NZ’s electricity market needs reform to meet data centre demand

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Picture of Simon Dux
By Simon Dux
Source: New Zealand Geothermal Association

New Zealand’s electricity market is not equipped to support the scale of new demand from data centres and other energy-intensive industries without major structural reform, according to a government-commissioned review by Frontier Economics.

The review warns that the current system faces “irrevocable harm” unless bold changes are made to improve security of supply, address dry year risks, and ensure sufficient investment in firm, dispatchable generation.

Frontier found that the market works reasonably well for renewable investment, with a strong pipeline of solar, wind, and geothermal projects underway. But it is failing to deliver investment in the kind of reliable, flexible generation needed to back up renewables when water storage is low.

The report concluded that policy volatility, including the gas exploration ban and shifting renewable targets, has undermined investor confidence. This has left the market without a credible mechanism to ensure reliable supply during dry years, when hydro output falls short.

As a result, Frontier recommends the Crown step in directly to secure and sell thermal generation capacity through a new entity (“New Co”), acting as guarantor of supply during shortages. Independent retailers and large users would have priority access to this backup capacity to ensure fair competition.

Frontier also argues that government majority ownership of the “gentailers” (Meridian, Mercury, Genesis) constrains their ability to raise equity and invest in large-scale projects. It recommends the government divest its shareholdings and reinvest proceeds into securing fuel supply and dispatchable generation.

The review also calls for rationalisation of New Zealand’s 29 electricity distribution businesses into a handful of “super distributors” to reduce costs and improve network efficiency—critical for handling large new loads like hyperscale data centres. Finally, it suggests merging the Electricity Authority and Gas Industry Company into a single “Energy Authority” to oversee both sectors in a more integrated way.

Frontier also identified fuel security as critical, recommending the government invest in securing reliable fuel supplies alongside generation capacity – an issue it linked directly to declining gas reserves and the need for backup during dry years.

Implications for data centres

For data centre operators looking at New Zealand, the review poses questions: Frontier’s view is the current electricity market cannot guarantee reliable, cost-effective supply for big new entrants. Without structural changes, large-scale consumers such as data centres would face exposure to volatile prices and potential reliability issues during dry years.

Frontier’s conclusion is blunt: the electricity market must be restructured, with government taking a targeted but more active role in securing firm generation. Without this, the combination of rising demand, high dependence on hydro, and fragmented distribution risks leaving the country unable to accommodate the next wave of large energy users.

Government response

The government has since responded with a mix of commitments, but observers say the devil will be in whether reforms are deep and fast enough. An article in the Post characterises the political tension, noting the government acknowledges some of the risks but has opted against the sweeping structural reforms Frontier proposed, with the Post suggesting concerns about political feasibility played a role.

In essence, the government emphasises working “in partnership with industry” to unlock new investment, with finance minister Nicola Willis assuring the Crown-owned gentailers that capital is available for “strategic and commercially rational investments” rather than adopting Frontier’s more interventionist approach. It highlights that many of Frontier’s proposed changes – like divestment of government stakes and creation of a new ‘New Co’ to manage thermal generation – are beyond its immediate plans.

Instead, the government’s energy package focuses on two main tracks: security of supply and building better markets. On security, it is launching a formal procurement process for an LNG import facility to provide backup fuel during dry years – a significant intervention Frontier discussed extensively. It is also exploring how whole-of-government contracts could help underwrite new energy projects.

On market reforms, it plans to strengthen the Electricity Authority as a regulator, require non-discrimination rules so gentailers must offer contracts on the same terms to all buyers, and push electricity distribution businesses to collaborate and standardise processes. The government also plans to accelerate consenting reforms for renewable and transmission infrastructure.

The NZ government has moved to address one concern raised by Frontier: that the Crown-owned gentailers perceive barriers to accessing capital for major projects. Finance minister Willis wrote to Genesis, Mercury, and Meridian assuring them the Crown is “prepared to support capital funding requests for strategic and commercially rational investments.”

This directly contradicts Frontier’s recommendation to divest the government’s 51 percent stakes entirely. Instead, Willis confirmed the government remains “committed to maintaining its legally mandated 51 percent stake” and is “more than willing” to participate in equity raises for major investments “if the proposals stack-up”.

Data centre dilemma?

For data centre operators in New Zealand, the report’s message is pretty clear as far as Frontier is concerned: under present settings, New Zealand’s electricity market offers less certainty for extremely large, continuous loads. Without robust reforms, the threats of exposure to price volatility and dry-year shortfalls is real.

The government response does not reject Frontier’s diagnosis of the problem – acknowledging that “the market has failed to invest in the back-up fuel and generation we need” for dry years – but stops short of embracing the structural fixes Frontier advocates. Where Frontier proposed divesting government ownership and creating a new state entity to manage thermal capacity, the government opted to retain its shareholdings while intervening more narrowly through an LNG facility, capital assurances, and regulatory reforms.

Whether this lighter-touch approach will be sufficient to address the structural challenges Frontier identified will be one data centre operators will be watching closely.

 

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