy constraints already undermine New Zealand’s industrial base and economic competitiveness. Without action:

• Industrial closures will accelerate.

• Energy poverty will rise.

• Grid stability will deteriorate.

• The risk of an economic collapse becomes an increasingly likely outcome.

New Zealand possesses the natural resources and institutional capability to reverse this trend, but doing so requires leadership, foresight, and a physics-first approach to energy strategy.

It is often hard for people to grasp the full implications of energy scarcity as New Zealand has not experienced genuine hardship for some time.

It is relatively easy to empathize with the people getting their final pay cheque at Kinleith, but much harder to appreciate the wider effects.

Economies collapse. When this happens, it happens quickly. We must remember that money is a claim on energy, and if energy becomes increasingly scarce any stores of value we have will erode rapidly. It will destroy our savings, the value of our property, our pension, everything of economic value. It also destroys the opportunities for our children in the future.

New Zealand has an opportunity to plot a different course. Relatively insulated from the world and rich in natural resources. New Zealand is small and nimble and could implement such a policy. The only thing missing is foresight, boldness and leadership to plan for a future of abundance.

Personal Note:

For those more familiar with my writings, and who have read “Biophysical Realities”, you may be confused by my advocacy for growth on a finite planet without recognition of the externalities.

I am acutely aware that all things grow and collapse. It is the nature of the universe. All things are cyclic in nature. We cannot avoid this painful but fundamental reality.

As a species however, we are not ready for this discussion and completely unprepared for what it means. We need more time. Time to inform, time to grieve for what was, and time to create new cultural narratives. Life will inevitably be much simpler, more regional, but potentially richer and more connected.

As our current system reaches its apex in the years ahead our key challenge is to find a way to “bend and not break” as Nate Hagens describes the situation. Bending is the slow and deliberate application of energy to reshape the future. Breaking is sudden and violent. We need to buy ourselves time and in the current paradigm that means to grow as we plan and adapt. Adaptation will require energy.

“The idea that we can grow indefinitely in a finite system is the fundamental delusion of our age” Paul Chefurka