Future Focus: Signposts to Success for New Zealand's Primary Industries
2. Energy Cost and Supply: Beyond cheap oil
What is the global picture?
Most of the world’s energy needs are currently met by burning hydrocarbon fossil fuels (coal, oil, natural gas). To address climate change, emissions from these processes will need to be mitigated by improving efficiency, introducing emission reduction technologies, and government and market interventions. This is likely to increase the costs of energy, together with the fact that the marginal costs of oil exploration and extraction are increasing steadily.
In addition, it is widely believed that the condition of “peak oil” – where the global rate of extraction of oil exceeds for the first time the rate of discovery of exploitable reserves – will be reached between 2010 and 2020. This will have disruptive effects on markets, which will then exhibit greatly increased price volatility around a rapid upward price trend.8
Disruptions because of regional conflicts, or other constraints on access, are also likely to impact on the security and reliability of oil supply in the next several decades.
Other key aspects of global future insight include:
• By 2015, reflecting global political resolve around climate change, there is globally binding implementation of combinations of taxes and emission cap-and-trade, which effectively internalise by 2020 the hitherto external costs of emissions from combusting hydrocarbons. These measures increase sharply the costs of use. The impact is strong in all applications but is especially harsh for users of commercial aviation.
• Substitution of carbohydrate sources (“biofuel”) for hydrocarbon transport fuels is initially gradual but spikes up as emission costs are internalised and capital markets thus respond to more accurate relative price signals. Renewable electricity will also replace fossil transport fuels, through plug-in hybrids and electric vehicles. Battery and fuel cell technology will be improved.
• The relatively moderate costs of coal extraction are more than offset by emissions charges and transportation costs. Reliable technologies that “clean” coal (such as carbon capture and storage [CCS]) do not emerge until 2030. With a cost on carbon, solid wood energy is likely to be fully competitive with coal. Thus, the use of coal declines, despite abundant reserves.
• Countries/regions that have potential for renewable electricity generation (hydro, wind, wave, tide, geothermal, solar/photovoltaic) have increasingly attractive opportunities to substitute these sources of electricity for oil, gas and coal.
• Nuclear electricity generation expands globally towards 2020, despite unresolved issues around waste management, due to the commercialisation of new small-plant technologies.
How exposed is New Zealand?
Under some scenarios the real cost of using hydrocarbons could increase by up to three-fold by 2020.9 This would have impacts through all land-based value chains from farms and forests, through processing, and on into domestic and international markets. These impacts could have significant implications for the viability of particular enterprises and value chains, and could shift patterns of land use.
The increased drying of eastern areas as New Zealand’s climate changes with global warming will result in increased demand for energy use for irrigation – and there will be increasing tensions around the allocation of water across irrigation, hydro, amenity provision, and conservation values.
In addition, the increasing severity and frequency of adverse weather events due to climate change represents a substantial and increasing risk to the security of transmission of electricity to rural districts and whole regions of New Zealand.
Fossil fuels
New Zealand is already highly dependent on the importation of oil and will become increasingly dependent on imports of gas. These risks are passed directly to agriculture and forestry. Energy costs are a large proportion of input costs, and are imposing huge pressure as they increase. The intention to hold reserves of oil offshore – including in Europe – fails to mitigate most of the risk.
While preliminary exploration is planned for the Great South Basin, commercial production of oil and gas from any fields that might be discovered would likely be at least 20 years away.
The reliability of oil supplies is likely to be reduced in future due to constraints on access and disruptions due to regional conflicts e.g. in Nigeria, Venezuela, or the Middle East. This would introduce new risks on-farm, in processing, and in logistics. Transporting tangible agricultural and forestry goods is energy-intensive, and the risk associated with supply unreliability is compounded by the risk posed by concentration of the shipping industry and New Zealand’s remoteness.
The proposed set of Government strategies to achieve “resilient, low carbon transport” within New Zealand can be expected to have significant impacts on all logistics.
Dairy processing is among the leading uses of coal in New Zealand. New Zealand has huge reserves of coal (mostly lignite which is relatively energy-inefficient), but its use in the future is severely constrained by inherent carbon emissions. The timing of the emergence of technologies for “clean” coal burning (with CCS) is distant, their efficacy not fully tested, and their technical and economic viability in the uniquely New Zealand context (e.g. the level of earthquake activity) uncertain.
For these reasons, these technologies cannot be relied upon. Moreover, the cost of capturing carbon dioxide from coal-fired generators may substantially increase the cost of the electricity generated. Collection of coal seam methane may be another option for using domestic coal resources. Also uncertain is the technical and economic feasibility of using abundant Southland lignite coal as a feedstock to make diesel.
Renewables
In any event, as the prices of fossil fuels increase (especially oil, but also natural gas and to a lesser extent coal), bio-renewable sources of energy will become relatively more attractive. Their costs of use will compare increasingly favourably with electricity generation from hydrocarbons, particularly once the cost of emissions is internalised. Use of renewable sources would be reinforced by a national strategy of recovering some supply security through local bio-renewables, even if their cost remains relatively high.
New Zealand has a relative abundance of renewable energy resources – especially hydro, wind, geothermal, biomass, and (in due course) marine (wave and tidal). The use of all renewable energy sources, as well as distributed generation (“microgeneration”) – local generation by solar, wind or micro-hydro – will expand substantially. Distributed generation potentially provides resilience for rural communities.
However, hydro and wind generation impacts directly on rural land use, and in general there will be increasing tension around the location of energy infrastructure, e.g. transmission lines and wind turbines on rural land.
While there will be increasingly attractive land use opportunities for renewable carbohydrate energy sources, there are some concerns that this places competitive pressure on some traditional food/fibre enterprises, or competition for land use for animal protein production.
Nuclear?
Towards 2020 new-technology nuclear power plants could be proposed for New Zealand, although there are substantial uncertainties – not only technical and economic, but also political.
Biofuels
Globally, there is a huge drive for biofuel alternatives to imported oil. For example, President George W Bush announced in 2006 a goal for the USA to have replaced 75 percent of imported oil with biofuel by 2025. In New Zealand, the Government has mandated biofuel use (whether from local or imported sources) to begin in 2008, and to comprise 3.4 percent of fuel company sales by 2012.
The potential for energy crops depends largely on land availability. Ethanol is the most common biofuel worldwide, produced from wheat, corn and other cereals, and sugar cane – that is, food crops. Some biodiesel is also produced from oilseed crops. It is already apparent that the commitment of land to biofuels may place competitive pressure on traditional food and feed production, for example, increasing the price of wheat for staple foods in some regions.10
There are also concerns that committing land to biofuel production may cause loss of biodiversity, increased greenhouse gas emissions, and destruction of rainforests.11 More intensive animal farming could also be necessary to free up current grazing pastures for crop production.
Other issues include competition for water resources, an increased need for fertiliser and pest control interventions, and yield volatility from crops such as corn. Second-generation biofuels use biomass from lignocellulosic wastes, crops on non-arable land, and microalgae.
The case of biofuel development to date illustrates well the complexity and unpredictability of impacts of global drivers (see Appendix 1). For example, agricultural markets have been reacting to higher energy prices for some time. But increasingly, commodity prices have reflected competitive demand for agricultural products as bioenergy feedstocks. It is uncertain whether this will be a lasting structural change for agricultural markets.
8 There remains some controversy around the concept of “peak oil”, and the observation has been made that the futures market for oil prices remains flat, because it is economic at current prices to produce oil from oil shale, etc.
9 This projection reflects the impact on hydrocarbon markets of widespread acceptance of “peak oil”, the impact of carbon prices/emission taxes, and – to a lesser extent – the increasing marginal costs of extracting hydrocarbons.
10 Hence the riots in Mexico in 2007 as many people were unable to afford to buy tortillas, their staple wheat-based food.
11 Accordingly, New Zealand’s biofuels legislation includes a clause enabling the development of environmental sustainability standards.
Contact for Enquiries
Strategy and Performance Group
Ministry of Agriculture and Forestry
Pastoral House
25 The Terrace
PO Box 2526, Wellington
Tel: +64 4 894 0593
Fax: +64 4 894 0738
Contact this person
