This month saw “electricity crisis” headlines proliferate with an unseasonal cold snap and low wind generation causing Transpower to release a warning notice and ask New Zealanders to reduce power use. After a long period of no growth, reports this month also suggest electricity demand in New Zealand is increasing. In light of these developments, this month we take a look at the recommendations from the Market Development Advisory Group (MDAG) for the wholesale electricity market and consider what progress has been made.
Our electricity demand is expected to grow substantially with the electrification of transport and process heating. MDAG forecast total electricity demand to grow by 33% between 2020 to 2035 and 50% by 2050 in its December report on price discovery in a renewables-based electricity system. MDAG notes that these projections may be too low as they do not include any additional electricity demand for aviation or marine transport.
Massive investment is needed to meet rising demand. MDAG estimates that $27 to $37 billion of new investment in demand-side flexibility, batteries and generation will be required by 2050. There needs to be clearer investment signals and more detail on the benefits of investment in flexibility on both the demand and supply side.
MDAG made 31 recommendations in its report to update the design of the wholesale electricity market, to be implemented in three tranches. All recommendations are designed to strengthen the four core pillars of a wholesale electricity market for a high-renewables future. Those core pillars are accurate pricing, tools to manage risks, competition, and public confidence.
As we transition from fossil fuels to renewable energy, MDAG warns of three risks to consider:
Risk 1: Operational co-ordination of the market is becoming more challenging and tranche 1 of its recommendations relates to ensuring accurate prices. With a greater range of users in the electricity market and different generation sources to co-ordinate, price signals must be accurate. Accurate pricing measures recommended by MDAG are being prioritised by the Electricity Authority (EA) with a work programme announced on 13 February 2024.
Risk 2: There is a risk of premature closure of fossil fuelled plants due to a declining revenue outlook caused by the growth in renewable generation. MDAG believes that this risk is unlikely as New Zealand, unlike many other countries, does not subsidise new renewables. New Zealand’s recent solar revolution is timely given the cost of solar has been in steep decline, with MDAG noting that few people would have predicted that the cost of solar PV would fall by more than 90% since 2000. Some of MDAG’s recommendations relate to reducing the risk of premature retirement of thermal plants such as development of new reserve product, like batteries.
Risk 3: Delayed investment in additional flexible resources such as biofuel. Although investment should be forthcoming because of the contracting and investment incentives in the wholesale market, some recommendations are made to reduce the risk of any delay in investment, such as facilitating the development of one or more standardised flexible supply contracts.
MDAG notes that whilst a well-designed wholesale electricity market is a central piece of the picture, there needs to be the right settings to allow for new renewable generation such as a timely and efficient resource consenting process and clear carbon pricing rules to drive decarbonisation decisions. For more information on measures being taken towards improving these areas see our articles on the Fast Track Approvals Bill and RMA reform and the consultation documents released by the Ministry for the Environment this month on updates to auction and regulation settings for New Zealand’s ETS.
The EA is incorporating MDAG’s recommendations into its work programme as a sequenced package, as described on its website. It is completing work that is already in progress on 10 of MDAG’s recommendations. For example, the EA announced this month that it is working to improve the information available on the pipeline of new developments of renewable generation and large-scale load (MDAG’s recommendation 17). The EA intends to publish a consultation paper on this project in mid-2024.
Watch this space and please get in touch with one of our energy experts if you would like to know more.
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