Government announces Energy Package in bid to combat rising power prices

What is in the Energy Package?

The Government has announced a number of initiatives intended to address concerns around investment in generation and structurally higher power prices.

1. Potential future investment in mixed ownership model (MOM) companies

A promising development is the Government’s clarification that the belief the MOM companies have been constrained in their ability to invest in larger generation projects due to the Crown’s perceived unwillingness to participate in equity capital raisings is incorrect. The Minister of Finance has written to Mercury, Meridian and Genesis confirming the Government is open to participating in equity capital raisings by the MOM companies and expects them to seek out and bring forward commercially sound opportunities for new generation and firming capacity that align with its goals for the Government to consider supporting. The announcement has already been welcomed by Mercury, Meridian and Genesis, with Meridian’s chief executive commenting that it represents “the biggest change to our capital investment settings since we were listed in 2013”.

Without support from the Crown or changes to the MOM legislation, three of the sector’s largest players were unable to utilise all of the tools in the capital management toolbox to invest in new generation. The Government’s support should enable the MOM companies to accelerate identified projects and explore more significant investment proposals that might otherwise have been off the table.

2. Commencing a procurement process for a liquid natural gas (LNG) import terminal

New Zealand’s energy challenge isn’t about generation capacity; it’s about fuel, and hence the proposal to explore LNG imports to support firming. At this stage, all the Government is committing to is undertaking an ROI process to “test market interest”. Whether LNG is a feasible long-term solution to New Zealand’s energy shortage remains to be seen. The Government has indicated the next decision point is in December.

Building an LNG terminal is one thing; securing supply – and shipping – is another. Realistically, investment in LNG import infrastructure will likely only be viable with offtake commitments from large gas users. While gas is a critical fuel for electricity generation during dry periods, demand from the power generation sector is intermittent and varies significantly year to year.

Tying New Zealand’s energy market to the international LNG price is also a critical strategic choice that warrants careful consideration.

3. Leveraging Government’s energy demand

The Government already procures gas and electricity through all-of-government contracts. This proposal would go further and use longer-term power purchasing arrangements (PPAs) to underwrite investment in specific generation projects, across a range of technologies and fuels.

A lack of liquidity in the PPA market has been a significant barrier for renewables developers, so this approach has real potential to accelerate development.  Deploying public funds on the demand side may prove more efficient than the supply-side initiatives that have typically dominated reform proposals.

But it is important this initiative does not distort the market for generation investment. Existing market mechanisms are intended to ensure the most efficient projects proceed, influencing project location, technology choice, and scale. The Government will want to ensure the procurement process takes into account the efficiency of competing projects.

4. Removing barriers to renewable development

Most of these initiatives represent work that is already underway or, indeed, well-advanced. Nevertheless, it is good to see the Government reaffirming its commitment to streamlining consent pathways for renewable development, and the announcement includes new details on the expected timing of implementation of those pathways for both onshore and offshore renewables.

5. Improving the efficiency of electricity distribution

Frontier has highlighted the fragmented nature of New Zealand’s distribution sector as a barrier to innovation and efficiency – which is news to no one. The Government, however, has rejected Frontier’s proposal for forced consolidation, likely mindful of Labour’s experience with the Three Waters reforms. Instead, electricity distribution businesses (EDBs) have been asked to report on opportunities for greater standardisation and collaboration, with potential further regulatory action to follow.

The Government also proposes relaxing restrictions on EDB involvement in generation. While this is unlikely to significantly increase generation investment, it will be welcomed by EDBs seeking to use generation for network support or to diversify their business to support affordable delivery of their core lines services.

6. Strengthening the market

Several commentators have called for transformational change in the electricity market. However, Frontier, supported by consultancy firm NERA and the Government, maintains that that the basic market structure is fit for purpose, although there is scope for improvement.

The Government proposes to:

• develop tools to mitigate sovereign risk, such as indemnities, co-investment, public-private partnerships, and other procurement contracts,
• strengthen the powers and processes of the Electricity Authority (with details yet to be determined),
• enhance disclosure requirements to improve transparency in the gas and electricity markets, and
• address any “residual” dry year risk not otherwise covered by the Package, though what this means in practice is still be worked out.

What’s not in the Energy Package?

The recommendations the Government has declined to adopt tell us more about their diagnosis of the problem and their preferred strategy. The Government rejected a number of Frontier’s recommendations, most notably: 

• creating a new Crown entity (“NewCo”) to invest in and manage thermal fuel and firming capacity. Frontier saw this as a necessary solution to market failure, but other experts engaged to peer review Frontier’s report warned of political risks and inefficiency associated with this proposal,
• removing electricity from the Emissions Trading Scheme (ETS). Frontier argued its inclusion was of limited environmental value, but both peer reviewers disagreed, (unsurprising given this Government views a stable ETS as its primary climate change policy lever),
• divesting Crown shareholdings in Genesis, Meridian, and Mercury, on the basis there is insufficient evidence this would improve investment incentives. Instead, the Government will lift capital constraints to achieve this,
• amalgamating the Electricity Authority and the Gas Industry Company. The Government rejected this consolidation, considering it potentially destabilising at a critical time. Instead, it will focus on improving transparency and accelerating rulemaking within existing structures, and
• forcing amalgamation of the 29 electricity distribution businesses into five “super distributors”. The Government rejected this recommendation on the basis it would be expensive, complex, and likely to face strong opposition from communities.

Frontier presented its principal recommendation – establishing NewCo – as essential to addressing the underlying issues behind New Zealand’s energy security and affordability crisis. So it is striking that, despite considerable time and investment in the review, the Government has dismissed the primary solution put forward by its appointed expert. That decision, and other points of difference with Frontier, indicate the Government’s overarching approach to the electricity sector and its strategy for energy security and affordability.

Frontier argues that policy instability over successive governments has stifled investment in generation – particularly in the firming capacity needed for an increasingly renewable system. Frontier argues that “the core problem is one that has been caused by Government, and so it requires a solution by Government as the private sector has no means by which they can address this problem”. That solution is for the Crown to directly intervene and invest in thermal generation capacity with the goal of underwriting the sourcing of fuel.

That is an ambitious proposal, fraught with political and market risks, as the peer reviewers explained. The Government’s preferred solutions are to explore LNG, strengthen the System Operator’s role in monitoring and managing security of supply, and to implement (currently unspecified) regulatory changes to address dry year risk. The Government does recognise the risks associated with policy instability and will develop options to reduce sovereign risk. Those options would aim to pre-commit future governments to continue supporting projects commenced under this Government. But they would not prevent, for example, a reinvigoration of the Onslow scheme, which Frontier identified as a key reason for depressed generation investment in recent years.

The Government’s response to Frontier’s proposals tells us two important things about this Government’s strategy for energy security and affordability.

First, the Government remains committed to the view that the market is the primary tool for delivering timely investment to meet New Zealanders’ needs. As stated in the October 2024 Government Policy Statement, “the Government’s role is to ensure clear and consistent regulatory settings, reflected in market rules with robust compliance monitoring and enforcement, that enable an efficient market anchored by accurate price signals, and effective risk management tools and competition”. It also emphasised that “the Government’s role is also to avoid policy decisions that would have the effect of chilling or crowding out private investment”. This Energy Package is consistent with that fundamental policy setting. But for those commentators who believe the market has failed, this will look like doubling down in the face of a crisis.

Second, the commitment to markets, competition, and private investment reflects the reality that current fiscal settings do not leave much wriggle room for publicly funded solutions. Frontier’s proposed NewCo solution is ambitious, complex, and risky – but, above all, expensive. While Frontier argues NewCo would be sustainable and self-funding, it would nonetheless require the Government to put capital at risk at a time of many competing calls on the public purse. Crown ownership of thermal generation would also be grabbing the tiger by the tail: it would likely crowd out private investment, effectively binding the Government to long-term involvement in the sector.

What’s next?

Some of these initiatives are already in play. The Government is well advanced on policy changes to facilitate renewables development. The Minister has already written to the Chairs of the MOM companies indicating the Crown’s willingness to inject equity.

Market soundings on leveraging the Government’s energy demand and procuring LNG will shortly commence.

The detail of the remaining initiatives is still to be developed, but the Government has committed to moving quickly to get the pieces into place to support secure and affordable energy for New Zealanders.

Our thanks to Brooke Kinajil-Moran for her assistance preparing this article.