There’s often an energy shortage at this time of year if the early winter is dry and lake levels in the hydro dams fall below capacity. The opposition blames the government for its failure to allocate adequate rainfall in the Southern Alps and the government responds by scolding the public for spending too long in the shower. But then spring comes, the rain falls, the crisis is averted and people fall in love, marry – and, yes, take long showers – and later die.
This year, in our own exclusive Olympics of national decline, the energy shortage has surged out of the gates in a heroic attempt to compete against the crises in health, education, infrastructure, trade and cost of living.
A cold snap in May brought the nation dangerously close to widespread blackouts. Recent price fluctuations in the wholesale electricity market are threatening manufacturers, jobs, and the so-fragile-it-might-not-be-real economic recovery.
Just under 60% of our electricity comes from hydro and most of the rest comes from a mix of geothermal, wind, coal and gas. Hydro and wind are down this year and the nation’s gas reserves are running out faster than expected.
National blames the previous government’s oil and gas exploration ban for the shortage. New Zealand First blames the high cost of energy on profiteering energy companies and the Electricity Authority, the notoriously ineffective regulatory agency memorably described by Resources Minister Shane Jones as being as useless “as a chocolate teapot”. Finance Minister Nicola Willis has requested an urgent briefing from Treasury.
Methanex, the nation’s largest consumer of natural gas, has temporarily closed its production plant because it is more profitable to on-sell its contracted gas supply to the energy companies than to manufacture methanol.
Energy insecurities
Economists and industry experts have long warned that the dysfunctional structure of our electricity market incentivises energy insecurity as a business strategy. The sector is dominated by Meridian, Contact, Genesis and Mercury, which generate nearly 90% of the nation’s electricity, then retails it to industry and households.
This arrangement rewards them for under-investing in their own capacity, because restricting supply inflates prices. A 2023 report found that over a 10-year period, the power companies paid out dividends of $10.8 billion while investing only $4.5b into new projects. This makes our energy infrastructure dangerously fragile – because fragility is good for business. Household rates have run ahead of inflation, so the government subsidises consumption via the winter energy payment, spending half a billion dollars a year to help superannuitants and low-income households keep the heater on.
Industrial costs have surged: major manufacturers have described power prices jumping from 10% to 40% of costs in a few months.
Government benefits
The primary beneficiary of this deliberately dysfunctional framework is the government. It’s the majority shareholder of Meridian, Genesis and Mercury, so it makes a tidy income from all this economic vandalism – as do the minority shareholders (alongside the owners of Contact Energy, whose chief executive has been warning politicians sternly not to interfere in the electricity market).
So, we should be sceptical of politicians who affect outrage at the behaviour of companies they control and the failure of regulatory agencies whose legislation they write and whose boards they appoint.
Jacinda Ardern’s oil and gas ban is not the cause of the current crisis: it was just a public relations stunt, and its impact on current prices is minimal. Since 2020, the industry has spent more than a billion dollars looking for new reserves under existing exploration permits with little to show for it. We are running out of gas, both metaphorically and literally.
The government will interfere in the electricity market. If it doesn’t, it will risk serious blackouts next winter and it is already suffering reputational damage.
Prime Minister Christopher Luxon and his cabinet are busy flying around the world announcing that “New Zealand is open for business”, so it is suboptimal for the nation’s major manufacturers to announce they’re closing factories because of price gouging in the wholesale energy market.
And it’s only a matter of time before those price increases flow into the household sector, prompting rage from voters as they struggle to absorb savage increases in insurance, rates and power simultaneously. The torrent of people leaving the country will only increase.
In the short term, Energy Minister Simeon Brown is looking at importing liquid gas, which will require construction of an LPG terminal, a non-trivial piece of infrastructure that it will need to build very quickly.
Renewables needed
Long term, the most desirable model is a distributed renewables network – a combination of geothermal, wind farms, rooftop solar (currently generating more than 11% of Australia’s electricity) and green hydrogen – using the southern lakes for backup and peak power.
Infrastructure Minister Chris Bishop insists the government’s fast-track approval scheme will allow rapid construction of energy projects that were either rejected under the Resource Management Act process or delayed for years in litigation and consent applications. He takes savage glee in pointing out that it’s often environmental groups that prevent construction of wind turbines and green hydrogen plants.
Reducing living costs and growing the economy are supposed to be among the government’s top priorities. It has also committed to achieving the nation’s climate change targets, albeit with less enthusiasm.
The transition to a competitive, low-carbon energy market would help deliver all three of these goals. Like all positive change in politics, it will be fiercely opposed by the dominant industry players who benefit from the broken status quo. They’ll probably lose this battle. Any government delivering a winter of blackouts would be annihilated in the subsequent election – but it might be wise to stock up on firewood and candles just in case.
