Meridian Energy : submission - Draft advice to inform the strategic direction of the Government’s second emissions reduction plan - June 2023

20 June 2023

Consultation: ERP2

He Pou a Rangi Climate Change Commission

PO Box 24448

Wellington 6142

By email: [e-mail]

2023 Draft advice to inform the strategic direction of the Government's

second emissions reduction plan

Introduction

Meridian's purpose is clean energy for a fairer and healthier world. Meridian is Aotearoa's largest electricity generator producing energy from 100 percent renewable sources - wind, water, and sun. Our hydro stations generate enough electricity to power around 1.4 million homes each year and our wind farms generate enough electricity to power around 152,000 homes each year. Meridian is also a major nationwide retailer through our Meridian and Powershop brands.

Meridian is committed to meeting future energy needs with renewable energy and taking bold action on climate change. Some of our initiatives include:

• construction of a new wind farm (Harapaki in the Hawke's Bay)1
• construction of a grid-scale battery (Ruakākā Energy Park in Northland)2
• a target of bringing seven new large-scale renewable generation projects into operation around Aotearoa in the next seven years3
• a 100% electric light vehicle fleet

1. https://www.meridianenergy.co.nz/power-stations/wind/harapaki
2. https://www.meridianenergy.co.nz/power-stations/ruakaka-energy-park
3. https://www.meridianenergy.co.nz/news-and-events/meridian-energy-targets-seven-large-new-renewable-energy-projects

Meridian Energy Limited	Level 2, 55 Lady Elizabeth Lane	Phone [phone]
	PO Box 10-840	Fax [phone]
	Wellington 6143	www.meridianenergy.co.nz
	New Zealand

• investment in a nationwide network of electric vehicle chargers4
• competitive home EV charging plans5
• supporting our industrial customers to decarbonise process heat through electrification (examples include Mataura Valley Milk, Alliance Group, Meadow Mushrooms, and Woolworks)6
• a proposal to build the world's first large-scale green hydrogen plant in Southland7
• a significant investment in permanent native forests8
• half by 30 - our target to halve gross scope 1, 2 and 3 emissions by the 2030 financial year (over 95% of our emissions are scope 3 emissions from our supply chain)9
• taking a leading role on climate-related financial disclosures since 2019, well in advance of legislation mandating climate-related financial disclosures.10

Meridian strongly supports the work of He Pou a Rangi and sees huge value in independent and robust climate policy advice to government. When the Commission released its first emissions reduction plan advice in 2021, Inaia tonu nei, it concluded that there are achievable, affordable, and acceptable pathways for Aotearoa New Zealand to achieve its emissions reduction goals. Meridian agrees that is still the case. However, the imperative to act with urgency is greater than ever. New Zealand must do its part in the global effort to limit the average temperature increase to 1.5°C above pre-industrial levels. Inaction will only push the burden onto future generations and increase the cost of adaptation.

Meridian and the electricity industry will be at the leading edge of this transformation and will be a key enabler of emissions reductions in Aotearoa. We broadly support the Commission's headline draft recommendations.

We note that this round of advice from the Commission has been framed slightly differently to previous advice and is more focused on the strategic outcomes needed to achieve the second emissions budget and enable future climate goals, leaving policy details up to the Government of the day. While that seems broadly sensible and realistic, Meridian hopes that this does not mean the Commission will shy away from direct criticism of government

1. https://www.meridianenergy.co.nz/ev/zero-charging-network
2. https://www.meridianenergy.co.nz/for-home/ev-plan
3. https://www.meridianenergy.co.nz/business/sustainable-options/process-heat-electrification- programme
4. https://www.meridianenergy.co.nz/news-and-events/meridian-selects-southerngreenhydrogen- partner
5. https://www.meridianenergy.co.nz/community-support/forever-forests
6. https://www.meridianenergy.co.nz/good-energy/environment/half-by-30
7. https://www.meridianenergy.co.nz/about-us/investors/sustainability/climate-disclosures

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Meridian Submission - ERP2 draft advice - 20 June 2023

policy or avoid more specific policy recommendations where current policies appear to be heading in the wrong direction - if not in this advice then in the Commission's monitoring of progress against budgets.

This submission focuses on the sectors and policies where Meridian has experience or expertise, namely:

• gross emissions targets and the role of forestry;
• the emissions trading scheme;
• an equitable transition;
• energy and industry; and
• transport.

Gross emissions targets and the role of forestry

He Pou a Rangi proposes that in the emissions reduction plan for the second budget the Government must:

• commit to a specific level of gross emissions for the second and third emissions budgets no less ambitious than 362 MtCO2e and 322 MtCO2e respectively, and ensure that its policy choices align with delivering this outcome; and
• communicate indicative levels of gross emissions and carbon dioxide removals from forestry out to 2050 and beyond to guide policy development.

Meridian recognizes that Aotearoa is different to most other developed countries because the potential scale of land-based carbon removals via forestry is very large relative to national gross emissions. Government decisions are therefore critical to determine how much to reduce gross emissions instead of using forestry to meet the 2050 net zero target. Meridian agrees with previous analysis by the Commission showing the longer-term risks of too much forestry including:

• the bounce up in emissions after 2050 unless new forests are planted in perpetuity;
• the risk of fires, flood, or other natural disasters releasing carbon into the atmosphere sooner than expected;
• the impact on rural communities of extensive plantation forestry; and
• collapse of emissions prices so that emissions reduction investments do not proceed and ETS revenues (for reallocation to fund complementary policies, equitable transition policies, and adaptation) are greatly reduced.

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Meridian Submission - ERP2 draft advice - 20 June 2023

Meridian therefore agrees that the fundamentals for a successful transition include the prioritisation of gross emissions reductions (rather than relying too heavily on removals). To achieve this, we broadly support the Commission's draft recommendation to make the emissions pricing system consistent with delivering the specific levels of gross emissions for the second and third emissions budgets, and with the 2050 net zero target, by:

• implementing an amended ETS that separates the incentives for gross emissions reductions from those applying to forestry; and
• developing an approach that can provide durable incentives for net carbon dioxide removals by forests through to and beyond 2050.

The Commission has not made specific policy recommendations but instead outlines several options that could be adopted. Those options are similar to government proposals recently released for consultation on 19 June 2023. Of the potential options raised by the Government, Meridian would support policies that change the ETS incentives that apply to forestry, either by:

• restricting the portion of forestry units that emitters can surrender; or
• restricting units earned by forestry e.g. one unit for every two tonnes of carbon dioxide removal; or
• restricting the lifespan of forestry units so they cannot be stockpiled, reducing their value.

However, Meridian's support for such options is subject to the proviso that any restrictions should not apply to the permanent forest category of the ETS, which is simultaneously proposed to be redesigned so that only permanent native forests or forests in transition to native can be registered in the permanent category. This combination of options would retain strong ETS incentives for permanent native and transition forests given the associated biodiversity and social co-benefits and increased resilience as a long-lived carbon sink. At the same time, exotic and plantation forestry would be less incentivised under these options and units from those forests would decrease in value. That would lead to the desired outcomes - ETS unit prices that drive material gross emissions reductions and more indigenous afforestation.

We would not want to see the ETS become purely a forestry tool with any gross emissions reductions instead reliant on complementary policies. Meridian believes that more efficient gross emissions reductions will result if the ETS is used because:

• it is a "polluter pays" framework (as opposed to the taxpayer bearing the cost burden); and

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Meridian Submission - ERP2 draft advice - 20 June 2023

• as stated by the Productivity Commission in the Low-emissionseconomy report:11

"Properly designed and implemented, emissions pricing is a powerful policy instrument to reduce emissions. Emissions pricing provides strong incentives to reduce emissions at least cost. It decentralises decisions to invest, innovate and consume across the economy to people who have the best information about opportunities to lower emissions given their circumstances. An emissions price is also pervasive through the whole economy - shaping resource and investment decisions across all emitting sectors and sources."

The emission trading scheme

Meridian considers the ETS to be the best policy tool to reduce greenhouse gas emissions in New Zealand and to enable the achievement of emissions targets and budgets. However, to be effective, the ETS must operate to limit unit availability over time in line with budgets and send increasingly strong price signals to reduce emissions. Meridian hopes that the Government and businesses will become comfortable with steady, market-driven increases in unit price - consistent with the Commission's advice to date on the price pathway.

In the absence of these increases in unit prices, New Zealand will either:

• not meet its emissions budgets and be off track for the 2050 target; or
• to meet budgets and targets the Government will need to intervene more directly and more drastically in markets, generally at higher cost and greater disruption to the New Zealand economy than a transition based primarily on price signals.

In addition to the forestry and gross emissions-related changes to the ETS discussed above, Meridian also strongly supports the Commission's view that the ETS needs to be correctly calibrated to achieve the desired outcomes - this includes unit volume and price control settings as well as industrial allocation policies.

Meridian strongly agrees that emissions pricing is a powerful and flexible tool for tackling climate change because participants face the costs associated with their emissions while being free to decide how best to make reductions based on their individual circumstances. The ETS also has broad coverage, affecting a much wider range of decisions than would be possible with more targeted policies.

11https://www.productivity.govt.nz/assets/Documents/4e01d69a83/Productivity-Commission_Low-emissions-economy_Final-Report.pdf

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Meridian Submission - ERP2 draft advice - 20 June 2023