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Eye-watering wholesale electricity prices, among the highest in the developed world, and a gas shortfall so severe that central government is struggling to keep hospitals, prisons and schools running – New Zealand is very definitely in the throes of an energy security crisis.
Key elements
- Reversal this year of the oil and gas exploration ban through amendments to the Crown Minerals Act.
- Providing for the importation of liquefied natural gas (LNG), which the Government acknowledges will play a vital role in firming generation and will likely to be needed in the short and mid-term (if not also long-term).
- Easing restrictions on electricity lines companies (distributors) owning generation, with details to be confirmed later this year.
- Ensuring access for gentailers to hydro contingency, to be progressed before winter 2025.
- Reviewing electricity market regulation, detail and scope yet to be revealed.
We focus on two of these changes below, with our thoughts on LNG facilitation to follow.
Removing the oil and gas ban
We expect the reversal of the ban will be accompanied by the removal of the onerous oil and gas decommissioning requirements imposed by the previous Government. The Coalition Government is on record as supporting the alignment of the New Zealand regime with “international best practice” in order to “better balance regulatory burden and risk”.
Specific changes it has indicated would:
- Ensure that the rules around the requirement on permit holders to provide financial securities allow this to be achieved in a way that is cost efficient and “best suits the holder’s circumstances”.
- Restrict trailing liability to the most recent transferor (while useful, this is unlikely to move the dial on encouraging investment in New Zealand oil and gas assets).
- Align post-decommissioning liability with UK and Australian practice with the effect that holders, while remaining liable should any problems arise, will no longer be required to make payments or provide a security in anticipation of difficult-to-quantify future risks.
We ask why this legislation has taken so long and whether it will persuade offshore investors that New Zealand’s oil and gas sector is no longer high risk. With the long-term decisions nature of investments into oil and gas exploration and infrastructure, operators need certainty over a period of decades in relation to investment decisions.
There are also some difficult technical issues to resolve. Chief among these is the design of the financial securities regime with the Ministry of Business, Innovation and Employment (MBIE) yet to finalise the supporting regulations for the previous Government’s Crown Minerals Amendment Act.
Easing of distributor/generator separation
Two obvious ways to achieve this would be either to remove the restrictions on joint ownership in the Electricity Industry Participation Code (Code) or to increase the volume of generation distributors can own or be invested in before separation is triggered. That threshold is currently 50 MW of generation being connected to the relevant distributor’s network.
Easing these restrictions enables a new source of potential investment in generation, but also empowers distributors to use generation more freely as network support, which will help to keep lines costs down over the long-term.
Both would involve changes to the Code. These can be achieved through two processes:
- An amendment with consultation, a process which generally takes a few months and in this case is likely to receive widespread feedback both in support and against, or
- An amendment with urgency, which the Electricity Authority can revert to where it considers this is “in the public interest” but which can be in place for only nine months. After that period, it can be replaced by permanent amendment.
Our view again is that, while this is helpful it is unlikely to be a ‘game-changer’ in terms of substantially increasing generation capacity.
Building generation is expensive and there are very few distributors in New Zealand that would have the availability of capital, and the desire and ability to depart from core business, to make significant difference in generation capacity across the country.
And, while it is positive to see the government responding to the current situation, none of the proposed initiatives address the immediate issue, which is that we have a shortage of fuel this winter and likely next as well.
Keep an eye out for our further thoughts on the introduction of LNG, to be released tomorrow.
