Price shocks, rural ruin and rolling blackouts: the cost of a hasty transition to renewables

Expert warns fast switch to renewables risks more rural job losses.

New Zealand must transition to renewable energy, but a poorly managed shift could have devastating consequences. That's according to Gerard Dale, a partner at Dentons who says a rushed transition could mean steep power prices, impoverished rural areas and potential energy shortages.

"We need to plan the transition to renewables, and plan it well," says Dale. "If we don't, we'll get price shocks, and I think we're starting to see that now. We'll have a gap where we've turned off traditional energy sources and haven't enabled new sources, and that will result in higher costs and greater unemployment."

Rural areas will bear the brunt of rising power prices

New Zealand has already seen significant electricity price hikes for both households and businesses. Low hydro lake levels and limited gas supply has driven prices up 6.4% in the year to March 2024, following price rises of 4.4% in same period for 2023, 2.2% in 2022 and 8.7% in 2021. For wholesale customers, power has gone from around $100 per megawatt hour (MWh) in September 2021 to around $700/MWh this August.

Energy costs were cited as a major factor in the recent closure of two Winstone Pulp International sites in the Ruapehu District. A rushed transition to renewables would likely result in many more closures and job losses for industrial businesses in the regions, says Dale.

"It's not a surprise that our pulp and paper mills are struggling. I've been in these rural areas recently and you can see how close some of these big businesses are to marginal. We need a transition that doesn't end up with rural New Zealand out of work."

He points out that mining is a major employer in the West Coast, generating 8.4% of the region's GDP. The coal that comes out of the West Coast is vital to the process of steelmaking, and the steel is vital to building wind turbines and solar arrays.

"Most of the high-paying jobs are associated with mining, and past governments keep suggesting they switch to tourism - but do they really want to go from a job paying six figures to a job that pays maybe $60,000 and is seasonal? Why are we closing the things we need? This is just impoverishing the regions. We don't want a fast transition to renewables that shafts the rural sector.

"We don't have the money to do all this at once"

New Zealand is doing well at generating renewable energy, but it faces some steep challenges to reach its decarbonisation targets. Our aging grid infrastructure is already struggling to meet peak electricity loads. We need to increase our electrification, solve the 'dry year' problem with some type of battery storage, and decouple from our dependence on imported oil. The to-do list is long and expensive, and the budget is limited.

"Our power infrastructure is old, and it hasn't been as well maintained as the public thought. It's capital intensive and that bill is coming due," says Dale. "We need to change our power source to renewables but also change our grid, and we don't have the money to do all this at once. We need to balance these out. The transportation and distribution of electricity might be a higher priority than cutting off traditional energy sources. Price insecurity and shocks could lead to energy deprivation if we're not careful."

Massive opportunities for the future of our economy

The good news is that New Zealand is already performing well on renewables, says Dale, and we don't need to rush to turn off traditional energy sources.

"We're in a good spot compared to most countries, and we don't have far to go. We've got great opportunities. If we can marry up renewables with batteries, we've solved our supply-side issues. That also means investors will take a longer-term view of renewables projects. And with our natural wind and solar resources, if we could produce green hydrogen we could export it, as ammonia for instance."

Done well, a steady and balanced transition to renewables would also increase our energy security, which would make New Zealand less vulnerable to supply chain problems and oil price shocks.

"The world isn't exactly the safest place anymore. Energy security is paramount, so maybe we don't retire assets like Huntly too quickly. We might not use it, but maybe we keep it in case we need it."

The future of our energy system could also be more widely distributed - imagine if the 55,000 new houses recently approved in the fast-track consenting process all had solar panels and batteries attached. Each one would then be drawing only lightly from the grid, and in the future, they could sell back excess energy to further reduce their power bills.

"We might not have the money to do everything, but because of our distance and size, New Zealand is quite good at innovating," says Dale. "I think we can transition well and solve the challenges with a bit of planning. We just need to be careful not to throw out traditional energy too soon. We can have ESG principles, but not at the expense of wellbeing. We're not going to be the country we aspire to be if we can't enable people to make a living and keep lifting ourselves up."

This article was originally posted to BusinessDesk. You can find the link to the original article here.

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