Collective action and a “whole of system” approach to regulatory development are two of the most important areas for the New Zealand energy sector’s climate change response, according to Lucie Drummond, Executive General Manager Sustainability at Mercury NZ. MinterEllisonRuddWatts Partner and Energy Sector Lead, Scott Thompson, sat down with Drummond to zero in on Mercury’s climate reporting and some of the barriers and enablers to its climate and decarbonisation ambitions.
Mercury is a publicly listed, integrated energy business with both generation and retail arms. It generates electricity from 100% renewable sources: nine hydro stations on the Waikato River, five geothermal plants in the central North Island, and five windfarms including New Zealand’s largest, the 222 MW Turitea Wind Farm. Mercury also has a pipeline of future development across the country which supports its long-term objective to play a leading role in New Zealand’s successful transition to a low-carbon future – and it anticipates both climate-related opportunities and risks as it pursues this objective.
Navigating the Aotearoa New Zealand Climate Standards
In 2023, Mercury prepared its first Climate Statement in accordance with the new Aotearoa New Zealand Climate Standards (the Climate Standards). Mercury identifies increased electricity demand from decarbonisation and investor desire for renewable generation as its material climate-related opportunities. A reduction in hydro generation flexibility and profitability due to variable weather, asset damage from growing intensity of atmospheric conditions, supply chain constraints, and government policy settings are its material climate-related risks. In its first Climate Transition Action Plan, also published in 2023, Mercury outlines the actions it is taking to achieve ambitious carbon reduction targets. Policy and regulation are once again called out as risks in this action plan.
Although not required to comply with the Climate Standards until FY2024, Mercury saw early adoption as an opportunity to develop its internal processes. Drummond says it will come as no surprise to anyone that it wasn’t an easy process. Mercury was familiar with reporting from its voluntary climate-related disclosures, having published full Taskforce on Climate-Related Financial Disclosures (TCFD) reports since 2020. However, the rigour required by the Climate Standards was both a highlight and a challenge for Mercury.
Drummond identifies the approach to quantification as particularly challenging and something Mercury continues to work on [1]. Another challenge for a listed company with international investors, like Mercury, is reconciling New Zealand and global guidance on transition planning. One of the key drivers for Mercury’s Climate Transition Plan was presenting its action-oriented approach to climate change in an accessible manner for its wide range of stakeholders.
Drummond offers the following advice for other companies preparing their Climate Statements for the first time:
Get started. Ask others how they have done it in practice – translating the theory that exists in guidance documents and standards into practice is challenging. People are really willing to share how they have done this for their organisation. As we now have a standard that requires compliance and has associated liability, it can be difficult to navigate the perfect getting in the way of the good. Getting started in FY24 will mean an organisation can take advantage of the transitional provisions and this will help with that.
Policy and regulation: Risk or opportunity?
Policy and regulation feature heavily in Mercury’s risk profile. To quote its Climate Statement, Mercury sees a risk that “government policy settings fail to balance the energy trilemma and lead to a decline in electricity demand growth and/or a loss of investor confidence in the electricity sector, increased costs for the sector, and/or delayed development of renewable electricity generation capacity”. Part of Mercury’s response to that risk has been to engage on policy settings that support a successful transition.
Mercury’s Executive General Manager Sustainability, Lucie Drummond believes there are clear opportunities for New Zealand’s energy sector to work together on a “whole of system” approach.
Drummond says that the former Government’s “aspirational” target of 100% renewable electricity by 2030 created a high-level system barrier to investment in both “firming” (e.g., gas peaker) generation and renewable generation – impacting New Zealand’s security of supply. There are other more detailed policy and regulation barriers, such as the current funding mechanisms for networks. Drummond also sees significant potential for unintended consequences from new policy or regulatory changes to the electricity market.
Conversely, Drummond identifies four key regulatory changes which could make a positive difference to the energy transition:
- A clear Gas Transition Plan (originally due under the Emissions Reduction Plan by the end of 2023 [2]);
- A clear consenting regime to enable renewable development at the pace required while maintaining social licence with community;
- Demand-side policies to help step up electricity use and in turn support renewable investment; and
- Enabling network and transmission investments that would support a smart electricity system.
Collective action
Drummond stresses that collective action will be necessary to deliver a smooth energy transition for New Zealand.
Mercury, along with other energy sector players, was actively involved in the commissioning of the Boston Consulting Group’s 2022 independent report, The Future is Electric, which provides a system-wide perspective on the transition.
Building on that report, Drummond says there is a need to coordinate actions across the system. Already there have been joint sector groups on key topics, for example the work of the Electricity Sector Environment Group on the Resource Management Act reforms and the work of the FlexForum on distributed energy resources. However, more is needed.
The scale and pace of change required for the energy transition is unprecedented. It will take us working individually and collectively to be successful. A mechanism that enables more collective action is critical to navigating the transition for New Zealand in a way that maintains secure and affordable supply.
She advocates for a sector and government framework where the right people are in the room looking at the challenges and priorities and talking about how the sector can work in a more connected way. Drummond sees such a forum as an opportunity to either inform or deliver New Zealand’s Energy Strategy which is due in 2024.
Act now
The message is clear – now is the time for action. With a new Government there are clear opportunities for all energy sector participants to work together to develop a “whole of system” approach to New Zealand’s energy transition.
Footnotes
[1] Entities can elect to use adoption provisions under NZ CS 2 exempting disclosure of current and anticipated financial impacts in the entity’s first reporting period.
[2] Action 11.3.1, Aotearoa New Zealand’s First Emissions Reduction Plan.
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