Government sets out stall on energy reforms, rejects Frontier advice

Wednesday, 1 October 2025

Energy Minister Simon Watts says the Government will develop new rules, in consultation with industry, to ensure dry years don’t cause an energy crunch.

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The Government has released and rejected radical advice it received from British consultant Frontier Economics that it sell its 51% stakes in Meridian, Mercury and Genesis and reinvest the proceeds in tackling the country’s “dry year” risk and in thermal generation in order to prevent “irrevocable harm” being done to the energy system.

Instead, Energy Minister Simon Watts has announced a suite of more conservative measures that it says will help secure the country’s energy future.

These include possible assistance for a terminal to import LNG, new powers for the Electricity Authority and a prod to power companies to invest more in power plants.

The Government’s proposed package of reforms is a mix of tangible moves and teasers of possible actions to come, but it has not at this point confirmed changes that would fundamentally change the way the electricity industry operates.

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Meridian Energy chief executive Mike Roan backed the Government’s work programme, saying it would bring forward investment in new generation, and welcomed its support for LNG imports.

But Auckland Business Chamber chief executive Simon Bridges said it was “a missed opportunity”.

“What’s missing is a willingness on the Government’s part to step in to address what is a broken market. Kiwi businesses and households have been crying out for bold action – today, they didn’t get it,” Bridges said.

John Harbord, chief executive of the Major Electricity Users Group, said there were positives but the reforms lacked strong action on affordability and competition.

“We cannot see how it will materially support struggling businesses in the short term. Prices are too high now and any further increases may result in more of our industrial businesses closing,” he said.

Frontier warned in its much anticipated 270-page government-commissioned report that if “bold changes” weren’t made to the energy system “irrevocable harm could be done”. The report was commissioned in February by Watts and associate minister Shane Jones and released on Wednesday alongside the Government’s response.

“As New Zealand’s reliance on renewable energy increases to supply an increasing amount of electricity to meet the country’s electrification goals, so does its vulnerability to dry year shortages,” it said.

“Without definitive action by the Government, dry year risk will lead to increased prices, loss of supply and economic disruption that will drive industry out of New Zealand,” it went on to warn.

Its suggestion centred on the establishment of a new state-owned business it dubbed New Co to provide sufficient thermal generation, while leaving renewable generation to the private sector.

But the Government’s response said that while it agreed with the diagnosis behind Frontier’s thermal investment suggestion, it did not agree with its proposed remedy and the proposed sales of its shares in the gentailers were not being progressed.

It has also rejected Frontier’s advice it consolidate the country’s 29 lines businesses into five entities and remove electricity generation from the Emissions Trading Scheme to cut the cost of power.

The closest it has come to a nod to Frontier’s thinking appears to be an announcement by Watts that regulations will be developed to attempt to deal with the risk of a lack of electricity during “dry years”.

A “framework” for addressing that risk will be designed in consultation with industry by early next year, he announced.

The Government appears ready to take a more active role facilitating the import of LNG.

The dry-year risk was the subject of the former government’s NZ Battery Project, which included the investigation of a pumped hydro scheme at Lake Onslow, though there is no indication a project of that nature is back on the Government’s agenda.

In another development that appears to have been prompted by Frontier’s advice, Watts made clear the Government could chip in more capital to Meridian, Mercury and Genesis, if they felt a need to raise extra cash to invest in additional generation.

The three firms have been paying a high percentage of their free-cash flow in dividends to shareholders, which include the Government as their 51% owner. That is not usually a sign that businesses expect to need to tap shareholders for extra cash.

But Frontier maintained the three firms had faced constraints on their ability to invest in large projects because of a “perception” the Government would not provide additional equity.

In a response written to the gentailers, Finance Minister Nicola Willis has said the Government would look favourably on capital raisings to fund new power plants that advanced its goal of secure and affordable energy.

The Ministry of Business, Innovation and Employment will invite registrations of interest from businesses that could deliver an LNG import terminal by the winter of 2027, Watts announced.

However, the exact role he envisaged the Government might play in supporting any investment in imported gas was not spelt out.

Generators including Contact Energy have helped develop a proposal for a small-scale LNG facility that they envisage could be set up on a converted drilling rig at the Port of Taranaki at expected cost of between $140 million and $295m.

But Contact chief executive Mike Fuge said two weeks ago that there was as yet no agreement on who might fund it.

In other measures, Watts plans to beef up the Electricity Authority through a law change that will give it more powers to monitor the security of supply.

The fines the Electricity Authority can impose for breaches of its regulations will be increased and it may become a criminal offence for businesses to mislead the authority.

In one potentially controversial development, the Government could indemnify investors in oil and gas infrastructure against losses caused by government policy changes, according to documents released by Watts this morning.

The Government will also investigate directing its own purchases of electricity — which account for between 2% and 4% of the country’s total demand — to new power plants to encourage further investment, an idea previously discussed by Commerce Commission chairperson John Small.

Two peer reviews of Frontier’s report, produced by economic consultants Nera and Daglish & Associates, and also released today, were critical of its advice.

“Perhaps partly due to covering so much ground, Frontier does not present detailed evidence to support each of its recommendations,” Nera said.