A new report from the Parliamentary Commissioner for the Environment urges serious analysis of the country's energy future before any decisions are made, Marc Daalder reports
Meridian Energy's proposed large green hydrogen electrolyser in Southland would raise power prices but have a relatively modest impact on climate pollution.
That's one of the findings of a new modelling report commissioned by Parliamentary Commissioner for the Environment Simon Upton. The modelling has limitations, including ignoring the economic benefits of selling commodities like hydrogen and aluminium, and its scope is limited to the impact of various decisions on the electricity system.
The Energy Link model, used by electricity generators to forecast future demand, supply and other factors, was used for the analysis.
READ MORE: * Tiwai smelter sees path to remain until 2039 * No Lake Onslow pumped hydro before late 2037 * PCE: Hydrogen could make emissions budgets unachievable
It suggests Southern Green Hydrogen would need to bring in more than a billion dollars a year in added benefits to New Zealand for the numbers to stack up. The net present value calculated in the report for the project ranged from -$12 billion to -$55 billion over the next 50 years, as compared to the base case.
"All hydrogen scenarios remain a net cost to society (the benefit-cost ratio is below 1) throughout the modelling period. This is because hydrogen generation is very inefficient, requiring around twice as much renewable energy to produce each kWh of hydrogen, increasing aggregate demand on the network and a need for significant additional renewable generation thus leading to an increase in electricity prices for end consumers," the report concluded.
The focus of the hydrogen section of the report was on large-scale hydrogen manufacture for export, not necessarily potential domestic uses.
A spokesperson for Meridian disputed the findings of the report.
"In Meridian’s view, even if the assumptions underpinning this modelling are correct (and they are highly unlikely to be), the analysis somewhat misses the point. It excludes the significant benefits to society from aluminium and hydrogen production in New Zealand in terms of jobs, export earnings, global emissions, and tax revenue for the Crown. De-industrialisation, lowering our productive capacity, and shrinking the New Zealand economy is not in Meridian’s view the right way forward as we look to lower our carbon emissions," they said.
"Meridian has commissioned its own modelling of the costs and benefits of flexible hydrogen production relative to several other options to significantly lower the carbon emissions produced by our energy sector. That modelling suggests flexible hydrogen production is one of the lowest cost options. We believe it is possible for New Zealand both to achieve our emissions reduction goals and ensure we have the industry, jobs and export earnings necessary to ensure the long term benefit of consumers in the fullest possible sense."
In addition to hydrogen, the report modelled a baseline scenario where no major interventions occur, a scenario where the Tiwai Point smelter closes in 2025 and a scenario where a five terawatt hour pumped hydro scheme is built in Lake Onslow in Central Otago. The work was commissioned a year ago, before the Government's alternative to Onslow (a portfolio of hydrogen, flexible geothermal and smaller pumped hydro in the North Island) was revealed. It has been updated however to take into account Onslow's new capital price tag of $15 billion.
The scenario with the highest net present value was closing Tiwai, which had benefits of $20 billion to $62 billion, depending on the discount rates used. As with hydrogen, Tiwai would need to provide the country $1.5 billion to $2 billion in annual benefits to override the savings from closing it – which mostly come in the form of lower power prices, closing fossil fuel plants earlier and deferring some investment in new renewables.
The Lake Onslow scenario had the lowest emissions, because virtually no gas-fired plants were needed for peaking or for addressing dry-year risk. However, all scenarios charted a path to relatively low emissions and none reached 100 percent renewables by 2050.
The key benefits of the Onslow scenario were enjoyed in the long term, with power prices falling below the base case in the late 2030s or 2040s. Onslow also reduces the volatility of electricity prices, bringing up the troughs by creating demand at times of cheap prices and shaving off the peaks through generating power when prices rise.
It is also the best option for security of supply, able to deal with peak demand and dry-year risks. Its net present value spanned a cost of $2 billion to a benefit of $13 billion over 50 years, with benefits more than doubling if the horizon was extended to 100 years.
In a note accompanying the report, Upton urged policymakers to undertake more rigorous and detailed analysis of options before making any decisions.
"As a young man, fully a generation ago now, I witnessed a seriously flawed debate about the energy sector projects that erupted in the wake of the oil shocks of the 1970s. The fortuitous (as it was then) discovery of vast offshore gas resources sparked a rush to invest in energy security. Many of those investments were controversial, some of them proved to be extremely costly. All of them had system-wide consequences that created a path dependency from which New Zealand must now extricate itself," he wrote.
"Today’s decarbonisation challenge is every bit as significant, and the scale of investment required even greater. We are already seeing significant public subsidies being extended to technologies that are claimed to be part of the future. There are hard choices to be made. There is no perfect solution and none of us can predict the future of technology or the shape of the economy in a warming and climate-disrupted planet. The most we can hope for is high-quality decision making based on even-handed treatment of the options."
He was unimpressed with the level of debate to date, saying criticisms of Onslow as a "white elephant" or praise as a "nation-building project" were "not a substitute for serious analysis".
While Upton made no recommendations as to what choice is the right one, the report does come after he spent much of 2022 pushing the Government to be cautious in its support for hydrogen.
In March 2022, he wrote to senior ministers to warn them that a big investment in green hydrogen could make it difficult to meet New Zealand's climate targets, because the electrolysers would soak up renewable generation otherwise needed for decarbonisation. Further letters in a similar vein were exchanged throughout the rest of the year.
The modelling also adds to a series of reports about New Zealand's energy future, including a major release last year by Boston Consulting Group commissioned by electricity generators.
A discussion document on the Government's Energy Strategy is expected at the end of the year, with a final plan in place by the end of 2024.
