The energy shortage is forcing manufacturers to cut production to keep power flowing to households. Will more renewable electricity fix the problem for the future?
Rob Allen has worked for some of New Zealand’s biggest energy and telecommunications sector organisations. He is a consultant with more than 30 years’ experience in public policy, regulatory advisory and management roles.
OPINION
The electricity industry feels like it is at war with itself.
If the Governmentor media says there’s a crisis, one of the gentailers will say there isn’t.
If the Minister of Resources says there is “profiteering” there will be denials.
The Minister of Energy and Minister of Resources may agree competition is a problem but some of the major players claim the opposite.
If a major electricity user shuts down, they are told it’s their own fault. The same goes for independent retailers, some of whom are no longer taking on new customers due to soaring electricity prices.
We got lucky with benign weather last year, but 2024 showed we can’t rely on good fortune to get us through winter. Things are likely to remain tight over the next few years.
Market or weather conditions can only go so far in explaining why prices have been higher and supply has been tight.
Accepting that this is just the way things are is tantamount to resigning ourselves to a status quo that could have been avoided had the biggest players in the market chosen to invest more.
The electricity market should be the engine room for economic growth not a handbrake. We need more investment in energy generation if we are to meet our electricity needs.
The Minister of Energy’s view is “we haven’t seen as much investment back into generation as we should have from the gentailers”. The gentailers are Contact, Genesis, Mercury and Meridian who supply about 90 per cent of electricity in the market.
In the past 15 years new generation hasn’t kept up with decommissioning of thermal plants. The new generation has tended to be wind turbines and, more recently, solar which is great but small and piecemeal.
A power pylon toppled over at Glorit near the Kaipara Harbour in June. Photo /Michael Craig
The Electricity Authority has been concerned about committed investment not being enough to replace thermal, and about how slowly generators are investing in response to high electricity prices. According to Electricity Authority data, some generation sites have sat idle for years even after being consented.
The Electricity Retailers Association, exclusively comprising the gentailers, has stipulated that there’s around $6 billion set aside for investment in new generation by 2030.
That number sounds impressive, but it’s worth remembering Meridian, Contact, Genesis and Mercury pulled in combined earnings of more than $3 billion in just the last year from their wholesale generation businesses.
The point here is that more should be done.
Electricity Networks Aotearoa, the industry-body for all local electricity distributors, suggests “a failure of the market to function effectively” and if the market was working properly elevated electricity prices “would spur a material increase in generation investment which in turn would lead to a decline in wholesale prices”.
Things start to look a bit rosier with the uplift in generation options currently being explored but Transpower warns “international experience is typically that only around 20% of proposed projects are ultimately developed”.
New Zealand doesn’t have a proven track record of generation investment in recent years to be sure about what will happen.
The promise of a $6 billion investment might sound good now, but there’s little guarantee of this actually coming to fruition down the line or when.
The Government is progressing reforms to make it easier and cheaper to invest in generation. These include replacing the Resource Management Act, fast-track consenting, a bill to help offshore wind, and winding back regulatory barriers to local electricity distributor investment.
This will help but more changes are needed.
Relying on a few large suppliers hasn’t worked well in groceries, the petrol market or banking and isn’t working well for electricity.
The country needs a growing diversity of electricity generators if we want more new generation when and where it is needed.
The Government has signalled there will be a market review next year. The focus on whether the market’s regulatory regime is delivering competitive, affordable prices is needed to put the sector back on track.
The main independent electricity retailers want gentailers to split their wholesale and retail businesses in the way Chorus and Manawa have.
So do NZ First and the Green Party. The chair of the Commerce Commission has been clear independent suppliers need access to hedge products from gentailers on fair terms. The Minister of Energy has said he understands non-discrimination rules have worked well in the UK.
None of these reforms are new. They have been used to regulate Chorus in telecommunications and elsewhere in the OECD. We’ve done this before and it allowed strong competitors like 2degrees to emerge and put downward pressure on telco prices.
Whatever the Government does, not everyone will be happy.
During the last major reforms in the 1990s, ECNZ tried to use scaremongering that its break-up into Genesis, Mercury and Meridian could result in the lights going out.
ECNZ even complained about what would happen to its art collection. The lights didn’t go out and while current settings aren’t perfect no one would want to go back to how ECNZ tried to manage the dry year in 1992.
Thirty years later the switch has flipped, and the conversation needs to be about what reforms are needed to keep the lights on and the energy transition.
The cycle of sustained high prices, ever-increasing record profits, and tight supply conditions isn’t good for the electricity sector or the sustainability of current market settings. Nor is it good for exporters, households and businesses.
