Why fixing New Zealand's electricity market would wipe billions off the sharemarket
- Grant McLachlan
- 2 days ago
- 3 min read
Contact Energy's record profit is being reported as a winter windfall. It is closer to the going rate for a market built to protect scarcity.
Contact Energy posted a $423 million annual profit this week, up 62 percent on the year before, as the country came through a winter of record power prices, the New Zealand Herald reported. Chief executive Mike Fuge called it ‘transformational’.
The coverage this week will ask why power bills are so high. It will not ask the harder question — what happens to the sharemarket if someone actually fixes it.
Four companies, one very good year
The big four gentailers profit from the inefficiency.
Contact's $423 million profit sits alongside a market capitalisation of roughly $9.3 billion.
Meridian Energy, the country's largest generator, is valued at close to $15.7 billion, having swung from a $121 million loss to a $227 million half-year profit on strong hydro and wind.
Mercury NZ, worth about $9.6 billion, reported earnings of barely $1 million in FY2025 after fair-value derivative losses masked an otherwise solid operating year, though its FY2026 first-half EBITDAF rose 28 percent.
Genesis Energy, the smallest at roughly $3.2 billion, lifted profit 29 percent to $169 million.
Between them, the four gentailers are worth close to $38 billion on the NZX.
Average cost versus scarcity
The core problem is how prices are set.
Before 1998, the state-owned Electricity Corporation ran the country's hydro dams and thermal stations as one integrated system, pricing power at average cost and reinvesting the surplus in new generation. The reforms that followed broke that model into four competing companies whose combined earnings before interest, tax, depreciation and amortisation reached $2.7 billion in 2024 alone — with FY2026 running well ahead of that figure.
Average-cost pricing, of the kind that operated under the old model, would strip most of that margin straight back out.
Hydro is not even trying
I ran the data and it was revealing.
A physics-based audit of the Waikato, Waitaki and Clutha hydro schemes — together 38 percent of national generation — found they produce about 84 percent of what the water flowing through them could generate with modern turbines and rational dispatch. Obsolete turbines running decades past their design life, uncaptured river head, and a spot market that rewards withholding water over generating it account for the gap.
Fix the dispatch incentives and hydro alone could close much of the gap that thermal, and now new wind and solar, are being built to fill at far higher cost.
Why wind and solar would struggle
Hydro has a big up front cost and low running costs, thermal has low up front costs and high running costs, geothermal has low up front costs and low running costs, but wind and solar are problematic.
New wind and solar are the most expensive marginal generation currently being built, priced to clear a market in which thermal generation often sets the spot rate. Drop prices to average cost and the power purchase agreements underwriting much of that build programme stop making commercial sense. Politicians who have committed New Zealand to a solar-heavy transition have, in effect, committed themselves to keeping prices high enough to justify it.
The government owns a majority stake in three of the four companies profiting from the prices it says it wants to bring down.
The billions at risk
A genuine return to average-cost pricing would reprice the sector.
Regulated infrastructure trades at a fraction of the earnings multiple an oligopoly commands, and the Crown holds 51 percent of Meridian, Mercury and Genesis directly.
Every KiwiSaver fund holding NZX50 shares, every retail investor who bought in during the 2013 and 2014 partial privatisations, and the Crown's own balance sheet would absorb the fall.
We're not talking about small change. It will be transformational for the economy.
No one with the power to fix it wants to
I have argued for years that the fix is consolidation, public ownership and average-cost pricing.
The marketing spend, the dividend extraction, and the hedge-trading overhead built into today's model would disappear. So would billions of sharemarket value, overnight.
We're talking about wiping at least $20 billion off the sharemarket and thousands of redundancies and a significant drop in the advertising revenue of many media companies. But that would free up more disposable income for consumers and the expansion of industries.
This is precisely why no government, of any colour, has been willing to trigger it. Instead, they propose tweaks that don't address the core problem and stall until the issue no longer leads the news cycle.
New Zealanders keep paying for a market that was designed to protect the wealth on the NZX, not the power bill on the fridge.
