“To meet our emissions goals and take advantage of new technologies, the traditional ways we have powered our vehicles, industries, and businesses are going to have to shift to low-emission electricity'" says Graham Campbell of the Infrastructure Commission.
Photo / Christine Cornege

More co-ordination is needed among all players to operate a new energy system and meet future demand and expectations, writes Graham Skellern

New Zealand needs an energy system that is low-priced, reliably supplied and low-emitting to lift economic performance and improve the wellbeing of all Kiwis.

A recent report, “Shiftingcurrents: Energy infrastructure in transition”, by New Zealand Infrastructure Commission Te Waihanga examines the challenges the country faces as the energy system shifts to power a low-carbon economy.

“Already we’ve seen an increased shift in the proportion of our energy system that is renewable. As this shift continues, the way our energy system works will likely change,” says Graham Campbell, director economics and research for the Infrastructure Commission.

But he says the focus should be on achieving balance between three key outcomes: affordability, reliability, and low emissions, often described as the “energy trilemma”.

“New Zealand has traditionally performed well relative to international peers on these measures,” says Campbell.

“The vast majority of our electricity generation relies on cost-effective renewable sources like hydro, wind, and geothermal. Maintaining this performance will be more challenging in the future.

“To meet our emissions goals and take advantage of new technologies, the traditional ways we have powered our vehicles, industries, and businesses are going to have to shift to low-emission electricity.”

More infrastructure will only be part of the transition; the system will also need to become more sophisticated in the way it responds to supply and demand pressures.

Under a system with more renewables, prices will often be very low but could also occasionally be very high during intermittent periods to ensure balance between supply and demand.

“This means the ability to shift demand away from peaks (whether daily or seasonally) will become more valuable. We’d anticipate that demand flexibility and financial hedging will need to be used to smooth price volatility.

“In the longer term, competitive generation markets with low barriers to new entry, and managing risk will all play a greater role in keeping the system affordable and resilient,” Campbell says.

The report suggests four ways New Zealand can navigate the latest challenges and join the path to affordable prices, stable supply, and low emissions:

Low-cost electricity infrastructure

The shift toward renewables is fundamentally changing the economics of electricity generation. Wind and solar have become much cheaper to build and have low operating costs, while thermal generation has become more expensive to run.

As cheaper renewable generation continues to displace more expensive thermal capacity, this should put sustained downward pressure on prices in normal periods.

The challenge is ensuring that the commercial case for firming generation, which is needed when renewables fall short, remains viable so the system can handle demand peaks and dry years without severe price spikes.

Infrastructure providers need confidence that demand will be there before committing to large, long-lived investments. In the short term, clearer policy signals, for instance around the gas transition and the role of government supply interventions, could have reduced price volatility and improved investment conditions.

Over the long term, certainty about New Zealand’s path to net zero is essential. Without it, the investment needed to meet decarbonisation-consistent electricity demand is unlikely to materialise at the pace required.

Flexability

As the energy mix shifts towards renewables, wholesale prices will increasingly be either very low or very high, making the ability to shift demand away from peaks more valuable.

Demand flexibility, competitive generation markets with low barriers to new entry, and well-functioning financial hedging markets will all play a greater role in keeping the system affordable and resilient.

Infrastructure is only part of the answer; the system needs to become more sophisticated in how it responds to supply and demand pressures.

Power players

The energy system involves many players – asset owners, regulators, investors, and consumers. Change in one part of the system can have consequences elsewhere.

More active co-ordination will be needed to track these interactions and ensure that interventions in one area do not inadvertently create problems in another.

However, co-ordination alone is not sufficient - the governance arrangements overseeing the system will also need to evolve as the transition progresses.

The gas transition is a cautionary example. Limited visibility over production risks caused disruption that better institutional arrangements could have reduced.

As the energy transition gathers momentum, the ability to monitor progress, anticipate emerging risks, and provide clear signals to all players will become increasingly important.

The report says after a long period of stable electricity prices, the market has become increasingly volatile since 2019 and average prices have trended up. This volatility has had a significant impact on industrial consumers who are most exposed to price variability.

After initially being protected by long-run price contracts, residential customers are starting to feel the impacts: 6.7% of households reported not being able to afford to keep their homes adequately warm in 2024.

In 2025, 63% of retail prices were due to generation, retail and administrative costs; while 37% were due to the transmission and distribution components.

So, what happened? From 1995 through to 2019, futures contract prices, which indicate electricity generators and buyers’ expectations for future wholesale prices, were almost exactly in line with the estimated long-run cost of building new generation.

Beginning in 2019, prices spiked upwards and remained elevated. While forward prices are beginning to come down, the normalisation of prices has been slower than most consumers would like. Prices are still above estimates of the long-run cost to build new generation.

The report queries whether the sustained period of prices above the cost of supply raises the issue of whether a return to normal price levels could have been achieved earlier - and if there are frictions preventing that adaptability.

This includes regulatory barriers to quickly adding supply and ensuring the market is sufficiently competitive to incentivise new entrants to build new generation when prices are high.

More active co-ordination across agencies and organisations will be needed, tracking how decisions in one part of the system affect outcomes in another and ensuring that interventions designed to solve one problem do not inadvertently create others.

But co-ordination alone is not sufficient.

The gas sector provides a cautionary example, says the report. Limited visibility over production risks and the pace of decline in domestic gas availability caused problems for both the electricity sector and large industrial and commercial gas users.

Institutional arrangements that actively tracked risks across the energy system and signalled them to infrastructure providers and users could have reduced the severity of this disruption.

The commission forecasts that business-as-usual demand for electricity and gas infrastructure investment would equate to between $2 billion and $5b a year.

However, an additional $26b of investment will be required above business-as-usual investment needs to meet decarbonisation goals (net zero emissions for all greenhouse gases except biogenic methane by 2050), and related future demand.

Campbell says because New Zealand’s electricity market operates on a commercial basis, infrastructure providers won’t build new generation, transmission, or distribution unless they have reasonable certainty that the demand will be there. Build too early, and they risk financial implications.

However, the risk is that if they build too late, demand will outpace supply, leading to higher prices than is necessary.

Much of the future demand for electricity will arise as consumers and businesses switch from fossil fuels to electricity as part of our net-zero goals.

“Currently, developers believe there will be some increase in demand in the next 10 years, but not enough that would be consistent with decarbonisation of transport, heating, and industry,” says Campbell.

“Starting in 2019, electricity prices began rising well in excess of estimated costs of adding new supply and persisted this way for the next few years.

“In a functioning market, we would expect additional supply to be commissioned and prices to be coming down. Therefore, the solution to the current turbulence in energy prices is most likely increasing supply.”

“Much of the future demand for electricity will arise as consumers and businesses switch from fossil fuels to electricity as part of our net-zero goals,” Campbell says.

Policy, regulatory, and market settings should give consistent investment signals, reduce uncertainty and support timely build-out of generation, storage, and networks.

The transition will require greater co-ordination between the players in the system. The complexity of the energy system means that policy and operational changes in one part of the system can have consequences for the other.

Transitioning

Electricity generation including wind and solar has become increasingly renewable and cheaper, making much thermal generation uneconomic. Thermal power stations that have closed since 2007 are:

Te Awamutu Gas turbine 54MW, closed 2007

New Plymouth Gas/oil turbine 600MW, 2008

Huntly 3 Coal/gas steam turbine 250MW, 2012

Otahuhu B Gas combined cycle 404MW, 2015

Southdown Gas combined cycle/cogeneration 170MWm 2015