Wholesale electricity prices and wholesale gas prices have both risen sharply.
Short and longer-term supply-side constraints, as well as short-term demand-side management (both electricity and gas) have become much more evident. Examples include:
- Several large industrial users being unable to (or expressing concerns about being unable to) secure appropriate short or long-term contracts for the supply of electricity and/or gas in the market. This has meant we have seen several industrial users being forced to shut off or turn down their plants, either because they cannot get energy supply, or it is considered to be prohibitively expensive.
- The electricity demand response arrangements that have formed part of the Tiwai smelter electricity supply – with Meridian having already made a significant demand response call to help manage South Island hydro lake levels.
- The Government establishing the Gas Security Response Group in May 2024, and the recent expansion of that group to include key industrial users, with the group being tasked to help the Government formulate plans to respond to the domestic gas market being significantly tighter than had previously been anticipated.
- The expectation that coal imports are likely to continue and expand, to enable the Huntly power station to provide further thermal capacity to back up the more intermittent wind and solar generation while the renewables build-out continues.
While there are many factors affecting the energy markets overall, these things show the situation is changing rapidly and has become much more acute.
That several industrial users have said in the past week that they are closing or suspending their operations highlights this very starkly.
Both the Electricity Authority and the Gas Industry Company have warned that the energy sector faces challenges on multiple fronts, and the latter has said the stressed energy market conditions are likely to continue into 2025, and potentially into 2026 or beyond.
Major capital investment will be required to address these challenges – and a critical component of these decisions is developers and investors feeling they have sufficient investment certainty.
Energy sector investment landscape certainty
A starting point is the Government's discussion document on its second Emissions Reduction Plan. ERP2 expressly includes, as one of many objectives, the continued expansion of renewable energy use and generation (to double by 2050).
The Government has also been clear that it sees a continuing role for gas and technological advancements as providing a bridge for the energy transition to an expanded renewable energy base.
New Zealand is not an outlier in this regard; Australia and many other countries are following a similar approach.
The current energy affordability and availability crunch is likely to be used to emphasise that all options will be on the table to address energy security concerns.
The conclusion of the Tiwai Point smelter electricity negotiations has provided some market certainty.
The resulting long-term electricity supply arrangements involving NZAS and three of the major gentailers, together with the demand-response component, gives clarity to the status of a material portion of New Zealand’s electricity demand profile and gives developers and investors increased confidence to invest.
Similarly, the end of feasibility work on the proposed Lake Onslow pumped-hydro scheme has signalled to developers and investors they will not be crowded out of further renewables developments and projects by the scale and the execution/timing uncertainties associated with a significant pumped-hydro scheme at the feasibility stage.
While there still remains some policy and regulatory uncertainty in the energy sector, these two developments are expected to be important in terms of facilitating further investment into New Zealand’s renewable energy sector.
Other enablers of development and investment activity
The introduction of the Fast-Track Approvals Bill, aimed at streamlining the environmental consenting process for new developments, should prove to be an enabler of investment in New Zealand’s energy sector (especially for renewables development and investment capital).
While this proposed legislation has attracted some criticism that it may vest too much power in Ministers, it should be a step forward in removing some of the actual and perceived “red tape” and delay that has been associated with some key projects in recent times.
This is to be supplemented by a new National Policy Statement for Renewable Electricity Generation, which is expected to be released later this year, and which should serve to provide further certainty as to consenting processes for renewable developments.
The Government has clearly signalled, by way of a new Ministerial directive letter, that it wishes the Overseas Investment Office to minimise compliance costs for investors and to focus on high-risk applications.
The Overseas Investment Office is to target a 50 per cent reduction in processing times for 80 per cent of consent applications.
While we do not expect this to move the dial much in terms of the substantive assessment of OIO applications for renewables or other energy sector developments and projects, it is a clear signal that the Government does not expect undue delays or blockages associated with inbound foreign investment approval requirements for well-qualified overseas investors.
The signalling impact of the Ministerial directive letter for inbound investors could well be just as important as its substantive effect.
There is also a raft of other policy work that has been completed or is under way in terms of other enablers.
There are too many to address them all here, but by way of illustration, these range from the use of grid-scale battery storage systems to the role of hydrogen, the possibility of LNG imports, and establishing a robust framework for carbon capture, utilisation and storage (CCUS).
These are in addition to the continuation of the work that has been under way for the past two years on the development and implementation of a regime for the regulation of offshore wind developments.
We are encouraged that while some of these things are new, others are the continuation of work started by the prior Government, which hopefully indicates a move to a bipartisan approach to critical energy infrastructure projects.
The challenge
Ensuring security of supply requires further private sector investment.
The Government must seek to create a business and regulatory environment that encourages private sector development and investment into New Zealand’s energy sector.
Having an investment climate that continues to support expanded renewables investment is clearly critical.
It is now becoming equally clear that investment across the broader energy sector to support New Zealand’s industrial base will also be important.
For these things to succeed, the Government must actively encourage investment into the broader sector, and facilitate an investment climate that provides long-term certainty for investors.
We expect the Government will be keenly focused on that objective.
This item first appeared in Energy News and is republished with permission.