On 11 October 2024, the Government released a new Policy Statement (GPS) for the electricity industry, outlining priorities and providing clear signals to the Electricity Authority Te Mana Hiko (EA) and wider sector about the expected regulatory settings during the Government’s term in office. The EA must have regard to the GPS when carrying out its role as the energy sector regulator.

In this article we set out the key aspects of the GPS, including the importance of affordability, reliability, competition, and meeting rising electricity demand. It will be important for all energy sector participants to look out for upcoming regulatory changes as policy is implemented.

Responding to decarbonisation

The Government expects demand for electricity to rise significantly over the next 30 years due to decarbonisation efforts, particularly due to electrification of the transport fleet and process heating. Renewable energy generation is required to double by 2050 to meet this increase in demand, with electrification being a critical part of meeting Aotearoa's Net Zero 2050 target. The Government states in the GPS that this will require investment of "tens of billions" into new generation, transmission and distribution networks, and related services.

For the electricity system to function efficiently and serve the needs of all electricity consumers now and in the future, the Government believes that the electricity system must have:

• An efficient wholesale market with many different buyers and sellers;
• Efficient transmission and distribution networks; and
• Efficient and competitive retail electricity markets.

The GPS sets out how the Government intends to achieve this.

Building efficient markets

The Government believes its role is to put in place clear and consistent regulatory settings, and to avoid policy that will chill or crowd out private investment. This is clearly a key objective for New Zealand, given the increasing levels of global competition for funding and resources to facilitate each nation’s energy transition.

The GPS makes it clear that the Government is focused on an urgent update of the wholesale market to meet the ongoing transitional changes to our electricity system, which include:

• An increasingly diverse generation portfolio;
• An increase in electricity supply to and from distributed sources;
• Increased intermittency in supply, resulting in a greater reliance on hydro generation and storage to smooth supply;
• Demand-side response and flexible supply, such as batteries, becoming more valuable to manage demand peaks and tight capacity; and
• A spot market that needs to coordinate many more participants and resources.

The key changes that the Government is looking to implement are those previously identified by the Market Development Advisory Group in its final report from December 2023. The report made 31 recommendations to strengthen the design of the wholesale electricity market to make sure it can function efficiently with a much higher proportion of renewable energy in the future. The recommendations are based around four core pillars: accurate pricing, risk management tools, competition, and public confidence and are grouped into three tranches for implementation.

Transmission and distribution networks are also identified by the Government as requiring significant investment, prioritising network reliability while avoiding unnecessary cost increases. As the level of new variable and baseload generation rapidly increases to meet demand, New Zealand’s electricity infrastructure needs to keep pace in order to ensure we can meet our decarbonisation goals, as grid constraints can create significant hurdles for new investment.

The Government also believes that efficient network pricing will play a role in determining the necessary level of investment and capacity, which may involve demand-side response to manage peak electricity use in order to defer or avoid increasing network capacity.

Reliability and security of supply

Government policy is that public sector intervention in power prices would interfere with achieving reliability and security of supply, as it would “undermine incentives for participants to invest in flexible generation, energy storage and demand response solutions”.

The GPS states that managing risk is not the role of Government, the EA, or Transpower. According to Government, wholesale electricity buyers and sellers need to have risk management mechanisms in place to protect themselves, as the Government will not intervene in the electricity market or protect wholesale market participants from failing to manage their own energy risks.

The GPS sets out the EA’s role, which is to ensure that market arrangements facilitate and promote competition, including:

• Ensuring supply and demand information is up to date, comprehensive, and accessible to stakeholders;
• Ensuring that spot prices accurately reflect supply and demand;
• Putting clear emergency principles and processes in place to guide system operators.

In relation to spot price volatility, the Government recognises that this will increase over time with more variable generation, but it believes artificial suppression of such volatility will undermine incentives to invest in solutions, such as energy storage and flexible generation. The Government believes that efficient competition will encourage market competitors to find better solutions to meet increased demand and spur innovation.

EA must be neutral on generation types

The GPS emphasises the importance of effective competition in delivering reliable supply at the lowest possible price, noting that market rules should not favour one technology or solution over another. The Electricity Authority must be neutral towards the different types of electricity generation, because the Government wants carbon pricing rules, not electricity regulation, to be the primary tool to drive decarbonisation decisions.

Further policy areas

The Government is still planning to progress several measures to encourage electricity market efficiency and drive renewable generation, including:

• Resource consent process changes to speed up the construction of new infrastructure, storage and generation;
• Progressing the Customer and Product Data Bill; and
• Reviewing the level of investment that electricity distribution businesses can make into generation assets. 

Get in touch

If you have any questions about the Policy Statement or how it might affect you, contact one of our experts below.