As New Zealand’s economy electrifies, significant demand growth is predicted which will, in turn, necessitate significant growth in electricity supply. The gentailers are reportedly building “as much as they can, as fast as they can” [1]. However, to meet the predicted demand, we expect independent developers funded in part by offshore capital will need to play a role. But does New Zealand currently offer the right conditions to enable this development?
The Government has announced that it will look into, as part of its overall review of the electricity market, the extent to which business ownership and structures or design of markets are affecting incentives to invest in generation, storage, transmission, and distribution.
Anecdotally, there is no shortage of offshore funders seeking investments in renewable energy. Following the outcome of the US election, investment in the Asia Pacific region is seen as an attractive proposition. Equally, there are plenty of independent developers entering, or already in, the New Zealand market. According to the Electricity Authority’s (EA) Investment pipeline, although gentailers have the largest share of committed new electricity generation, the largest increase in new electricity projects (both committed and actively pursued) is being undertaken by independent developers.
However, independent generation projects appear slow to reach final investment decision (FID). This is occurring even in the face of high spot, forward, and wholesale prices.
In our view there are number of impediments to getting independents projects to FID (including labour shortages and availability of EPC contractors), but two key impediments are the Power Purchase Agreement (PPA) market and consenting.
PPA market conditions
Independent developers face the same development constraints as gentailers (e.g., resource consents, connections, network capacity, availability of skilled labour, supply chains, and internal capability). However, one unique challenge for independent developers is securing offtake agreements [2].
New Zealand is heavily reliant on a PPA market in the absence of any Government subsidies and so the conditions in our PPA market are likely contributing to the mismatch between investment potential and actual investment and development. Investors (whether debt or equity) typically seek long term PPAs (10+ years) before committing to investment and so these agreements underpin the development of generation projects [3].
Currently, finding PPA offtakers is challenging, with only a small number of New Zealand corporates meeting the necessary creditworthiness criteria. This limited pool of offtakers, especially beyond major electricity users like Fonterra, restricts investment opportunities. In other markets, large corporates (particularly in tech such as data centres) have been able to drive generation investment independently. Furthermore, a lack of long-term pricing information creates a mismatch between desired PPA terms. Developers typically seek agreements of up to 20 years, whereas offtakers, constrained by the lack of reliable price information, prefer agreements lasting between three to five years.
A deeper PPA market in New Zealand could significantly boost investment in generation. The Energy Competition Task Force is considering requiring gentailers to offer a minimum volume of flexible electricity in the form of long-duration contracts which could help generators secure PPAs. It is also working on standardised flexibility products which will provide the sector with more information about future electricity prices, supporting risk management and investment decisions.
Consenting delays
The Electricity Authority’s 2023 generation investment survey showed that environmental consenting processes remained a critical factor affecting the generation pipeline and development rate, with two international developers commenting that New Zealand’s consenting processes are the most complex they have encountered.
Strong uptake of the proposed new fast-track approvals process may alleviate the pressure of consenting delays for developers. Furthermore, offshore investors also need consent from the Overseas Investment Office (OIO) for certain projects. Recent Government policy announcements suggest the impact of this OIO approval process might lessen towards the end of 2025, although critical energy infrastructure is likely to continue attracting scrutiny [4].
The good news
Despite these challenges, we are still seeing interest from both overseas developers and investors. By fostering a deeper PPA market, improving pricing information, and streamlining consenting processes, New Zealand should be able to attract the necessary foreign investment to support its energy transition and secure a sustainable future.
Please get in touch with one of our energy experts if you would like to know more.
Footnotes
- According to an August Treasury briefing to the Finance Minister.
- Although gentailers also utilise PPAs for some projects.
- See "The role of PPA in enabling investment into renewable generation projects" for more detail.
- See "Open for business? New Zealand set to relax foreign direct investment regulation" for more detail.
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