The energy shortage is forcing manufacturers to cut production to keep power flowing to households. Will more renewable electricity fix the problem for the future?
A newly released briefing to Energy Minister Simon Watts warned that various challenges in the sector create the “risk of outages during winter peaks” and the potential for “business closures”.
The document shows security of electricity supply “is tight and driving elevated prices”, that gas supply needs to be maintained until there are suitable alternatives, and some New Zealanders and businesses “are finding energy unaffordable”.
The Briefing to Incoming Minister (BIM) was delivered to Watts upon his appointment as Energy Minister in January after Prime Minister Christopher Luxon’s Cabinet reshuffle.
A BIM is presented to a new minister to quickly get them across their portfolio and potential issues that need to be addressed.
The BIM covering energy was released on Monday afternoon and outlines the various strategic issues facing the energy system and potential actions to be taken.
Simon Watts became Energy Minister earlier this year. Photo / Alex Burton
Overall, it advises the Minister to take a “long-term view” as the sector argues a lack of certainty can hamper investment decisions needed to maintain energy security and reliability.
“This will involve making decisions in the face of a range of uncertainties, including the pace of demand increases, new technologies, and future commercial decision-making,” it says.
The report says the security of electricity supply “is tight and driving elevated prices”.
“Our most immediate challenge is to ensure sufficient electricity generation that can be dispatched when required,” it says.
“The electricity system needs to develop more firm, flexible generation to improve security and lower average prices. There is a lack of new plant being built that can reliably generate to meet peak demand when the wind is not blowing, the sun is not shining and the rain has not fallen.”
It says New Zealand requires gas, coal or diesel generation to provide “firm and flexible generation”. But there are “various challenges for these forms of generation to remain economic, which is driving high prices and the risk of outages during winter peaks”.
New Zealand is likely to get to “very high levels of renewable electricity in the medium-term”, but gas and coal will be needed for some time yet.
However, thermal generation is “ageing and so at [increasing] risk of suffering outages or coming to the end of its life”.
It is “increasingly constrained by declining domestic gas supplies”, and “less likely to attract investors to develop or maintain as it is being used less often”.
The briefing says that gas production is at a 40-year low and “continues to be below the sector’s own forecasts”. Gas reserves are in decline “despite significant investment” and the “challenging supply outlook has risks for both gas users and for electricity supply”.
“Businesses that rely on gas and cannot afford price increases or have no technological options to switch will also face increasing challenges. In some cases this may see business closures,” it says.
Genesis Energy's Huntly Power Station. Photo / NZME
New Zealand saw energy costs soar last winter during what Watts has called a “power crisis”. That was caused in part by low hydro-lake levels, a lack of wind and sun, and what the Government said was an inadequate supply of natural gas.
“There was a seasonal energy shortage in winter 2024, which resulted in prolonged high gas and electricity prices,” the briefing says.
“The tight gas supply led to some industrial gas customers struggling to get supply and the high prices impacted businesses bottom line.
“Notably some pulp processors cited the high prices as the reason for closing part of their businesses. Methanex paused production to sell their gas into the market which alleviated the shortage and reduced prices.”
It highlights that “building enough new generation to displace hydropower (allowing more water to be preserved going into winter) and maintaining existing thermal back-up generators like the Genesis Rankine units will be essential to managing seasonal energy risks in coming years”.
The Government announced several steps last August to deal with energy security and affordability, including removing regulatory barriers to constructing facilities to import liquefied natural gas. It also continued moves to reverse the previous Government’s ban on offshore oil and gas exploration.
The report says the country is going into this year’s winter “in a stronger position to manage capacity and seasonal energy risks than it did in the last wet year (2023) and dry year (2024)”.
“New geothermal generation and the return of some fast-start gas generation help provide more peaking capacity than 2023. High lake levels and gas storage (due to Methanex agreeing to reduce demand in late 2024) mean we have significantly more flexible fuels available to manage seasonal energy risks compared to 2024.”
However, it also warns the overall electricity system “is not on track to have the right supply to comfortably manage security risks in the coming years”.
“This is reflected in high electricity prices, which are driven by security of supply.”
Some Kiwis are finding it 'unaffordable'. Photo / 123RF
For some New Zealanders and businesses, the report acknowledges energy is “unaffordable”. A key driver of prices increases in the future will be investment in infrastructure in coming years, it says.
In April, household electricity bills are expected to increase on average by $10 a month before GST. That’s due to increasing material and labour costs, interest rates, and rising levels of investment.
The Commerce Commission recently agreed to lift the amount of revenue Transpower and local line companies can earn to help pay for improvements to the network. The briefing says if this investment was delayed, “it could result in higher prices down the line and a less reliable network”.
Watts at the time told the Herald he was aware of the cost-of-living issues.
“I am committed to cutting regulatory barriers to encourage investment in energy generation so we can deliver affordable energy prices for New Zealanders,” he said.
Electricity demand is predicted to increase by 70%-170% above current levels by 2050, but officials say more could be required “to enable new uses like producing hydrogen and other new fuels”.
To meet this demand, the briefing says there needed to be a “large and rapid increase in generation, transmission and distribution infrastructure”.
There’s work under way on this, the document says, such as with Resource Management Act reform and new legislation to govern offshore renewable energy work.
The BIM also highlights the need for “effective and efficient market regulation”, something the Government has been keen to address through an electricity market review which will report back by the end of June.
“Energy security is a top priority for the Coalition Government as the economy electrifies and we work to double New Zealand’s renewable electricity generation. We expect to see market-led approaches to energy security throughout the transition, and we want to make sure the markets are performing effectively,” Watts said last month.
“This review will help ensure our regulatory settings can deliver on the long-term interests of consumers, keep prices down for Kiwis and keep the lights on.”
The Government made a number of announcements last year to address energy concerns. Photo / Mark Mitchell.
Expectations from global trade partners for New Zealand’s products and supply chains to be “green” is also mentioned, as is the need to have oversight over fuel markets.
“As we import almost all of our engine fuels, a significant and sustained supply disruption of our engine fuels would cripple industry and cause significant hardship to New Zealanders. The Government therefore has a role to consider the public interest and whether there are appropriate levels of competition, fuel stockholding and investment.”
The benefits to New Zealand’s fuel security would also be limited as the country would still have to rely on imported crude oil. Resources Minister Shane Jone said it was a “stupendous amount of money”.
Jamie Ensor is a political reporter in the NZ Herald Press Gallery team based at Parliament. He was previously a TV reporter and digital producer in the Newshub Press Gallery office.
