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Watt’s up? New Zealand’s energy policy overhaul
The Government has announced a comprehensive energy reform package aimed at securing the country’s future energy supply by addressing weaknesses in the current electricity and gas markets.
The Government has rejected the more radical changes recommended in an electricity market review by Frontier Economics and embraced more targeted reforms aimed at addressing dry year vulnerability, declining gas supply and underinvestment in firming capacity.
The Government is focused on encouraging investment in the electricity sector to increase capacity, provide long-term reliability and firm up consumer confidence.
Background
- The New Zealand electricity market is heavily reliant on hydro generation and so is vulnerable to dry year conditions, leading to price volatility and security of supply risk.
- The average wholesale electricity price has more than doubled since the gas supply shocks in 2018, and contracts now include a $30-50/MWh risk premium due to the system's exposure to dry year price spikes. Additionally, domestic gas production is forecast to fall nearly 50% below projections made just three years ago, exacerbating concerns over energy security.
- The Frontier Economics review found that the market alone will not deliver sufficient firming capacity, as high upfront costs, uncertain returns, and policy risks deter investment in new thermal generation plants.
What the Government is doing
- Liquefied Natural Gas (LNG) import facility: The Government plans to procure an LNG import facility to ensure a reliable fuel supply during dry years. This was not one of the Frontier Economics recommendations and is a separate response to the issue of dry year risk.
- Capital investment and funding support: The Government plans to lift capital restrictions on its investment in the gentailers to encourage new generation projects. This is in response to Frontier Economics’ finding that the gentailers are limited in their ability to raise equity capital to invest in large-scale projects.
- Leveraging purchasing power and increasing investment: In response to the issue that investors are delaying investment in capacity projects due to policy risk, the Government intends to leverage its purchasing power through long-term contracts. It is hoped this will accelerate new energy projects by providing revenue certainty to investors. In addition, the Government intends to encourage investment in long-term firming through the use of indemnities for policy changes, co-investment in the form of equity or loans, and public-private partnerships.
- Renewable energy growth: The Government aims to double New Zealand’s renewable energy by 2050 through renewable energy targets and regulatory reforms, including fast-track approvals and offshore wind legislation.
- Market regulation: Another concern raised in the Frontier Economics report is that the Electricity Authority lacks the power to effectively regulate electricity markets, which may be limiting investment. The government intends to strengthen the Electricity Authority's enforcement powers and improve market transparency to ensure a fair, competitive, and reliable electricity markets. Additionally, the Government will work on designing a new regulatory framework between now and Q1 2026.
- Market information and transparency: The Government intends to enhance the gas information framework to provide timely and transparent data on gas reserves and production. This will include developing a robust information framework, ensuring accurate data collection, and making information readily available to market participants.
What the Government isn’t doing
The Government has not taken up the more radical structural changes recommended by Frontier Economics. These were:
- creating a new Crown entity to take responsibility for securing thermal fuel and firming capacity;
- divesting Crown shareholdings in Genesis, Meridian, and Mercury;
- removing electricity from the Emissions Trading Scheme;
- amalgamating the Electricity Authority and the Gas Industry Company; and
- amalgamating the 29 electricity distribution businesses into five super distributors.
Our thoughts
These reforms are a pragmatic attempt to address the weaknesses in the New Zealand electricity market, in particular its vulnerability to dry year conditions. The Government has chosen to focus on stability and credibility to encourage investment in long-term solutions.
This announcement comes a day after the Commerce Commission published its draft determination to approve the Huntly Power firming arrangements between the gentailers, which is shaping as an important tool for managing dry year risk in the short to medium term.
There is much more to come. We will be keeping an eye on further developments.
Get in touch
If you have any questions about this article, please get in touch with one of our experts.
Special thanks to Grace Windhager for her assistance in writing this article.
