Tina Schirr | Thu, 10 Jul 2025
The electricity market responded when hydro lakes were low and gas was scarce. (Image: NZME)
Just last winter, New Zealand’s electricity market faced an extraordinary test. A perfect storm combined high demand, low wind generation and a fuel shortage caused by low hydro storage and limited gas supply. Wholesale electricity prices spiked. Hydro and thermal generators faced fuel constraints and raised offer prices to conserve resources, driving prices sharply higher. Electricity prices surged past $800 a megawatt hour (MWh) and some industrial energy users scaled back. The situation and response had all the markings of a market in crisis.
Responding to stress
But those familiar with the energy market saw a different story. To them, it was a system under pressure doing what it was designed to do. The Electricity Authority’s report Review of Winter 2024 found the industry responded as expected and brought spot prices down. The electricity market responded with textbook efficiency. Supply tightened, demand rose, prices spiked. These price signals were meant to do two things: reduce immediate stress on the grid and encourage new investment in generation. The first part worked. The second, not so much.
Problems exposed
So, what was it about winter 2024 that made it so challenging? Cold weather and long-term electrification trends across transport and industry meant demand remained elevated in typically energy-intensive months. The system lacked flexible peaking capacity because of a diminishing gas supply, meaning there was little cushion when things got tight. Supply margins were already thin because of delayed generation projects and weather-driven constraints on hydro and wind. Finally, investor hesitation – driven by regulatory uncertainty and shifting decarbonisation settings – meant fewer projects were generation-ready when they were needed. While investment was triggered in this instance, it was slow to react to immediate supply issues. The price surge inevitably triggered demand destruction, with large industrials using the spot market to dial back operations or shut down altogether– not as a matter of strategy, but because there was no alternative. Prices fell, urgency faded and the system reset with a smaller degree of industrial participation. But long-term industrial exits usually wind up undermining economic growth.
A turning point
That’s only half the story. The winter of 2024 also marked a turning point in energy. Generators responded to market signals and investment interest in new generation, particularly renewables, and began building momentum. There was short-term pain but overall, it was a real-time demonstration of market forces in action. Winter 2024 showed us that while the market reacts quickly to stress, long-term resilience cannot be built on short-term price spikes alone. As New Zealand once again heads into colder months, the sector is better positioned to build a more secure, flexible and future-proof electricity system. The market isn’t one under threat but one sending the right price signals – even if the supporting structures around it need updating. The primary concern isn’t the price spikes themselves, but rather how we support long-term investment and ensure resilience.
Progress under way
Across the sector, conversations are shifting from managing volatility to preparing for growth. The gap between market signals and investment action is being closed slowly but surely, with growing recognition that smart, well-considered change is what’s needed, not a market overhaul. We’re seeing increased interest in long-term Power Purchase Agreements as a way to give certainty to producers and large consumers. The dry winter sparked discussions around capacity markets and strategic reserves to shore up reliability. The four largest generators have begun discussions around how to ensure long-term energy security using the Huntly power station to manage dry-year risk. Overall, there is a greater focus on regulatory certainty to reduce sovereign risk and encourage earlier investment decisions across the sector. We’re also noticing improved demand response tools to increase and reward flexibility, without forcing industrial exits.
Coming together
Winter 2024 revealed the tensions in our market design, but it also demonstrated how responsive and adaptable our system can be. That responsiveness is a strength we can continue to build on. As we move into winter 2025, the outlook is more promising. Investments initiated over the past year are beginning to take shape. Demand-side flexibility tools are being trialled and expanded. Regulatory settings are under review, but it is important to do so with careful consideration. While discussions around the regulatory framework are necessary, sudden reactions could exacerbate issues. Perhaps most importantly, there is growing alignment across government, industry and consumers around the need to evolve – not discard – our market model. The electricity market is not broken. It is signalling. It is learning. It is evolving. The challenge now is to ensure that the strengths of the market are supported with appropriate policy and investment frameworks that value long-term resilience, reward flexibility and ensure we do not sacrifice productive demand in pursuit of short-term balance. If we can get this right, New Zealand will come out of another winter with a more secure and more sustainable electricity system that supports the ambitions of the country it powers.