Govt says it has a plan to combat high power prices. The plan could do the opposite, report warns

Wednesday, 1 October 2025

The Government is pressing ahead with a package of reforms it hopes will drive energy costs down, despite a major report warning some of the proposals could keep costs high in the long-term.

Energy Minister Simon Watts and Finance Minister Nicola Willis on Wednesday morning unveiled a sweeping package of energy reforms aimed at tackling rising power bills and securing reliable electricity for decades, after the Frontier Economics reported warned the nation’s energy system is “under strain”.

The report commissioned by the Government, and much anticipated by the sector, laid out a set of ambitious, market-restructuring recommendations.

But peer reviewers NERA raised serious concerns and scepticism about these radical changes, warning they could disrupt competition and market stability.

Ministers ultimately rejected the most extreme proposals, including selling government shares in Meridian, Genesis and Mercury, creating a new state-owned electricity company to control thermal generation and backup fuel, and removing electricity from the Emissions Trading Scheme.

However, the Government has confirmed it will let its power companies — Genesis, Meridian, and Mercury — borrow and invest more in new projects, and support new electricity generation with long-term contracts.

Finance Minister Nicola Willis said she had written to the companies to confirm the Government would provide capital “to ensure a perceived lack of access… does not stand in the way of New Zealand’s energy security”.

This plan follows a recommendation from Frontier, even though peer reviewers commissioned by the Ministry of Business, Innovation and Employment, questioned whether government ownership was actually holding the companies back. Willis described it as a “perceived capital constraint,” while Frontier had diagnosed it as a genuine limitation.

Documents released on Wednesday show the diverging views between the Government, Frontier, and peer reviewers on how to tackle high power costs.

Report warns buying gas from overseas could be costly

The Government’s plan includes importing Liquefied Natural Gas (LNG) to ensure there is enough electricity during dry years, when rivers and lakes are low and hydro power generation dips. Part of the plan was to build a new LNG import terminal, a move that could be costly.

Frontier Economics warned that relying on imported LNG could expose New Zealand to volatile global gas prices and would not be as cheap as domestic gas. The report argued it made “no economic sense” to develop an LNG terminal solely for dry-year risk because “the large fixed costs would be spread over a relatively small amount of output,” and described an LNG terminal as a “last resort”.

Peer reviewers generally agreed, adding that government intervention on gas supply was a better alternative than Frontier’s proposal for a new state-owned electricity company.

Nevertheless, the Government is moving forward with the terminal, saying it will provide reliable, on-demand fuel, support the country’s largely renewable system, and keep power flowing for homes, businesses, and industry. Officials said it was also designed to boost investor confidence, encouraging new renewable projects by reducing the risk of energy shortfalls.

“Declining gas reserves and policy uncertainty have left the system exposed with no reliable source of fuel to power existing plants. This has resulted in increased wholesale prices for households and businesses,” officials said.

The Government plans a competitive procurement process for the terminal, with a Registration of Interest opening on October 6, 2025, and key decisions expected by December.

Conflicting views on majority state-owned power companies

The Government will allow Genesis, Meridian, and Mercury to raise more money to invest in large-scale projects, following Frontier’s recommendation to lift capital limits. Peer reviewers questioned whether these limits were actually a problem. NERA noted little evidence that government ownership was constraining investment, pointing out that Contact Energy—which the Government does not own a majority stake in—had the highest debt-to-asset ratio.

Despite these doubts, the Government decided to follow Frontier’s advice, directing the companies to pursue new generation opportunities.

Frontier warns some policies could push prices higher

Frontier Economics has cautioned that certain Government energy policies could increase electricity costs for households and businesses.

The report recommended removing electricity from the Emissions Trading Scheme (ETS), arguing it “substantially increases the cost of electricity to consumers without delivering a corresponding environmental benefit”.

Frontier estimated that New Zealanders paid $1.5 billion more for electricity in 2024 because of the scheme, and said the ETS is “largely a tax on electricity consumers”.

The ETS works by requiring companies that emit greenhouse gases to buy carbon credits. These costs are typically passed on to consumers, which raises electricity prices.

But the Government rejected the recommendation, saying it “remains committed to the ETS as central to climate strategy”.

Frontier recommended against proposals for “non-discrimination of contracts” and “virtual disaggregation” of power companies, arguing they “will instead impose higher electricity costs onto consumers and industry.”

The report explained that if gentailers have market power, a non-discrimination rule, which would require them to offer the same contract price internally and externally, could encourage them to raise the cost. Those higher costs could then flow through to prices offered to the broader market.

Splitting up the power companies (gentailers) removes their internal financial safety net, forcing them to spend more money on managing price risks, and those new, higher expenses will be passed directly onto customers in the form of higher bills, Frontier said.

Despite these warnings, the Government has decided to proceed with the measures. Officials acknowledge the rules “will not address the underlying problem of a lack of new firm capacity in the market,” the core concern highlighted by Frontier, but said it supports other actions intended to strengthen energy security.

Meridian says Government move is ‘bold’

Meridian responded to the Government announcement saying its willingness to participate in equity capital raisings was “bold”.

“It’s the biggest change to our capital investment settings since we were listed in 2013, and we acknowledge the Government’s commitment to help the country move forward,” Meridian chief executive Mike Roan said in a statement.

He believed it would add “even greater momentum” to its development pipeline and building new generation was the best way to improve energy security and affordability.

Energy Minister Simon Watts said in the joint statement with Willis that while renewable generation was ramping up, the country still lacked the backup fuel sources needed during dry years when hydro and wind couldn't meet demand.

“The electricity market performance review conducted by Frontier Economics confirmed that the market has failed to invest in the back-up fuel and generation we need to keep the lights on and the economy running during dry years,” Watts said.

“This uncertainty is what is keeping power prices up and placing unacceptable pressure on Kiwi households, businesses and industries alike.”

He said when the country has dry years, “like what we experienced in 2024”, it can take the economy up to 25 years to recover from inflated electricity prices.

“That’s why the Government is acting now.”