The reason is two generations of bold investment: last century’s hydro and this century’s quiet hero, geothermal. From less than 6% of the grid, geothermal is now more than 20%, running 24/7 regardless of weather or time of day. The foresight and investment of developers from the Tūaropaki Trust and the Tauhara North #2 Trust to Top Energy, Ngāti Tūwharetoa ki Kawerau, Contact Energy, Mercury and others deserves recognition.
Geothermal’s rise displaced 24/7 coal-fired generation at Huntly; on average, coal is now supplying less than 4% of our electricity. That should be the end of coal, right? No. Coal has become the essential and only reliable option for drought insurance. The South Island’s rainfall and snowmelt remain fickle; in dry years the deficit can be massive. There’s a one-in-four chance drought requires additional back-up energy equivalent to half the country’s hydro lakes and a one-in-100 chance it requires additional back-up energy equivalent to the entire hydro storage. Covering the one-in-four scenario with coal means emissions comparable to half of Air New Zealand’s annual total. Unlike international flights, the power sector pays for its emissions through the Emissions Trading Scheme (ETS).
Gas once shouldered a decent part of this firming role, running steadily in response to drought to support the lakes heading into winter. But flexible gas output is shrinking fast. And batteries? Try 350 million Tesla Powerwalls sitting fully charged and waiting for up to half a year. Or solar? You’d need 10,000,000kW of excess capacity. More than the entire grid’s peak capacity today. Coal may not be wanted, but from time to time we need it, because we’re so renewable.
Electricity prices matter. They flow into every home budget and business cost and today they’re unnecessarily high. This isn’t about bad actors manipulating markets (with one exception: the previous Government’s gas ban of 2018). Given the greater role gas has previously played in New Zealand’s economy and wellbeing, it is unfortunate that the policy contradiction of the gas ban with reducing poverty was not addressed.
Pricing outcomes often relate to the unintended consequences of interacting systems and situations. Left unchecked, these issues will undermine the affordability essential for growth and sustainability. With a clear understanding of why pricing is elevated, policy settings can be carefully tweaked without distorting the market-based signals that make renewable development investable.
Electricity doesn’t slow down when it’s scarce, like traffic, broadband or airport queues; it simply stops. The consequences of an unreliable system are catastrophic. Transpower’s Security of Supply Outlook report warns New Zealand is already well outside a reasonable risk profile for the next decade – and that’s assuming billions of dollars in new generation arrive ahead of schedule and projects get through the RMA consenting swamp. In 2035, three well-aged Huntly units will hit 50 years of service and be retired, if they last that long. They are now the only plants capable of providing drought insurance.
Gas, once a saviour, is itself fading. Forecasts by the Ministry of Business, Innovation and Employment (MBIE) show supply will be virtually gone within a decade unless rescued. It could be saved, but only with unprecedented political maturity across Parliament, inviting the sector back with apologies and up to a billion dollars of non-recourse drilling loans to extend fields, demonstrating our national commitment. Without such measures, the sector will be gone and with it, a pillar of security not just for electricity but for the wider economy.
Power crises end political careers. They build slowly, simmer out of sight, then one cold night, the lights don’t come on. Every parliamentarian (Government and Opposition) should be losing sleep over this. Any politician who won’t acknowledge the security issues, be honest about the drivers and mature about the responses should be unelectable.
Even if the immediate issues seem somewhat technical, the big picture in front of us is clear: electricity consumption will rise – transport electrification, commercial heat, fuel-switching away from gas. Gas availability to the electricity sector will most likely keep declining for peaking and firming. Grid-scale wind and solar will continue to be built but won’t solve drought risk or peaking needs. Distributed solar and batteries will grow but remain relatively small in the overall mix.
No volume of Google searches or artificial intelligence (AI) prompts will change these fundamentals. We need policies that must work now, not that might help later. Here are four immediate recommendations, designed against the problem definitions above, to support outcomes for decades.
1) Winter security, without question
New Zealand should never wonder whether we’ll “make it through winter”. Anxiety alone drives up wholesale prices. Every January, Huntly must hold on site at least half the equivalent of national hydro storage in reserve. Fund this insurance via the Electricity Authority levy, sharing a very small cost across all users (about 20 cents per month for a household). Recent multi-generator commitments are helpful but structurally insufficient. Complement that stored fuel with new, reliable generation: underwritten, project-financed, high-efficiency thermal turbines, flexible enough to run on coal, gas, black pellets, or blended biomass. Put 500MW at Huntly and 500MW at Marsden to diversify location risk. National insurance shouldn’t sit on one site. A thermal plant that once stood at Marsden from the 1970s was sold for removal, unused, in 2012. Solid fuels are best delivered by train or ship, not trucks down the Auckland motorway. The Marsden rail spur would help.
2) Fix the ETS distortion
The ETS rightly incentivises low-carbon options. But there is no alternative for drought insurance, which means coal generation simply raises consumer bills without changing outcomes. At current settings, coal is $65/MWh more expensive solely because of the ETS. In residential power speak, that is 6.5 cents per unit, and each household uses about 8000 units per year. Align the ETS levy on coal with that for large gas generation units to reduce expected wholesale and retail prices.
3) Flatten demand peaks
As gas declines and wind and solar rise, peak demand becomes the enemy. A single cold winter evening can strain the grid, especially if something trips. Stronger price signals are needed. Distribution networks should introduce very wide time-of-use pricing for retailers, who can then pass incentives through to households. Just 4% of homes running clothes dryers equals the load of a 200MW power station. Price signals can avoid building one – and available capacity is best used to enable more wind and solar.
4) Maximise distributed generation
Rooftop solar should grow without subsidies. Allow customers to sell surplus power to a company other than their retailer; export prices will rise to real market levels, unlocking investment. Pair that with cheap green loans from banks and distributed generation (and possible storage) will expand responsibly.
New Zealand needs urgent correction on the trilemma of trade-offs. Sustainability is strong, but security and pricing are in jeopardy. Unless urgent, multi-partisan, pragmatic policies prevail, we will stumble into shortages and further elevation of prices. Our national journey will be seriously impaired.
If anyone believes we can discard thermal fuels for drought insurance when there are no credible alternatives, know that voting for such policies exacerbates misery for those who can least afford it. And that, New Zealand, is unfair and unkind.
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