New Zealand is in the throes of what Prime Minister has termed an “energy security crisis,” a declaration underscored by the recent turmoil in the country’s electricity market. This crisis, driven by a convergence of environmental, economic, and technological factors, has led to soaring wholesale electricity prices and significant stress on industries reliant on stable energy costs.
The crisis is more than just a spike in prices; it reflects deeper, systemic challenges within New Zealand’s energy sector. With August 2024 witnessing daily average electricity prices fluctuating between NZ$164.52 and NZ$853.57 per megawatt hour (MWh), the situation stands in stark contrast to the previous year, where the highest daily average was NZ$168.43 per MWh. These unprecedented price surges have prompted urgent calls for a review of the country’s electricity market structure, signaling a critical juncture in New Zealand’s pursuit of energy security and sustainability.
The Electricity Authority attributes the current market volatility to a perfect storm of factors. Among them, a shortage of gas has been particularly impactful, exacerbating the situation by limiting the availability of one of the key inputs for thermal power generation. Compounding this issue is the significant reduction in rainfall and inflows into the country’s hydroelectric lakes, a worrying development given New Zealand’s heavy reliance on hydropower for its electricity needs.
Hydropower, which has traditionally been the backbone of New Zealand’s electricity generation, is now facing significant challenges. Current storage levels are approximately 800 gigawatt hours (GWh) lower than the minimum levels recorded in 2023, and more than 1,000 GWh below the historical mean for this time of year. These figures highlight a critical vulnerability in New Zealand’s energy infrastructure, one that is becoming increasingly exposed as climate change intensifies the frequency and severity of dry years.
Growing Demand for Electricity and Push for Decarbonization
Complicating the crisis is the projected growth in electricity demand. According to scenarios recently released by the Ministry of Business, Innovation and Employment (MBIE), New Zealand could see electricity demand increase by up to 82% by 2050, with peak demand potentially reaching between 9.1 and 12.5 gigawatts. This anticipated surge in demand is driven by a combination of factors, including population growth, increased electrification across various sectors, and the country’s ambitious goals for decarbonization.
New Zealand’s commitment to phasing out all fossil fuels by 2030 is central to its climate strategy, necessitating a rapid and large-scale shift towards renewable energy sources. However, this transition brings with it significant challenges. To meet the projected demand, New Zealand will need to more than double its current generation capacity, requiring an additional 20 to 30 gigawatts of renewable energy above the existing ten.
In response to these pressures, the energy industry has been accelerating its efforts to expand generation capacity. The government’s latest generation investment survey highlights a robust pipeline of projects, many of which are set to come online by the end of the decade. Solar power is expected to play a dominant role, with 6.4 GW of new capacity, followed by onshore wind projects contributing an additional 2.9 GW. Smaller but significant contributions are also anticipated from geothermal energy (0.6 GW) and grid-scale batteries (0.6 GW).
The commissioning of New Zealand’s first 35-megawatt battery facility at Huntly earlier this year marks a critical step towards stabilizing the grid and meeting peak demand. However, while battery technology offers valuable support in balancing short-term fluctuations, it falls short of addressing the long-term storage needs required to ensure consistent power supply during extended periods of low generation, particularly during dry years.
Hydropower and Challenge of “Firming” Supply
The evolving energy landscape necessitates a reevaluation of New Zealand’s reliance on hydropower. As solar and wind power become increasingly central to the energy mix, the intermittent nature of these renewable sources requires a reliable backup to ensure a stable supply. This concept, known as “firming,” involves using other forms of energy generation, such as hydropower, to compensate for periods when solar and wind outputs are low.
The variability in solar and wind generation is stark. For utility-scale solar, the generation capacity is expected to be between 19% and 26% for most of the year, while onshore wind may vary between 33% and 55%. According to modeling by the Electricity Authority, solar generation could fall below 10% of its total capacity for 60% of the time, while wind could experience similar lows 5% of the time.
Despite these challenges, the industry is optimistic about the potential of new renewable projects. By 2030, the combined output from new solar and wind projects is expected to reach approximately 21.6 terawatt hours (TWh) annually, which would account for about half of New Zealand’s current electricity demand.
Hydropower will remain a crucial component of New Zealand’s energy strategy, especially in the context of firming. Over the past decade, hydropower assets have generated between 24 and 26 TWh per year, providing a reliable and consistent source of energy. To achieve 100% renewable electricity by 2030, assuming coal is replaced by biomass at Huntly, New Zealand will need to replace between 3.5 and 5.6 TWh of gas generation with renewable sources.
However, the current battery capacity, even if fully developed and utilized, will not be sufficient to entirely offset the need for gas generation during peak demand periods. If all the batteries currently being developed are deployed for four hours a day, they would collectively contribute around 1 TWh annually. This shortfall underscores the importance of maintaining and possibly expanding hydropower capacity to ensure a stable and reliable energy supply.
One of the most significant challenges facing New Zealand’s energy sector is managing seasonal and daily variations in power generation. While wind generation is expected to remain relatively stable throughout the year, it tends to peak during the afternoon, aligning with solar power’s peak production. This synchronicity could lead to oversupply during certain periods, particularly in the summer, and insufficient supply during winter, when demand is higher, and solar output is lower.
Winter poses a particularly severe challenge, as lower solar generation coincides with reduced hydro storage levels. This seasonality is exacerbated by the risk of dry years, which could further deplete hydro reserves and strain the grid. Addressing these variations will require innovative solutions, including the integration of rooftop solar systems with battery storage, which can help mitigate peak demand during morning and evening hours.
The concept of a virtual power plant, where distributed solar systems are managed collectively to feed power back into the grid when needed, offers a promising avenue for addressing winter peak demand. However, this will require significant investment in infrastructure and coordination to ensure that these systems can effectively contribute to grid stability.
Wholesale Electricity Prices
The increased penetration of solar and wind power is expected to exert downward pressure on wholesale electricity prices during the warmer months. With lower operational costs and the potential for excess supply, prices are likely to stabilize at more affordable levels from September to May, provided there are no significant drought events.
However, the winter months may continue to experience price spikes unless the issue of seasonal storage is adequately addressed. The decision to scale back the NZ Battery Project, which aimed to develop large-scale storage solutions, has been met with criticism, with some experts warning that this could lead to future supply constraints and price volatility.
New Zealand stands at a critical crossroads in its energy transition. The current energy security crisis, marked by volatile prices and strained infrastructure, underscores the need for a comprehensive and forward-looking strategy to ensure a stable and sustainable energy future.
Achieving 100% renewable electricity by 2030 is an ambitious but attainable goal, provided the necessary investments are made in both generation capacity and storage solutions. Hydropower will continue to play a central role in this transition, offering the firming capacity needed to balance the variability of solar and wind power. However, addressing seasonal storage challenges and ensuring the resilience of the grid will be crucial to avoiding future crises.
As New Zealand navigates this complex landscape, it will be essential for policymakers, industry leaders, and consumers to work together to develop a robust and resilient energy system that can meet the demands of the future while safeguarding the country’s environmental and economic well-being. The decisions made today will shape New Zealand’s energy landscape for decades to come, determining not only the country’s ability to meet its climate goals but also its economic competitiveness and quality of life.
