Power Failure: What is wrong with the New Zealand electricity industry
- Grant McLachlan
- 15 hours ago
- 13 min read
Three decades after the most radical electricity market reforms in the developed world, New Zealanders are paying record prices for power generated by assets their grandparents built. Here is a comprehensive investigation into what went wrong — and what a genuine solution looks like.
Contents
PART ONE
The crisis that never left: price spikes, political silence, and patch-up reform
PART TWO
A century of public power: the history of generation and reticulation in New Zealand
PART THREE
The economics of the shift: from average cost pricing to profit maximisation
PART FOUR
How the NZ electricity market works: stacks, spot prices, and the thermal price-setter
PART FIVE
The cost structures of different generation types
PART SIX
Why reform failed: gaming, hydrology, and the illusion of competition
CONCLUSION
The solution: public ownership, institutional capital, and a return to optimal pricing
$1.86 billion | Combined gentailer operating profit forecast, H1 2025–26 (up ~45% year-on-year) |
+60% | Real-terms household electricity price increase since the 1998 reforms |
30% | NZ households currently in energy hardship |
$13.73 billion | Gentailer dividends paid 2014–2025 vs $6.8 billion in capital investment |
4 companies | Control ~90% of generation and ~95% of retail electricity market |
PART ONE
The crisis that never left: price spikes, political silence, and patch-up reform
In the six months to December 2025, New Zealand’s four major generator-retailers — Contact, Genesis, Mercury and Meridian — are forecast to record a combined operating profit of $1.86 billion, an increase of approximately 44 to 45 per cent on the same period in 2024. This surge has arrived at the worst possible time. Consumer NZ has warned that power prices are set to rise at least a further five per cent in 2026, following a 12 per cent increase in 2025 — itself following years of steady real-terms price growth that has left household power bills roughly 60 per cent higher in real terms than when the market was reformed 25 years ago.
The immediate trigger for renewed public anger was winter 2024. Between July and early August of that year, wholesale electricity prices surged from around $300 per megawatt-hour to above $800/MWh — more than four times the long-run average of $180/MWh recorded between 2018 and 2023. Energy-intensive businesses, unable to absorb costs at that level, temporarily or permanently closed their doors. The aluminium smelter at Tiwai Point — New Zealand’s single largest electricity user — had to negotiate emergency demand-response agreements with Meridian Energy to help stabilise the grid.
The causes were structural, not merely meteorological. Hydro lake levels fell to a six-year winter low, compounded by below-average snowpack and the lowest start-of-year hydro inflows in 93 years of records. Gas supply — the essential backstop for peak generation — was simultaneously constrained, as New Zealand’s indigenous gas reserves continue their long decline. The system had no slack.
The government’s response has been a series of incremental adjustments that industry critics have described as rearranging deckchairs. The Electricity Authority and Commerce Commission established a joint Energy Competition Task Force. New rules requiring larger retailers to offer lower off-peak prices were announced. The government committed to building a liquefied natural gas import terminal. “You can’t make cheap electricity with expensive fuel,” Consumer NZ’s Paul Fuge told RNZ bluntly. “It does seem like a bit of an own goal.”
Meanwhile, approximately 30 per cent of New Zealand households face energy hardship — unable to afford sufficient power to meet their basic daily needs — while the OECD’s December 2025 economic outlook identified electricity affordability as a prerequisite for the investment New Zealand needs to lift its chronically weak productivity growth.
None of this is surprising to anyone who has watched the industry closely. The problems visible in 2024 and 2025 are not the result of bad weather. They are the predictable legacy of an ideological experiment that began in the 1980s and accelerated through the 1990s — an experiment that treated a natural monopoly as though it were a competitive market, gifted publicly-built assets to private shareholders, and then stood back and wondered why prices did not fall.
PART TWO
A century of public power: the history of generation and reticulation in New Zealand
The municipal pioneers
The story of New Zealand’s electricity industry begins not in Wellington boardrooms but in Dunedin. In 1907, the Dunedin City Corporation became one of the first cities in the world — and the first in the Southern Hemisphere — to build, own, operate, and maintain a fully municipal power system supplying an entire city. The Waipori Falls hydro-electric scheme, progressively expanded from 1907 and substantially built out by the mid-1940s, replaced coal-fired generation that had powered the city’s tram network since the 1880s.
As commentator Peter MacDonald has noted, the Corporation employed its own engineers, electricians, linesmen and labourers, paid at normal working rates, with expertise built in-house and accountability running directly from workforce to city to ratepayer. The model worked because its purpose was clear: not profit, but cheap electricity, industrial growth, and long-term civic security.
The state era: 1945–1987
Major upgrades to generation and transmission between 1945 and 1970 were carried out by the State Hydro Electric Department, which built the backbone of the generation network that still supplies more than 60 per cent of New Zealand’s electricity today. The Waikato River chain, the Waitaki system, the Manapouri scheme, the Tongariro power development — these were publicly planned, publicly financed, and publicly owned. They were built for the public good, not for shareholder return.
Until 1987, generation and transmission were managed by the New Zealand Electricity Department (NZED), a government department that controlled and operated almost all New Zealand electricity generation and the national transmission grid. The system was a natural monopoly operated as a public utility. Prices were set on the basis of average cost. Generation was dispatched in merit order: cheapest first, most expensive last.
Corporatisation and the beginning of reform: 1987–1996
In April 1987, the NZED was corporatised and became the Electricity Corporation of New Zealand (ECNZ), New Zealand’s largest state-owned enterprise. In 1994, Transpower was separated from ECNZ and established as a stand-alone state-owned enterprise to own and operate the national grid. In February 1996, a group of assets representing approximately 22 per cent of total electricity production was carved off to form a new competitor, Contact Energy. In October 1996, a reformed wholesale electricity market began trading.
The 1998 reforms and the break-up of ECNZ
The Fourth National Government’s Electricity Industry Reform Act 1998 went further. Contact Energy was privatised. ECNZ was split into three competing state-owned enterprises: Meridian Energy, Genesis Power and Mighty River Power (later Mercury Energy). All energy companies were instructed to split their retail and lines businesses and sell one or the other.
A landmark legal analysis by Daniel Kalderimis in the Victoria University of Wellington Law Review concluded that the ownership split was “a staggering mistake” based on “inconclusive evidence, inadequate research, and major logical flaws” — and that the government had rejected unanimous policy advice warning against it. Since the split, average domestic power prices have risen dramatically.
What is a gentailer? – A “gentailer” is a vertically integrated generator-retailer: a company that both generates electricity and sells it to consumers through its retail arm. – New Zealand’s four major gentailers — Contact, Genesis, Mercury and Meridian — together generate approximately 90% of the country’s electricity and control 95% of the retail market. – Three of the four (Meridian, Mercury and Genesis) are 51% owned by the NZ government, creating a conflict between dividend income and consumer welfare. |
PART THREE
The economics of the shift: from average cost pricing to profit maximisation
Average cost pricing: the ECNZ model
Under ECNZ, the electricity sector operated on what economists call average cost pricing: price was set equal to average cost (AC), which means the firm earns zero economic profit — it covers all its costs, including a normal return on capital, but extracts nothing extra from consumers. Because the generation mix was dominated by sunk-cost hydro and geothermal assets, average cost pricing produced correspondingly low consumer prices.
In economic terms, ECNZ operated at the point where the demand curve intersected the average cost curve — the highest possible output at the lowest sustainable price. Generation was dispatched in merit order: cheap South Island hydro and North Island hydro ran first, and the expensive thermal stations at Huntly were brought on only as swing producers when hydro storage was low or peak demand required additional capacity.
Post-reform: the shift to profit maximisation
The 1996 and 1998 reforms replaced this model with a wholesale spot market in which generators bid their output into a pool, and a single clearing price — set by the most expensive accepted bid — is paid to all successful generators. Under competitive market theory, this should be fine: if there are enough competitors, no single generator can hold prices above the efficient level for long. But New Zealand’s electricity sector is not, and was never going to be, genuinely competitive.
The resources devoted to competing for retail customers illustrate the point. New Zealand’s gentailers spend tens of millions of dollars annually on marketing, customer acquisition, brand advertising and switching incentives. This expenditure is economically wasteful in a sector where the product — a kilowatt-hour of electricity — is identical regardless of who sells it. As Will Rogers observed: “If advertisers spent the same amount of money on improving their products as they do on advertising, then they wouldn’t have to advertise them.”
PART FOUR
How the NZ electricity market works: stacks, spot prices, and the thermal price-setter
The stack mechanism
Every half hour, generators submit offers to the System Operator (Transpower) stating how many megawatt-hours they are willing to supply at various price points. Transpower stacks these offers from cheapest to most expensive, then dispatches generation in that order until demand is met. The price paid to all generators in that half-hour period is the price of the last (most expensive) megawatt-hour accepted. This is called the clearing price or spot price.
How the stack works: a simple example – Suppose demand in a given half-hour is 4,000 MW. The stack, cheapest to most expensive: – Geothermal (Contact Te Huka etc.): 600 MW at $30/MWh – South Island hydro (Meridian Waitaki): 1,500 MW at $45/MWh – North Island hydro (Mercury Waikato): 1,000 MW at $60/MWh – Wind and solar: 400 MW at $75/MWh – Gas / coal thermal (Genesis Huntly): 500 MW at $120/MWh – Total dispatched: 4,000 MW. Clearing price = $120/MWh, paid to ALL generators. The geothermal plant costing $30/MWh also receives $120/MWh — a $90 windfall on every megawatt-hour. |
Why thermal now sets the price full-time
Under ECNZ, thermal was a swing producer: expensive to run, brought on only when needed. Under the reformed market, the dynamics changed completely. North Island hydro (primarily Mercury’s Waikato River chain) and South Island hydro (primarily Meridian’s Waitaki system) have different hydrological cycles and peak flow periods. Neither can fully substitute for the other. Because neither hydro system can guarantee to cover the other’s shortfall, thermal generation — principally Genesis’s Huntly station — must remain available and operational year-round as a price-setter of last resort.
PART FIVE
The cost structures of different generation types
Hydro
Large-scale hydro is the lowest-cost form of generation once built. The marginal cost of producing a megawatt-hour — essentially, the cost of the water flowing through the turbines — is close to zero. New Zealand’s hydro assets, mostly built between 1945 and 1985 by the State Hydro Electric Department, are fully depreciated: their capital costs were paid off by the ratepayers and taxpayers who funded them. The gentailers that inherited these assets did so effectively for free.
Geothermal
Geothermal generation — using heat from the Taupo Volcanic Zone — has similarly low marginal costs and, critically, runs at or near full capacity around the clock, making it an ideal baseload generator. New Zealand has some of the best geothermal resources in the world. The addition of Contact Energy’s Te Huka Unit 3 geothermal station, which began supplying the grid in October 2024 at 51.4 MW, illustrates the scale of what is available — but also how slowly new geothermal capacity is being developed relative to demand growth.
Wind and solar
Wind generation has low marginal cost but is intermittent: it cannot be relied upon to generate during winter peaks, when it may be cold, calm and dark simultaneously (in other words, when there is a frost). New Zealand’s wind farms achieve a capacity factor of around 45 per cent, but this still means they are idle 55 per cent of the time. Solar shares wind’s intermittency problem, compounded by the fact that New Zealand’s highest electricity demand occurs in winter, when solar irradiance is lowest.
Gas and coal (thermal)
Thermal generation — burning natural gas or coal at stations such as Huntly — has high and volatile marginal costs. Yet because they provide firm capacity that wind, solar and hydro cannot always guarantee, they remain in the merit order and, because they are often at the top of the stack, they set the price for everyone. Genesis stockpiled 465 kilotonnes of coal by April 2025, with a further 770 kilotonnes on order, in preparation for another potential dry-year winter.
The fundamental problem: in a system where thermal sets the marginal price, the cheapest-to-run generators (hydro, geothermal) earn windfall profits proportional to the gap between their cost and the thermal clearing price. Investing in more of these cheap generators would erode those windfall profits. Rational profit-maximising gentailers therefore have a financial incentive not to invest in new low-cost generation. Over the 12 years since partial privatisation (2014 to 2025), cumulative gentailer dividends totalled $13.73 billion — more than double the $6.8 billion spent on capital investment in the same period.
PART SIX
Why reform failed: gaming, hydrology, and the illusion of competition
The gaming of hydro storage
Generators with large hydro storage assets can choose when to release water into their turbines. By managing the timing of releases — holding water back when prices are low and releasing it when prices are high — a hydro operator can effectively shape the spot price. This is not illegal; it is the rational exercise of market power. Data published by the Electricity Authority in 2024 showed that the big gentailers had consistently earned more than $70 million in margins per week, rising to $119 million in the week before Associate Energy Minister Shane Jones accused them of “profiteering.”
The asynchronous hydrology problem
The Waikato River system — Mercury’s primary hydro portfolio — peaks in late summer and autumn, fed by lake inflows from the Taupo Volcanic Plateau. The Waitaki system — Meridian’s primary portfolio — peaks in spring and early summer, fed by South Island alpine snowmelt. The two systems do not peak simultaneously. ECNZ, as the single operator of the entire national hydro portfolio, managed these asynchronous flows optimally. The split into competing entities destroyed that optimisation.
Prices up, not down
The market reforms were supposed to lower prices. They did not. After an initial two-to-three-year period of modest price reductions following ownership unbundling in 1998, residential electricity prices rose by nearly 50 per cent in real terms between 2000 and 2009 alone. Consumer NZ estimates that prices are now 60 per cent higher in real terms than at the time of reform, despite the addition of new renewable generation capacity.
“The electricity industry has effectively become a redistribution of wealth that exploits consumers who are not shareholders. Rather than building more geothermal or hydro generation with lower running costs, we have seen many smaller, incremental, and inefficient wind, solar, and thermal projects. They’ve approached generation like building a stadium: Why build a bigger stadium when you can build one half the size and charge more than twice the price for tickets?” - Grant McLachlan
Some economists have argued that the mixed-ownership structure of the three government-owned gentailers creates a specific conflict of interest: the government receives dividend income from its 51 per cent stakes, giving it a financial incentive to maintain high electricity prices rather than to reform the market in consumers’ interest.
CONCLUSION
The solution: public ownership, institutional capital, and a return to optimal pricing
Utility companies are, by their nature, natural monopolies. They require enormous upfront capital investment, have very low marginal costs of production, and serve an essential public need. These characteristics make them ideal investments for long-horizon institutional funds — pension funds, sovereign wealth funds, and infrastructure trusts — that require stable, predictable returns.
New Zealand now has exactly the institutional capital required. The New Zealand Superannuation Fund, established by Michael Cullen in 2001 and forecast to reach $104 billion in assets by 2028–29, is one of the best-managed sovereign wealth funds in the world. The Accident Compensation Corporation (ACC) holds further tens of billions in long-term investment assets. Together, these two institutions represent a pool of patient, long-horizon capital precisely suited to owning essential infrastructure.
The proposal is straightforward. The NZ Super Fund and ACC, acting in concert, should acquire full ownership of New Zealand’s major electricity generators and consolidate them back into a single integrated entity. This entity should be operated on the ECNZ model: generation dispatched in merit order, prices set at average cost, no economic profit extracted from consumers, and all surplus revenue reinvested in new generation and network maintenance.
The financial case is compelling. The gentailers currently pay combined dividends of approximately $1.35 billion per year to shareholders. Under public ownership, this money would instead flow to the Super Fund and ACC as stable, inflation-linked infrastructure returns, while simultaneously being reinvested in the generation assets that would reduce consumer prices. The marketing budgets, the brand advertising, the armies of hedge traders and corporate lawyers — all of this overhead disappears when there is no competition to win and no shareholders to court. Critically, every dollar removed from an electricity bill is a dollar freed for growth-producing activity: household spending on food, health, and education; business reinvestment in plant, staff, and innovation; and the broader productive capacity that chronically high power costs have been quietly suppressing for three decades.
Where the savings would come from – Marketing and advertising spend — eliminated (no retail competition) – Windfall hydro profits — returned to consumers as lower prices, not shareholders – Dividend extraction — reinvested in new geothermal and hydro development – Hedge trading and financial risk management overhead — greatly reduced – Thermal dispatch — reduced to genuine swing production, cutting fuel costs – Executive salaries across four competing entities — consolidated to one |
The generation priorities would also change. Rather than incremental wind and solar additions, a publicly-owned integrated utility would have both the incentive and the capital to invest in new geothermal capacity and additional large-scale hydro storage. Geothermal in particular is ideally suited: it runs 24 hours a day, 365 days a year, at very low marginal cost, and its development would directly displace thermal generation at the top of the stack, permanently reducing consumer bills. The economic significance of lower power costs extends well beyond household budgets: affordable electricity is a structural competitive advantage for New Zealand businesses, and the investment currently crowded out by high energy costs — in manufacturing, processing, technology, and agriculture — represents the growth-producing activity the country needs to lift productivity and real wages.
Peter MacDonald’s observation about Dunedin applies equally to the national grid: public works built by public institutions, staffed by paid professionals working for the common good, delivered enduring value at a fraction of today’s transactional cost. The Dunedin City Corporation understood, a century ago, what the designers of the 1998 reforms forgot: that when a nation owns its essentials, it owns its future.
The electricity industry as currently structured is a mechanism for redistributing wealth from consumers to shareholders. It exploits the fact that electricity is not a discretionary purchase. It extracts rent from assets built by previous generations of taxpayers. And it does so while devoting extraordinary resources to the theatre of competition — the switching incentives, the price comparison websites, the brand campaigns — that serve no productive purpose whatsoever.
New Zealand has the capital, the institutional expertise, and the generation assets to fix this. What has been lacking, for three decades, is the political will to admit that the experiment failed.
