The Electricity Authority's (EA) latest working paper reveals a strong push to remove barriers holding back power purchase agreements (PPAs) in New Zealand, potentially opening new opportunities for independent developers and corporate buyers alike.

Key context

The paper paints a picture of an electricity market dominated by incumbents, with four large vertically integrated gentailers controlling around 90% of generation and most firming resources. This structure presents challenges for independent developers and corporate buyers seeking PPA-backed generation due to potential barriers in accessing firming.

These barriers may explain why PPAs remain a niche procurement option in New Zealand. The EA identified only 13 PPAs in the past five years, with only two involving independent generators and nine corporate PPAs (where the buyer is the end user).

Benefits of PPAs

The EA sees significant potential benefits in growing the PPA market. PPAs can play a critical role in enabling new generation and increasing competition in the electricity sector. They can provide a pathway for independent developers to enter the market, helping to diversify generation sources, and potentially driving down costs through increased competition. PPAs can incentivise earlier investment and drive innovation in generation technologies. For businesses, PPAs are a valuable tool for managing energy price volatility and supporting corporate sustainability goals.

Market challenges

The EA identifies several factors that impede increased PPA activity in New Zealand, including:

• Buy-side challenges: Limited number of corporate buyers with credit ratings strong enough to help secure funding for projects, difficulty in accessing fairly-priced firming and sleeving and assessing fair value and risk exposure, and a lack of large-scale demand capable of taking a development’s entire output.
• Sell-side challenges: The need for projects to demonstrate both credibility and competitiveness in the face of gentailer competition.
• Market structure constraints: Risk of potential foreclosure by gentailers restricting access to firming, limited liquidity and price transparency for electricity contracts, and higher cost of capital for independent developers.
• Investment and financing challenges: Developers face significant financing hurdles, as New Zealand's small market size and reliance on international capital increase competition for capital with other countries. The availability of PPAs is crucial to securing project finance, particularly from international investors accustomed to PPA-backed revenue certainty.

Options for intervention

To address these challenges, the EA is considering a range of interventions to facilitate PPA growth and remove market barriers, including:

• Regulatory measures:
  • Allocating firming or requiring gentailers to offer firming under long-duration contracts to support independent developers.
  • Greater pricing scrutiny for both firming and PPAs, including requiring incumbent generators to disclose firming pricing.
  • Scrutinising the PPA process, including setting principles and requirements for dealings between gentailers and parties seeking sleeving and firming.
• Market support initiatives:
  • Developing standardised PPA templates to simplify contract negotiations.
  • Establishing a PPA matching or pooling service to connect buyers and sellers.
  • Providing procurement resources to improve buyer sophistication and understanding of PPAs.
  • Providing demand information to help potential developers assess the need for new generation.

The EA acknowledges these interventions aren't without risk. Regulatory changes could potentially deter non-PPA generation investment, interfere with market-driven investment signals, or reduce participants' incentives to manage risk and innovate. These concerns will need to be carefully balanced against the potential benefits of a more competitive market.

Next steps

This working paper signals potentially significant changes for New Zealand's evolving PPA market. For stakeholders interested in shaping these reforms, submissions on the working paper close on 5pm 28 February 2025. The EA will hold a workshop for interested stakeholders during the submission period.

The EA plans to publish a consultation paper in April 2025, with the goal of reaching a decision on potential Electricity Code changes by June 2025.

If you have any questions about how the proposed interventions could affect you, or would like help making a submission, our experts can help.