Energy Minister believes surgical intervention could fix power market

Sunday, 17 August 2025

Energy Minister Simon Watts is talking up the case for “surgical” interventions in the power market as the Government prepares its response to a report it commissioned from British consultant Frontier Economics on the sector’s woes.

But if anyone was hoping for a radical unwinding of the so-called Bradford reforms that created the modern energy market in the late 1990s they may be disappointed.

“I fundamentally look at the energy market as doing what it should do. It is providing pricing signals which indicate where there are needs for more investment, and that is how the market should operate,” Watts told the Sunday Star-Times.

“We're not looking at it from the context of saying, ‘you know, we're going to throw the entire market out and start again’.”

Instead, the Government was looking at making some “surgical changes in the market in areas where we know there are problems that the market has not been able to solve itself”, he said.

“First and foremost, my main priority is ensuring we've got energy security and energy affordability,” he said. “The Government and the Prime Minister have made it clear New Zealand should have the most abundant and affordable energy on the planet, and we don't.”

A large volume of renewable generation was coming online, “which is great”, he said.

“The challenge is there is no new ‘firming’ generation in that pipeline.

“That is a gap in the market at the moment. You can see that from the forward look of the projects that are on the stack that are going to be built in New Zealand; there isn't a new thermal project on that list.”

Firming generation refers to electricity generation that can easily be turned on and off to meet peaks in demand or supply shortages, for example during weekday evenings or during “dry” winters.

That is currently a role largely filled by burning coal and gas and, in some cases overseas, by pumped hydro stations.

Traditional hydro generation and even geothermal power can also be used in that way, although the economics of using them only to meet peaks in demand is trickier.

“I'm [part of] a centre-right political party. I'm non-interventionist in my approach,” Watts said.

“But where the market is failing to operate, then we will look to make changes. And actually, there are a number of efficiency aspects of the market that also could make it run better than what it is, and we'll be open to doing that as well.”

Watts’ comments suggest government intervention along the lines of creating some form of “capacity market” could be one of the options ministers might consider.

That could see generators paid, one way or another, to keep spare generating capacity on standby for times when it was needed.

That concept was championed in 2021 by former Genesis Energy chief executive Marc England, who envisaged that in return for the payments, generators would commit to offering power from the reserve at a pre-agreed price, during a power squeeze.

A capacity market has been in place in the UK since 2014, but has proved controversial.

Britain’s Institute for Energy Economics and Financial Analysis (IEEFA) concluded in a 2018 report that its capacity market “almost entirely supports existing generation at present, including inflexible nuclear and dirty, ageing coal-fired plants”.

However, it said Britain’s capacity market could be improved if payments were targeted to support new-gas peakers, power storage, and demand response agreements that incentivised organisations to cut back power demand during a shortage.

Frontier has previously advised that “capacity mechanisms” introduced in the UK and EU could be viable options to provide a stable investment climate to ensure security of supply, but warned “all capacity mechanisms imply additional costs to the system”.

In New Zealand — assuming the Government did intervene to bring more firming capacity online — one question would be who footed the bill, and what the net effect on prices would be, given such insurance usually costs money.

The Government hadn’t made a decision on the former question, Watts made clear.

“We need to get certainty that we've got the forward increase in generation being built in the areas in which this country needs it.

“The question is, how do you fund, potentially, the solutions to the problem? There is a wide range of options, but it would be fair to say that those that benefit should be the ones that should be paying for that cost.”

The Frontier report was ordered by former energy minister Simeon Brown and associate minister Shane Jones, who gave the consultant a wide brief to review the performance of the electricity market.

Labour’s energy spokesperson, Megan Woods, said the Government should release the study now, ahead of it formulating its response.

“Given how critical this report is to households and businesses, getting some of the ideas out there and getting some input would have been really useful,” she said.

“When you think about the Commerce Commission market studies, there would be a draft report that came out before the Government’s response. We didn't wait.”

But Watts suggested the secrecy was warranted given the uncertainty the report could create about what might happen next.

That could suggest not all of the consultant’s recommendations will find favour.

“One of the reasons why we haven't released that report is because we're very aware that the energy market is looking for certainty,” Watts said. “We don’t want to put a report out with a whole lot of problems without solutions or commitments from the Government on what we're going to do.”

The Cabinet would be considering Frontier’s recommendations soon and the release of the report and the Government’s response was only weeks away, he said.

Associate Energy Minister Shane Jones, who has made clear that NZ First could split with the coalition government on energy policy by making radical reforms a centrepiece of its next election campaign, said it was fairly well known Frontier had “covered a host of options”.

“But really it comes down to political will and I accept that the gentailers remain a potent force protecting their current rights and corporate dominance,” Jones said.

“The option that we always focused on is breaking the gentailers in half, forcing them to be just generators and sell the power that they have into a transparent wholesale market that a total range of retailers can purchase into and ensuring that there is a functioning, transparent, regulated market for firming power.

“Unless we can drop the price of power, in particular firming power, then I am very pessimistic about saving the manufacturing sector in New Zealand,” he said.