The relationship between New Zealand's climate,energy, and the economy to 2025

Abstract

This study looks at the effect of current climate variability and projected future climate change to 2025 on New Zealand's energy industry (mainly electricity supply and demand) and at the wider economic implications of these effects. Electricity demand is modulated by climate largely through temperature, while electricity supply is modulated largely through rainfall and inflows to the major hydroelectricity‐generating lakes in the South Island. Six climate scenarios are examined with an energy model to determine the change in the demand for energy and the change in the composition of energy supply, especially with regard to the mix of electricity generation. The output from this model is then used as an input to a multi‐industry general equilibrium model of the New Zealand economy.

The modelling demonstrates that while the expected effects of projected climate change on the energy industry over the next two decades are reasonably significant, the flow‐on effects from the energy to the wider economy are negligible, albeit slightly favourable. Modelling of the effects of climate variability, which includes unusually cold years, unusually warm years, and variable precipitation, however, shows that unexpected adverse events do have a measurable economic impact, particularly if wage rates are inflexible. Export industries are particularly disadvantaged by higher energy costs, implying a need for adequate reserve generation capacity. Just how much reserve capacity is optimal is a topic for further research.

Climate change scenarios to 2050 and 2100 show much greater climatic effects than are expected over the next 20 years. These have not been modelled as the types and costs of electricity generation technologies that might become available beyond 20 years are extremely uncertain.