New Zealand could face another electricity shortage in 2025 as natural gas remains in short supply and Tiwai Point backstop won’t be available

After a dangerously dry winter, spring has brought heavy rainfall which has filled the hydro lakes and sent wholesale electricity prices tumbling to unusually low levels.

Transpower has stopped its emergency electricity supply management and the energy crisis has been averted — at least for a time. 

New Zealand has mostly survived the winter but it paid a price. Thursday was the last day of operation for Winstone Pulp International after almost half a decade of business. 

And, Oji Fibre Solutions is also closing its mill in Auckland. Both these businesses faced other financial pressures but high energy prices sealed their fate. 

More businesses temporarily halted operations. The aluminium smelter at Tiwai Point reduced its output, Methanex stopped production to sell its gas supply, and Pan Pac Forest Products paused work for a couple of weeks.

These closures will be another whack for our already miserable economic output and current account deficit. But impossible to measure are the costs incurred by investors choosing not to set up business in New Zealand due to the high price of electricity.

Critics of the electricity market structure complain the country’s energy demand is being moulded to match supply, when it really ought to be the other way around.

No intervention worth the mention 

The Electricity Authority has established a task force with the Commerce Commission to look at ways to boost competition and encourage more investment in new generation. 

It has eight initiatives but the most interventionist of these would be to require gentailers to deal with all retail business on the same terms as with their own retail divisions.

The Coalition Government has shown a limited appetite for intervention so far, but it has promised to consent an LNG import terminal — as long as it is completed within three years. 

It has also promised to reverse the oil and gas exploration ban. However, none of these measures are likely to do anything to secure New Zealand’s energy supply next winter. 

If 2025 turns out to be another dry year, the energy problem could get even worse. 

Transpower warned this week the risk outlook was “concerning” as gas supplies would still be limited and the Tiwai Point demand response couldn’t be used two years in a row.

“It is critical the industry continues to focus on fuel storage and availability ahead of 2025, including across controlled hydro storage and thermal fuel arrangements,” it wrote.

“Peak capacity risks, especially in cold snaps, will persist until there is sufficient investment in flexible resources such as batteries, demand response and peaking generation.” 

While New Zealand was able to avoid power losses this winter, it relied upon a 185 MW reduction in energy use from Tiwai Point which will not be available next time.

The network operator appears confident it can cope with another dry winter but does worry about unexpected cold snaps and generation outages. There’s little margin for error. 

Gentailers grow market share

Forsyth Barr analysts said these concerns about winter 2025 were evident in electricity futures trading at $233 per megawatt hour, similar to prices in early July when conditions were dry.

For context, the average wholesale electricity price in September—now that the hydro lakes are full and the weather is warmer—was just $80 per megawatt hour. 

Futures contracts for 2028 also began trading this week at an average price of $152, well above the estimated cost of new supply which ranges between $115 and $120. 

“The strong message from the market is to continue building new generation, and preferably build faster,” Forsyth Barr wrote in a note to clients.

If construction continues at its current pace, supply and demand may not get back into balance until after 2030. Although, the analysts thought the pace would increase. 

While the period of high prices hasn’t boosted gentailer margins, Forsyth Barr said four biggest players all increased market share for the first time since 2016 in August.

“This is a strong sign that independent retailers are under pressure at present,” the analysts wrote. 

Flick Electric was the only non-generator to even marginally gain customers. The company’s website says it is “calling out rule breakers” and lobbying to “break up big power companies”. 

In a recent blog post, a company spokesperson said Flick had had to limit its growth because the cost of taking on new customers was too high.

“It’s our view that these recurring sky-high prices aren’t just the symptoms of short supply — they’re also the symptom of a market structure that allows power prices to keep rising”.

It's unlikely that any intervention in the electricity market can prevent the next three years of tight supply and high prices ahead. But, while we grit our teeth and bear it, policymakers should think hard about how to ensure the problem doesn’t repeat itself.