Sunday, May 26, 2024

Fuel markets to become more resilient, competitive

The Government says it is strengthening the nation’s fuel sector through a suite of initiatives to increase supply resilience and sustainability, and to encourage more competition.

Energy and Resources Minister, Megan Woods says the improvements will pave the way for a more stable, low-emissions fuel supply, greater choices for consumers, and a more competitive wholesale fuel market with the power for the Commerce Commission to regulate prices, if required.

“We know many households are struggling with the increased cost of living, so we are pulling back on any potential extra costs on consumers as a result of the biofuels obligation,” said Dr Woods.

“This supports a range of actions we have taken to ease the pressure on families, alongside the extension to our fuel tax cut, reduced road user charges and half price public transport until January 2023.

“We are improving New Zealand’s fuel supply resilience with onshore fuel stocks obligations for the fuel sector as well as Government-procured diesel storage,” she said.

The Government has agreed to a package of actions to ensure sufficient fuel stocks are held onshore to further improve our fuel supply resilience and economic security.

“Having a sufficient supply of onshore fuel stocks will help shield us from major disruptions to international oil and fuel markets, natural disasters and infrastructure failures. And while the risk of a major disruption to our fuel supply is very low, the impacts would be significant and felt across the economy,” Minister Woods said.

Fuel importers and wholesalers with bulk storage facilities will be required to hold minimum levels of onshore stocks of petrol, jet fuel, and diesel. Minimum fuel stockholding levels for them will equate to approximately 28, 24 and 21 days’ worth of petrol, jet fuel and diesel respectively, the Minister said.

“The Government will also procure additional onshore storage of reserve diesel stocks of at least 70 million litres of diesel, providing approximately seven days’ cover.”

“The focus on diesel for additional stockholding reflects the importance of diesel for the operation of critical services, such as emergency services and deliveries of food and essential goods. Transport fuels currently underpin the day-to-day running of our economy and it’s vital we manage our fuel resilience well.

“New Zealand’s fuel supply has always been reliant on imports, as the refinery was configured to refine imported heavier crude oil. The difference now is that we no longer import crude oil, instead we import refined fuel products from a range of overseas refineries. The additional onshore storage of diesel stocks will also boost our contingency supply,” she said

An independent review of national fuel security was completed when New Zealand’s refinery signalled it would transition to an import-only terminal for storing fully refined fuels.

The review found the refinery’s closure improved the overall resilience of our fuel supply chain in the sense that we no longer face the risk of a single point of failure associated with an unplanned refinery outage, and fuel companies now deliver fuels to New Zealand in more frequent shipments from more diverse sources.

“While we recognise fossil fuels will continue to play an important role in our transport system for some time, we are setting in motion other actions to help us reach our emissions budgets,” said Minister Woods.

“The Sustainable Biofuels Obligation has a significant role in supporting this and delivering the Government’s Emissions Reduction Plan (ERP); it will prevent around one million tonnes of emissions from cars, trucks, trains and ships over the first two years and up to nine million tonnes by 2035.

“We are moving the start date for the obligation for fuel wholesalers to deploy biofuels into their fuel supply, out to 1 April 2024 instead of next year, to allow the sector more time to prepare. This will allow wholesalers to get the necessary infrastructure in place, and to source high quality feedstocks.

“It’s also reducing any extra potential costs consumers could face; while biofuels will account for a very small part of the overall fuel price, we recognise that motorists don’t need any extra costs in the current cost of living crisis,” she said.

Fuel wholesalers will need to meet emissions intensity reduction targets of 2.4% for 2024 and 3.5% for 2025. Provisional targets will be set for 2026 and beyond, increasing up to 9.0% by 2035, with adjustments on the intensity targets in the intervening years to make up for the year’s delay in implementation.

“Biofuels are a great way to reduce emissions without replacing existing ICE vehicles. Biofuels alone won’t get us to net zero, but they are an important part of the toolkit to help us manage a fair, inclusive and equitable transition to a low-emissions future,” Minister Woods said.

The Government has also agreed to give the Commerce Commission the power to step in and set fair prices if needed, to encourage more competitive wholesale pricing and bed in the changes we have already made, the Minister said.

A terminal gate pricing regime was one of several changes brought in under the Fuel Industry Act 2020 to improve competition at the wholesale level and increase the transparency in fuel markets. The terminal gate pricing regime requires wholesale suppliers that sell from terminals to post a daily spot wholesale price (the terminal gate price). If requested, wholesale suppliers must supply the retailer with the requested amount at the terminal gate price. This improves access to the wholesale market and provides for transparent wholesale prices, which makes it easier for new participants to enter the market and for existing fuel sellers to expand into other regions.

The regulatory backstop measure was recommended by the Commerce Commission in 2019 as part of its fuel markets study which prompted the Act.

“While the Act is already facilitating a more competitive wholesale fuel market, there are some outstanding risks to the success of the terminal gate pricing regime,” Dr Woods said.

“For example, the increased price transparency helps competition, but there’s a risk that wholesalers could co-ordinate prices, due to the greater wholesale price transparency, unless there are some disincentives built into the system.

“Following consultation with the sector in 2020 we are now pushing through on development of the backstop regime, which would allow for terminal gate prices of one or more wholesale suppliers to be price regulated if excessive terminal gate prices are found to be offered. It is expected to come into effect in mid-2023.

“This suite of measures strengthens our fuel system to make it more secure, sustainable and affordable for all New Zealanders,” Minister Woods said.

Latest Articles