New energy security plan targets power price stability and dry-year risks

The Government has unveiled a two-pronged strategy aimed at strengthening New Zealand’s energy security and shielding households and businesses from future electricity shortages and price shocks, announcing both a new Winter Energy Reliability Obligation and progress toward establishing a liquefied natural gas (LNG) import facility.

Energy Minister Simeon Brown said the reforms are designed to ensure the electricity sector takes greater responsibility for managing dry-year risks, when low hydro lake levels can significantly reduce electricity generation and place pressure on power supplies.

Under the proposed Winter Energy Reliability Obligation, major electricity generators, retailers and large electricity users would be required to secure sufficient back-up energy well in advance of forecast dry winters. The system would include a long-term requirement for large electricity buyers to arrange dependable winter cover years ahead of any anticipated shortfall, alongside a short-term backstop requiring major generators to demonstrate they have firm fuel supplies available if hydro storage falls to critically low levels before winter.

Brown said the changes are intended to reduce the risk of supply shortages and the extreme wholesale electricity price spikes experienced during the 2024 dry-year event, which contributed to higher power bills for households and businesses.

The Government also plans to strengthen enforcement measures, increasing penalties for serious breaches of electricity market rules from a maximum of $2 million to as much as $10 million, three times the commercial gain obtained, or 10 per cent of a company’s turnover, whichever is greater.

As part of the wider reforms, the Government will amend the Electricity Industry Act to give the Electricity Authority a clearer mandate to oversee dry-year risk management. The Authority will also be required to provide annual reports to the Minister on current and emerging security-of-supply risks. The Government Policy Statement on electricity will be updated to emphasise reliability, affordability and management of dry-year risks.

Alongside the new regulatory measures, the Government is continuing work on an LNG import facility, which it says will provide a reliable source of back-up energy when renewable generation is unable to meet demand. Brown said increasing renewable generation remains a priority, but argued that wind, solar and battery projects alone will not provide enough cover for prolonged periods of low hydro generation expected later this decade.

The Government has advanced two potential providers to the Request for Proposal stage and expects to select a preferred developer this year, with the facility targeted to become operational in 2028.

According to Brown, wholesale electricity prices for 2028 and 2029 have already fallen by about $20 per megawatt hour since the LNG project was announced in February, with estimated savings of up to $800 million annually expected to flow through to consumers and businesses.

The Government is still working through funding arrangements for the LNG facility but says it will not be financed through a levy on household power bills. Officials from the Ministry of Business, Innovation and Employment and the National Infrastructure Funding and Financing Company are consulting with electricity companies on potential funding models.

Brown said the LNG facility and Winter Energy Reliability Obligation form key parts of the Government’s wider Securing Affordable Energy plan, which aims to provide reliable and affordable electricity while reducing the risk of future dry-year disruptions to households, businesses and the wider economy.

Image credit: Matthew Henry