New Zealand’s electricity market is in crisis, with soaring wholesale prices driven by a severe gas shortage and dry weather.
The surge in energy costs is threatening to push up household bills and has already forced some businesses to close.
The energy crisis quickly turned into a political crisis.
Energy Minister Simeon Brown blamed Labour’s exploration ban for the gas shortage and said he was considering importing liquefied natural gas."
NZ First’s Shane Jones, an associate energy minister, told RNZ that big electricity companies were “profiteering” from the shortage and that government intervention was possible.
The Treasury has been asked to produce an urgent briefing for Finance Minister Nicola Willis explaining why prices spiked above $800 a megawatt-hour and what could be done about it.
Pan Pac Forest Products, one firm that had to halt operations, said the government should reassess the market structure, which didn’t seem truly competitive.
Gentailer power
The four big companies which dominate New Zealand’s electricity market—Meridian, Contact, Genesis, and Mercury—are ‘gentailers’ which both generate and sell electricity.
Some critics say they use their market power to keep wholesale prices high and use generation profits to subsidise their retail businesses. This makes it difficult for independent retailers to compete.
An internal Commerce Commission memo, released under the OIA, said the “structural framework” that would make this behaviour possible was present in the market.
However, the commission didn’t open an investigation to determine whether it was happening. It said the Electricity Authority was best placed to look at the issue.
In his interview with RNZ, Shane Jones described the regulator as a “chocolate teapot,” which suggests he doesn’t have much confidence in its ability. Neither do some participants.
Electricity Authority chief executive Sarah Gillies released a statement on Friday evening, saying the regulator was stepping up its surveillance of gentailers and other market players.
She said fuel shortages could “only explain so much”. The regulator has asked for more data than usual and planned to publish a new analysis next week.
“We will be testing to see if the prices are justifiable in the circumstances, which is why we are digging deeper and making the companies give us more information, so everyone can see exactly who is making what and to shine a light on the current situation”.
New Zealand was at a 'tricky stage' in its transition to a renewable energy system, with the dry winter and gas shortage putting immediate pressure on the wholesale market.
“It is not acceptable for consumers, large and small, to be carrying the full cost of the transition for the next couple of years until new generation comes online,” she said.
Going bust
Dry winters and limited gas supplies should not come as a surprise to an electricity sector that has long known about the need to scale up renewable generation capacity.
Despite this, new projects have been slow to be built. This may be because the sector is incentivised to build only just enough electricity supply to meet demand and not more.
Each new unit of generation added to the grid reduces the price paid for every other unit already in the market. Energy companies with large amounts of generation capacity do not want to oversupply the market and drive down prices.
It’s like playing blackjack. They want to hit 21 without going bust.
Margaret Cooney, the chief operating officer at independent retailer Octopus Energy, said the price signal had been saying “invest, invest, invest” for a long time, but the market had been slow to respond with additional supply.
“The Government probably has no choice other than to import LNG in the short term. Then the goal should be to bring forward new development quickly, so that high energy prices don’t cripple the economy,” she said.
Small retailers like Octopus would like more electricity generation and lower prices to offer customers but feel the big players make it difficult. For example, they don’t offer long-term supply contracts that would support a new entrant generator entering the market.
They also don’t have to internalise the risk of electricity shortages, and so are more worried about the risk of oversupply.
Trust the process
In a recent note to clients, equity analysts at Jarden said elevated wholesale prices were likely to hang around until 2028 when additional supply catches up with forecast demand.
But they worried the next two years of “super-elevated” wholesale prices could put pressure on the industry to commit to even more capacity and push the market into oversupply.
“Building with the hope that your competitors show constraint is never a great strategy and adding large quantities in one go is an even higher risk strategy,” they wrote.
Equity analysts at Forsyth Barr said higher wholesale prices didn’t boost gentailers’ earnings in the short term, as most electricity was sold at fixed prices. Any benefit would only appear in earnings reports when contracts were renewed at higher prices, likely in 2026 and 2027.
However, prolonged high prices might prompt regulators and politicians to start asking whether the system was broken and in need of reform.
“In our view the answer to both questions is no, the current pricing is a market response to an extreme fuel shortfall that the market has never seen before,” Forsyth Barr wrote.
That may be so, but with businesses closing and households facing another cost-of-living increase, government ministers may be reluctant to gamble on inaction.
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