Another dry winter looms large in the minds of industry and politicians. Another winter of high electricity prices and industrial closure has been clearly indicated as unacceptable by the government. If there was a core topic at Downstream New Zealand last week then that was it.

While Ackama has been doing steadily more work in the energy space in Australia (our clients in the last couple of years including APVI, Pacific Blue, Kraken, and Kaluza), we’ve actually done much less in New Zealand, so we decided this year to sponsor Downstream and get a better grip on what’s going on in our other home market. So here is a small collection of things I made notes about while I attended.

Everyone is a little lost after Contact’s Wind farm proposal was rejected

Contact’s wind farm plans have just been rejected  which they’re now appealing (read here for more info) and this shaped much of the conversation around valid responses to the current market issues as industry viewed the approval of projects like this as a key part of supporting the growth of renewables in NZ. The position of the Minister on the day was that they should resubmit via the new fasttrack process. However, it’s clear from talking to industry participants that they view the fasttrack process as dangerously political and having potential impacts on both their social licence and some sovereign risk exposure if the government changes.

Sovereign Risk

Sovereign risk is the risk that a future government will change something in the market or settings in a way that negatively impacts businesses in the future. This is remaining a large issue in the industry as so many large infrastructure builds take 10-20 years to turn a profit which allows a lot of time for governments to change policies if there is a perception that future governments may flip-flop on market settings. A good example of this is the changes to gas exploration (banned under Labour and allowed again under National). Although no longer banned, there is limited appetite to make further investment given the unpredictability of the future while at the same time other more costly approaches to improving energy (such as pumped hydro) are also disincentivised because there is an increased possibility that cheaper gas might come back online, making the investment returns on building other large infrastructure lower.  By far the most important step here is to find a compromise that the major parties will hold to over time. Flip-flopping policies is much worse for New Zealand than any other option.

Decarbonisation is a challenge for the whole industry

New Zealand is in an enviable place due to our well-developed hydro, but we remain incredibly dependent on thermal generation (i.e. burning things).

New Zealand is likely to burn a lot of coal this year given the dry winter. Technically most of this coal will be burned by Genesis at the Huntly power station. The reality is though that even the pure “renewables” generators have contracts in place with Genesis to have access to that power in the event of a shortage. Obviously nearly everyone would prefer to still have access to power in the event that we run out of hydro supply etc, but this strongly reinforces the point that individual retailer decisions are only relevant to our decarbonisation story if they change the overall renewable portion of the market. If we just track company by company then the only incentive is to move all the carbon producing generation to a single company that can then take all the sin unto itself and leave everyone else suitably virtuous.

Government and Regulators need to come up with better threats

The big gentailers(major generators who own their own retail businesses) keep being told that if they don’t come up with a solution to current market conditions themselves then the government will do it for them.  As far as I can tell the two things that would potentially work are either:

• Enough generation coming online in the market that is not under control of the gentailers to create an actually healthy and deep energy market.
• Splitting the generation businesses apart from the retail businesses

Unfortunately, the gentailers have no ability to do the first (since them building more generation would just strengthen the existing market inefficiency) while the second is basically the biggest stick the government has to threaten them with so they’re entirely rational to just play for time and take small steps towards improvements to put it off since they’re not that keen on voluntarily hitting themselves with a stick.

New Zealand is drifting backwards (comparatively) on Distributed Energy

At least some of this is due to our lower sunlight hours than Australia meaning the payback is not quite as fast on solar etc. But the steady decrease in the cost of solar should be starting to see an uptick that is not really there (made worse by events like the recent collapse of Solarzero).

Barriers listed in this space include:

• 29 different (and relatively small) distribution companies across the country making rollout of grid integrated systems costly and time consuming.
• Lack of government support and subsidies.
• Lack of awareness and education
• Difficulty projecting impact and savings (this is true both for domestic solar and other projects in that New Zealand is a small enough market that we definitely need more generation to avoid high practices but it would also be entirely conceivable that we could overbuild and end up with energy prices cratering in the early 2030s which is an unappealing risk).

Time of Use Pricing

Consumer time of use pricing is working well to encourage load shifting when it is simple and consistent. Such as having a free hour of power at 9 pm or 3 hours in the morning. This is helpful with reducing risk but there is at least modest consensus that automation or domestic batteries would be required for load shifting to occur in response to real time network events etc.

Do we actually have the scale for a functional market?

One question raised is whether New Zealand by itself can be treated as a market to the degree that the government and regulator would like. We are a small country while a lot of the answers are very large investments. Treating building new capacity as an investment is a little bit like a game of chicken. They want to build exactly enough additional generation that they all make more money but moderate over-investment could easily flip us over into oversupply and lower energy prices to the degree that investors would regret their investment. The oversupply would probably be a benefit to the rest of New Zealand but really encouraging investment may require additional government non-market guarantees along the lines of minimum pricing for a period after construction.

There’s a lot of potential

New Zealand is still way out in front in terms of our generation through renewables and being a small flexible country that could pave the way if we get on top of things. We’re also in a position to be a fast-follower on innovation elsewhere. For instance, at Ackama we’re just finishing Consumer Data Right integrations in Australia on the retailer side and on the consumer side. New Zealand is only just passing similar legislation now. This timing is positive since it means we can draw from what’s working in Australia and save a lot of time if we jump on opportunities as they arise.

Downstream

It was great going along to Downstream and meeting a bunch of kiwis who care deeply about the future of energy in New Zealand. Shout out to the organisers and all the new people I met as part of the event.