At the heart of Wednesday’s energy announcements was an admission that market forces were failing to provide a secure electricity supply that can manage years with low rainfall.
It is true, this problem was exacerbated by the Labour Government's ban on oil and gas exploration (which has now been lifted) but it isn’t the only cause.
Frontier Economics found a fundamental market failure was limiting the incentive for electricity companies to build power plants that provided supply during dry years.
“The key problem is that, given the size of the New Zealand electricity market, under the current market design, investors struggle to capture sufficient returns for investment in assets to address dry year risk and, to a lesser extent, firming,” it wrote in its report.
“This is because competitors, and industrial customers, can free-ride on the investment made by someone else that has the effect of suppressing prices.”
Added on-demand capacity reduces risk of scarcity and therefore prices for all energy users across the board. Those who do not make the investment benefit alongside those who do.
“This creates an underinvestment problem, as private entities have little incentive to build assets that may be rarely used, and so have limited revenue opportunities, but are essential during periods of high supply risk,” Frontier said.
The report said the main obstacles were shareholders’ reluctance to fund new fossil-fuel plants and the risk that climate policies could wipe out their value. But both problems are intensified by freeriders and a shortage of fuel supplies.
Investors don’t want to pay for an asset that's expensive to run and could end up sitting mostly idle as the grid bathes in cheap (or legally required) renewable power. Oil drilling firms are unlikely to start a new field just to supply a little spurt of gas in occasional dry years.
It is a problem that needs solving. The Ministry of Business, Innovation & Employment said the risk of high prices in a dry year added $30 to $50 per megawatt hour to electricity futures contracts, equivalent to about $200 or $300 a year on the average household bill.
With the market unwilling to take action, it falls to the taxpayer to fix it. So the Crown has promised to use a chunk of its limited capital allowance to provide energy security.
Literal national giveaways (LNG)
On Wednesday, the Coalition announced it would look at building a liquified natural gas (LNG) import facility and told state-owned electricity companies it would fund a capital raise for energy security projects.
Imported LNG would help to solve the fuel scarcity problem. It could take the form of a billion-dollar offshore terminal, or a smaller onshore option for a few hundred million dollars.
The latter would only cover some of the dry-year energy needs but it could complement the coal boiler in Huntly and whatever domestic natural gas supply was available.
But it would be expensive energy and only economical to use in moments of tight supply.
A year ago, the Coalition asked the energy industry to organise its own LNG terminal with some regulatory help but it was unable to make it stack up commercially.
MBIE will also put out a broader request to the industry for other investment options which could provide energy security in dry years.
Labour had planned to build a pumped-hydro scheme (essentially a water-based battery) but opponents argued it would be too expensive and also discourage private sector investment.
The Coalition scrapped further planning of the scheme, which was estimated to cost up to $15 billion, but some private investors have reportedly been looking at reviving the project.
Another option might be to build more solar and wind, allowing existing hydro dams to save more water for dry winters. But lake storage is limited and heavy rain is often spilled in the wet months.
Whatever gets built, someone has to cover the cost. While the Crown is prepared to underwrite an LNG import terminal, it would prefer the electricity sector to invest itself.
Capital raises allowed
To this end, Finance Minister Nicola Willis has offered to inject capital into state-owned electricity firms if they use it on projects which support energy security.
Frontier Economics said in its report these firms had avoided raising equity capital because they believed the Crown would refuse to take part, effectively vetoing any attempt.
Instead, they have used corporate bonds to finance developments. Bonds are usually cheaper for short-term funding, but equity is better for long-term projects where returns are uncertain or a long way off.
Shares in Meridian Energy jumped 4.7% following the announcement, adding $685 million to its market valuation, suggesting investors saw the energy policies as good news.
Chief executive Mike Roan said having the Crown willing to support a capital raise would help to bring forward investment in new flexible electricity generation.
“This is bold. It’s the biggest change to our capital investment settings since we were listed in 2013,” he said in a statement.
“This will add even greater momentum to our development pipeline, and building new generation is the best way to improve energy security and affordability.”
Genesis Energy shares rose 2.1% and Mercury Energy climbed 1.4%, while privately owned Contact Energy gained just 0.9% on Wednesday.
Low risk til ‘26
Greg Smith, an investment specialist at Generate, said the market was prepared for an interventionist policy but “ultimately it was a damp squib”.
“If the government manages to follow through on introducing an LNG import terminal, that would reduce dry year risk on hydro operators, of which Meridian is the largest, and allow them to conserve water in dry years, thus achieving higher prices,” he said.
While Meridian shares saw the biggest bounce, Forsyth Barr analysts said Genesis stood to benefit most given it has limited capital and was already focused on backup generation.
In a note to clients, Forsyth Barr analysts Andrew Harvey-Green and Hugh Lockwood said the announcements removed the risk of structural change until after the 2026 election.
“It is notable that NZ First deputy leader and Associate Energy Minister Shane Jones was absent from the government’s announcement,” they warned.
“In recent weeks, he has proposed vertical separation, re-nationalisation of the generators, and compulsory capacity procurement, while expressing his ambition to become Energy Minister.”
Just nationalise it
The NZ Council of Trade Unions (CTU) and the Green Party have also advocated for renationalising the power companies, although their version wouldn’t directly harm investors as they suggest buying shares back at market price.
A report written by the CTU argued the electricity companies had manufactured energy scarcity by paying out dividends instead of investing new capacity. It wants the government to use that stream of dividends to purchase outstanding shares.
“The faster that the gentailers distribute dividends, the faster those firms will come back into public hands. Should those firms instead decide to use those dividends to deliver new generation, this will bring down the cost of electricity and provide New Zealanders greater energy security,” it said.
As of Wednesday, the 49% of shares owned by the market were worth about $12.2 billion but the process of bidding to buy them would likely drive the price higher.
43 Comments
Earl Bardsley is still banging on about Onslow. What else can you do for $15bill (Onslow last estimate) to cover a dry year. I'd think $10bill could do it at a reasonable cost in $/MWh and not unreliables either.
"MBIE said the risk of high prices in a dry year added $30 to $50 per megawatt hour to electricity futures contracts" My guess this is about 20% higher than the $/MWh averaged out in a normal year. As a householder one is paying around 35c/kWh = $350/MWh
Need a swing generator that unfortunately would most likely be the govt or an "independent" who could make money out of it. A bit like how unreliables are guaranteed a price/subsidy in other countries.
I'm siding with "just nationalize it" to be fair. Government generates, sells through a retailer network. If the current generators dont want to generate more then they are not serving the public.
I also side with breaking up Pak N Save and New World.
I heard part of an interview on national Radio the other day, didn't catch who it was with, but it was very clear the power companies are a significant cash cow for the government and they don't want to change that. They, the government, really are not serving the people of NZ.
The proposed policies could change that a bit - the dividends will presumably still flow, but the Government will be shoving money in the other end in the expected capital raises.
Probably just a short term change, a few years of supersized investment could settle the issue for now.
It's been a cash cow since at least Helen Clark's days. Power increases were around 5% per year per year then and there was general moaning about high electricity prices then. Now they are less of a cash cow because of only 51% ownership. Those calling for Nationalisation are under the mis-apprehension that prices will come down. Whether it's Labour, National or even NZ First they'll all want the cash cow. Politicians of any ilk like to get their grubby little paws on any form a funding as long as it can be hidden as not a tax.
" Whether it's Labour, National or even NZ First they'll all want the cash cow. Politicians of any ilk like to get their grubby little paws on any form a funding as long as it can be hidden as not a tax."
Excepting that the politicians will lose all cover and gain an additional watchdog body......hard to blame private interests for your woes when you have total control.
Wow. This coalition really is turning in to a bunch of communists :) . Nationalise everything, subsidise this, subsidise that. Their voters must be feeling pretty uncomfortable with the direction of travel. They usually scream "communist" at the slightest whiff of this sort if stuff from the other parties
Define what you refer to as "Communist" please?
Emotive, extreme language achieves little in the way of intelligent discussion. Justify what you have stated.
Sorry Murray, not being totally serious, hence the smiley face. Just trolling those on here who scream "communist" every time a "left" party does something.
It has been argued in the past, with some merit I would suggest, that as a market NZ is too small for our individual power companies and the best outcome would be a single government owned entity to manage the whole lot.
The government should move away from the dividend focus and build a system that is affordable and resilient. A well structured system would support all economic activity rather than be focussed on profits.
'It is true, this problem was exacerbated by the Labour Government's ban on oil and gas exploration (which has now been lifted) but it isn’t the only cause.'
Wrong, Dan. None of what might have been found, even if it existed, would have been in the pipeline yet.
'It is a problem that needs solving'. No, one can also learn to live with the comings-and-goings of nature. Indeed, she bats last and we will all end up there, reasonably soon. It only 'needs solving' from the arrogant POV of homo economicus recentus.
The bigger problem is the point that we are down the EROEI traverse far enough now, that society cannot 'afford' itself. Actually, it cannot spare enough of the available energy, to obtain a seldom-needed supply of energy. Society is further hamstrung by everybody seeing things through a money lens. Profit this, investment that, return the other.
We should be discussing efficiencies, triage and 'need'.
“Repeat a lie often enough and it becomes the truth”, is a law of propaganda often attributed to the Nazi Joseph Goebbels. Among psychologists something like this known as the "illusion of truth" effect.
https://www.bbc.com/future/article/20161026-how-liars-create-the-illusi…
"None of what might have been found, even if it existed, would have been in the pipeline yet"
This wasn't the only negative effect from the ban. Exploration permits already issued were abandoned (not just new ones) and investment in existing gas fields has been minimal due to the Government telling gas users they need to transition off asap... soon there would be no gas buyers!
The shortage would likely be occurring regardless of the exploration ban but it was definitely a contributing factor.
"The shortage would likely be occurring regardless of the exploration ban but it was definitely a contributing factor."
And that is what is described as a self contradictory statement
It is literally not but okay.
Heard of house batteries? Apparently they haven't.
Onslow was a dud idea. It would have been 40 billion anyway. But it did have the benefit of providing big generation with a bunch of captured tiny consumers who pay pay pay.
And the battery thing with solar is not just limited to overnight. It keeps the Lakes full until the start of winter. It does contribute in dry years even if not completely.
Even at $40 billion, it would be orders of magnitude cheaper than current chemical batteries per unit of stored energy. Not to mention much longer lasting. Last time I did a back-of-the-envelope calculation replicated Onslow with Tesla Powerwalls would cost about a trillion dollars and require 20 or so batteries in every house in the country.
The only question is whether we need that much storage, and if we can wait long enough for it to be built.
We have had this discussion before.
Onslows use is dry year, so months to a charge/use cycle. Maybe one a year. Batteries in a house would go thru a charge/use cycle several times a week.
That changes your calculation markedly.
What is preventing Onslow from having daily cycles as well as seasonal/multi-year cycles? So long as the average daily pump is somewhat larger than the nightly drain the lake can continue to be filled, and earn some money as it does so.
It sounds like yours is a common misconception:
"The idea of “dry year backup” gives an immediate image of a lake sitting at the top of a hill at the bottom of the South Island, waiting for a dry year to come along.
If constructed, the Onslow scheme would operate like any other pumped storage system in a commercial environment. That is, pumping when power prices are low, generating when prices are high, and doing nothing when prices are intermediate.
This implies near-continuous operation driven by power price variations, serving multiple purposes at the same time.
For example, having ability to switch between pumping and generating means its 1000 MW generating capacity could buffer 2000 MW of new wind energy. This would create only minor fluctuations in lake water level without imposing a trend, so seasonal and dry year operation is not affected."
https://www.interest.co.nz/public-policy/131671/earl-bardsley-lake-onsl…
The Onslow white elephant is 5x bigger than the dry year problem. It has the same storage capacity as all the other lake combined and would be the second longest dam on the planet. The dry year problem can be solved with Huntly and a big pile of coal. But we have to virtue signal and/or over complicate things.
"New Zealand has a back-up generator of the scale required to keep the lights on when the going gets tough. That is Huntly power station. It dates from the time when NZ had a centrally planned electricity system. As noted in the editorial, operating two of the 250 MW units at Huntly flat out for 3 months would provide enough electricity to meet the hydro shortfall in a year when hydro output is below the normal range.
...As noted in the editorial, the three low-rainfall years of 2001, 2008 and 2012/13 required in total 3,200 GWh of additional generation to address the “dry-year” issue, as shown by the orange line on the chart above. If Huntly power station had been operated purely in Security of Supply mode for that period it would have been used only three times, i.e., run 24/7 for three months on two 250 MW units to supplement hydro.
...the electricity market would need to be significantly revised to ascribe a value to Security of Supply.
...That radical change would open a market for Security of Supply, funded by a levy on electricity sales, like an insurance premium. A key condition would be that would only be used when strictly necessary and would not be a player in the general competitive electricity market."
https://www.energywatch.org.nz/issues/EW84_6-2021.pdf&ved=2ahUKEwjgmavp…
Yes, if you're not in the framework of removing fossil fuels from electricity generation the solution is easier. But that makes the surrounding issue of the cap and trade scheme more difficult - if you're using scarce and reducing carbon credits to keep Huntley pumping coal, that means faster decarbonisation required in the rest of the economy which will have costs associated with it.
I suspect you're happy to chuck out the whole cap and trade scheme to remove that issue, but suffice to say that isn't a majority view, and even the current coalition supports the cap and trade scheme.
I'm quite happy to chuck out the ETS. Lower electricity, fuel, food prices, more jobs tomorrow - and the weather just the same. If only the demos got a referendum on it.
Could replace coal with woodchip or pellets but harder to store than coal - still a far, far cheaper option than Onslow or batteries.
Your calculation of the number of power walls required was to provide for an entire dry year? Or the one night peaks?
You can't have it both ways to sound good.
20 Powerwalls per house was your calculation. Think about it.
That was for the same capacity as Onslow. Estimated around 5TWh for Onslow, 13.5kWh for a powerwall. So Onslow holds the equivalent of nearly 400 million powerwalls. There's about 2 million households in the country.
So yes, you're right my memory is way off - it's actually nearly 200 powerwalls per house to replicate Onslow's storage capacity.
Onslow would deal with the dry year issue, while also providing the daily buffer that you are talking about - there is no reason you can't have it both ways.
You can certainly make the argument that Onslow is unnecessarily big - that's the kind of question the NZ Battery project would have been evaluating before being shut down.
LoL 200 Powerwalls for each house. Your latest calculation.
Enough to get the house through a whole year. Without any charging.
Maybe rethink the assumptions
Is there any issue with my maths? I like the numbers - really shows what a monster onslow is, for better or worse. And highlights how cheap pumped hydro is compared to batteries, even though the sticker shock is pretty extreme.
"Enough to get the house through a whole year. Without any charging.
Maybe rethink the assumptions "
That's enough for a whole year.... If you use 7kwh a day....... Maybe rethink the assumptions......
"The only question is whether we need that much storage" - it seems a lot considering we always manage to get through without it.
$40 billion would be more than enough to do decent solar and batteries on every house in the country. Surely that reduced demand would get us through a dry year, as well as make us less reliant on the grid in emergencies etc. Seems unlikely that we get a dry year with little sunlight.
Yes, it would just about pay for something like a 5kW + battery setup on every house. If we wanted to spend that amount of money I'd think it crazy to do that rather than build Onslow, and you'd be cursing the decision 30 years down the line when you have to replace the whole fleet of panels, having already spend additional tens of billions on replacement batteries and inverters. Meanwhile the counterfactual Onslow has maybe spent a few billion on maintenance and upkeep, and will keep ticking for decades to come.
Agree to an extent. The flip side is that solar will reduce household electricity costs every year, while Onslow probably won't.
None of us are experts. But it is quite likely that the government interfering in the market by building Onslow would lead to hidden consequences.
I think if you're a shareholder or investor in NZ electricity sector it's very hard to see a market failure. There is no 'dry year' for dividend payments that's for sure. We voted for and chose this privatized model because we wanted lower taxes and market efficiency.
Big NZ power companies (Meridian, Contact, Genesis, Mercury) have together paid about NZ$10.8 b over the past decade in dividends. That's how the free market works - it's doing exactly what it is supposed to do.
In a free market wouldn't they have to compete with each other, and with new entrants attracted to the market? And for 3 of them, not be 51% owned by the entity that is also their regulator?
There are new entrants being attracted to the market. For example, Lodestone Energy have built several solar plants and are building more. I believe there are others entering the market with solar farms in particular.
We voted for and chose this privatized model
No we didn’t. In fact we did the opposite.
There is inefficiencies in that they can strategically delay bringing generation online for say an hour at peak times so to milk that 1hr of spot pricing for millions. I've family in the business who can attest to the delay in actioning notices to bring generation online, and happens semi regularly. This isn;t spoken about as it would have the public realise that we are being properly milked by the big gentailers who will do this with one hand, then virtue signal increased renewables and pump marketing for this with the other.
The primary objection from the electricity sector to the Onslow hydro storage project was that it would stabilize electricity prices and reduce profits. This would discourage investors in new generation they said.
The irony of entities who have paid out way more in dividends than they have invested in capacity objecting to the threat of increased generation capacity.
If you have control of the supply of a non-optional resource then you keep supply at a minimum to maximize the price.
This artificial scarcity ensures profitability to encourage ongoing investment - so the theory goes. The electricity sector in NZ operates exactly the same way as OPEC which lifts or reduces production of oil based on maintaining the highest overall price through time.
1% interest loans attached to the house for solar + batteries available to all who want them. If on WINZ then go through an approval cycle.
Not having to go through the ASB credit approval (took 1-2 months to approve a car purchase, by then I bought the car).
Loan sits with the house. Is collected via rates bill and is transparent.
It's apparent that ASB are not interested in personal loans if it took that long. I'm potentially looking for bridging finance. If it takes longer than a week I'll know they don't want my business either.
International cloud providers will be on cheap deals and taking capacity. Effectively subudised by NZ tax payers and they get a green power tick.
If only they paid tax here.
The people bemoaning the free market have no idea how bad electricity would be if it was run by the state. Look at state houses if you want an example; the state went decades with underinvestment, kept little shacks on prime 1/4 acre sections in cities, meanwhile house prices went to infinity. Every time the government changes the new lot change the plan; big state housing development near us has completely stopped since National won.
This reads as a game of chicken between a government who are under electoral pressure over supply security and cost, and power companies who smugly know that and are just waiting the government to build them more generation and storage.
It means the costs will be socialised because government is weirdly unwilling to exert control over what is a public good that never should have een privatised. Do they think it will spook the investment that isn't happening??
It makes no sense given the govt collects large amounts of tax from the gentailers as a cash cow, and they are willing to effectively nullify some of these taxes by spending into the sector, vs instead foregoing some of the taxes long term and forcing competition via breaking up the retail and generation portions. Willis has egg on her face once again and the desperation to look good in the public eye is becoming further apparent from the current coalition.
NZ retail energy costs are outrageous. I have lived in Alberta Canada. Currently, electricity is 1/3 NZ cost - mostly generated by coal), and natural gas 10x cheaper. How can NZ business compete with North American businesses when numpties like Labour (Cindy) cancel NZ gas exploration and current Labour (Chippy) say they'll reverse National's reinstatement of exploration. With govt 50% control of our 3 major power companies and the juicy dividends (taxation in disguise) received by govt, the NZ consumer is doomed.
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