Interview with James Kilty - the future of energy in Aotearoa

 

What could our country’s energy sector look like in 2030?

That’s the question global research firm KPMG asked 30 energy leaders and innovators here in New Zealand leading up to the October 2023 general election, including Powerco Chief Executive James Kilty.

“For success in the 2030s, we need to change our mindset now,” says James Kilty.

“We need more mature and connected thinking, and more flexible approaches to enable the energy transition.”

Here’s the full interview with James Kilty, where he shares his views on Aotearoa’s energy future.

 

What are the challenges faced by New Zealand’s Electricity Distribution Companies (EDBs) in the energy transition?

“There are huge challenges for every company involved in the country’s energy transition, but the major challenges for New Zealand’s 29 EDBs (who own and maintain the local poles, lines, cables and other equipment that deliver power to homes and businesses) relate to the regulatory environment, access to capital, access to resources to deliver the major increase in investment required, and maintaining political and customer confidence that price impacts are worth it. 

“We and the other EDBs understand that through increased electrification, increasing electricity to 60-70% of overall energy use, New Zealand can deliver much of the gross emissions reductions required to meet the net zero target. But this needs huge levels of investment, and the amount of capital required in the distribution sector is often underestimated.

“Boston Consulting Group’s ‘The Future is Electric’ report, published in 2022, estimated that New Zealand’s energy distribution sector needed $22 billion of investment up to 2030 alone. This is a 25-30% increase in investment over that period, largely driven by increased demand and making networks smarter to keep costs down in the long term. That investment enables a smarter, more distributed network, which is resilient and affordable in the face of increased storm activity and other climate-related changes. Studies show that the end point of electrification is more affordable for households (replacing internal combustion engine vehicles with EVs reduces household energy costs), though the transition may be bumpy, as costs may increase ahead of uptake.

“I believe by 2030, we may not have seen anywhere near that amount of investment unless the new settings enable EDBs to invest. EDBs today are struggling with rising costs, consenting challenges and resource constraints, and this is reducing the capacity to fund and deliver work at just the wrong time.

“Regulatory settings must help meet the challenge. EDBs must be enabled to invest ahead of need to enable electrification – there’s no point building lots of renewable power stations or distributed energy sources if networks cannot deliver. Equally, customers need a resilient network with sufficient capacity to give them confidence to electrify. If we continue our regulatory focus on ‘just in time’ infrastructure delivery, we’ll continue to deliver too late and will slow the transition rather than accelerate it. Being ahead of the curve will be sustainable politically, financially and environmentally." 

What might be some of the answers to the ‘access to capital’ challenge for New Zealand’s EDBs?

“Without access to capital, there will be a continued decline in the quality of New Zealand’s infrastructure generally, as noted by the Infrastructure Commission. Without capital, EDBs won’t create the decentralised, decarbonised, digitised system which is resilient enough to power the economy. Our green electricity system gives us the opportunity to ‘grow to zero’, growing our economy as we transition to net zero, but it’ll need investment. Investors that can attract debt, commit equity, and be enabled to do so by the right regulatory settings.

“The electricity sector does not need government investment. We are 85% renewable electricity now and will be ~97% by 2030 without intervention. What we regulated monopolies do need are regulatory settings that support us to invest in and deliver the infrastructure to support our net zero 2050 targets. The right settings support ongoing private investment in the electricity system and free up public money to focus in other areas, for example supporting more vulnerable energy consumers or helping our industries to transition. 

“Consolidation of EDBs has been considered several times. The operational cost savings are minor, largely due to the nature of an EDB. Our workforces have to be out in the field, close to the communities and assets they support. There might be some head office savings, but it‘s marginal in terms of the benefit to the end consumer.

“So consolidation isn‘t an operating costs strategy but rather a future-focused capital and resources one. Which means we then revert to the same issues around access to capital – the right regulatory settings, ability to attract debt, owners willing to invest equity, etc. 

“Powerco used to be a collection of council-owned entities. We’re now owned by long-term infrastructure investors, and this has allowed us to fund investment. I do worry that talk of consolidation is a distraction from taking action to decarbonise now. If asset owners see a need to sell to fund the transition or other adaptation needs, they’ll do it. Until then, it’s best if everyone just gets on with it." 

What should New Zealand’s energy sector be focusing on, for success in the 2030s?

“We need more mature and connected thinking and more flexible approaches to enable the energy transition. It’s too early to foreclose on options. Technology is developing quickly, and if we try to chart a ‘perfect’ path that forecloses options now, we risk bad outcomes. We cannot plan for perfection; if we try and design the perfect transition, it won’t happen. 

“For example, the 100% renewable electricity target is slowing our transition. It’s constraining investment that can support a resilient and affordable electricity system through the transition. This means higher forward electricity prices and increased reliance on imported coal this decade, which is the opposite of what we need. Gas peaking power plant, green gases, carbon capture utilisation and storage, gas storage all have important roles to play in a resilient and affordable transition and can be leveraged this decade for success in the 2030s. 

“Studies show the potential for around 30% green gas in the residential sector by 2030. So, let’s not foreclose on that either. With the biggest early wins in the transition being in transport and industry, biogas can help reduce emissions in the gas system for households without the significant costs of appliance changes. The gas networks can enable this.

“Growing a more productive economy and industries should be a major goal for our energy transition because it’s a fantastic opportunity to leverage our low-carbon electricity sector. Other economies are creating a path to net zero by exporting production to higher emitting economies. I think we’re still relatively immature in our understanding of carbon leakage. There’s a lot of debate, but it seems to me that as we already have a green electricity system, our objective should be to leverage it and grow industry here.

“For success in the 2030s, we need to change our mindset now. We don’t need perfection, we need progress. We need ‘good enough’. Low regret, directionally sound, and adapt in due course. Perfect can come later. For now, good enough is perfect! 

“If we keep options open, have enabling regulation, target growth, and let markets operate, then in the 2030s, we’ll have an energy system which, while not perfect, is at least progressing New Zealand aggressively to a net zero 2050 target; growing New Zealand to zero.”

You can download a full copy of KPMG New Zealand’s report: 30 Voices on 2030: The future of energy in Aotearoa.