New Zealand is likely to remain "addicted to oil," presenting a key challenge for reducing energy sector emissions, according to a Ministry of Economic Development report.

The latest New Zealand Energy Outlook (2009) is designed as a reference for the country’s energy policy debate. Published every few years, it makes 25-year projections of the country’s energy supply, demand, prices and emissions.

A key message from the report was New Zealand’s “addition” to oil, although demand was expected to slow, with growth in diesel use instead.

The new-look report found about half of New Zealand’s energy consumption came from refined oil products (petrol and diesel) – used mostly for transport and off-road uses including construction and farming.

Most of the oil consumed is imported as crude or refined products (as New Zealand’s premium-quality oil is exported).

The recession, along with the switch from oil to diesel was likely to reduce growth of oil demand from previous rates of 2.5% to about 1% a year. However, oil would remain the country’s dominant energy source, the report said.

“Until a widespread, cost-competitive alternative becomes available, oil will continue to dominate New Zealand’s energy demand and remains a key challenge for reducing energy sector emissions and improving energy security.”

Emissions
Increased demand for transport energy and the use of fossil fuels for electricity generation since 1990 caused greenhouse gas emissions from the energy sector to grow sharply over that time.

As electricity generation switched to renewable energy sources, emissions would flatten (especially after 2015), but the report found they were likely to stay about 40% above 1990 levels.

Transport emissions remained “a key challenge” in the long term.

Electricity
Electricity is the second largest source of consumer energy, comprising a quarter of all energy used. The report said wholesale electricity prices would go up about 1.6% a year above inflation.

Wholesale prices increased by almost 60% since 2000, driven by the increasing price of gas over that period. By 2030, in real terms wholesale prices were likely to rise by 40%, affecting retail prices in the long term.

Geothermal electricity was the most economic of new generation and prices could flatten over the next five years if existing plans were consented and built in time to meet growth, the report found.

But without new gas discoveries, there was not enough security of supply to support more base-load gas-fired electricity plants, it said.

Existing plants would be able to access gas at around $8.50GJ until 2020, but after that, gas prices would rise towards the opportunity cost of alternative energy (to about $13GJ by 2035 including emission pricing).

The transport and industry sectors were the heaviest energy users (making up 80% of New Zealand’s demand for energy), including dairy and wood processing along with aluminium smelting.

Key findings:

• Wholesale electricity prices to increase by about 1.6% a year
• Emissions from the energy sector will flatten, but will remain about 50% above 1990 levels in 2030.
• Emissions from transport are increasing but emission from electricity are declining
• Demand for diesel is expected to increase
• No new fossil-fuelled base load electricity generation plants are expected
• Electricity demand will grow at 1.5% a year, down from 1,8% a year
• Energy intensity improvements are likely (from about 1.0% to 1.2% a year), partly offsetting demand growth