The Press

Long cold winter may warm next week – power or not

It has been a week of turmoil at home and abroad. The week began with global markets getting smashed with big falls in the Nikkei in Japan and in the American stock exchanges. By the end of the week, the NYSE had turned around, on Thursday recording its strongest day since 2022. The Nikkei had also bounced back.

Here at home, the markets also moved a bit, but more notable than that is that most of the major banks’ economic teams have started really making the case – at times quite vociferous­ly – for a series of interest rate cuts from the Reserve Bank of New Zealand, sooner rather than later.

Next Wednesday’s interest rate decision will be one of the most closely watched for a while. While market consensus is in favour of a cut, and global markets have 100 basis points of rate cuts factored in by the end of the year, the Reserve Bank’s monetary policy committee must be convinced that inflation is back within band. Or at least that it will be at an appropriat­e level by the time interest rate cuts work their way through the system that sound money will be maintained.

When the coalition came to government it deliberate­ly stripped out the goal of maintainin­g “maximum sustainabl­e employment” from the bank’s mandate and house price stability, which was also put in by Grant Robertson, has similarly been scrapped.

Although independen­t, the Bank was left in no doubt by the incoming Government that getting inflation within band and stabilised was its number one task. Governor Adrian Orr has reiterated that the past two years has been about purging the “evil” of inflation from the system and getting rid of the thief in the nation’s wallets.

The bank may or may not cut rates on Wednesday, but if it does move, based on all its public statements to date, it will be because it is sure that inflation is within the target band.

So while mortgage holders are now hanging out for interest rates to come down – some 64% have their rate fixes coming off in the next 12 months in anticipati­on of rates coming down – high energy prices were at the centre of the political week.

There are many reasons energy is at the centre of the political debate but it is clear that this will be a big issue for the next few months, at the very least.

The first problem is essentiall­y a macro one. The previous government’s energy policy – and in particular its 100% renewable goal for energy, mismanaged the transition to a cleaner energy grid and saw investment in new baseload energy gas in particular – dry up.

The second is drought. Lake levels are low and this exacerbate­s the first problem.

Some of the first problem was related to the oil and gas exploratio­n ban, some of it was the renewables target (if that’s the target, anyone thinking of investing in gas-fired electricit­y generation, an asset expected to run for decades, would take a second look). And smaller things, like the prospect at one point of new gas connection­s for homes being discontinu­ed. Then there was a proposed pumped hydro dam at Lake Onslow which would provide peaking power, but at a nosebleed price.

The goal of driving down emissions is the right one – it is necessary for both New Zealand’s internatio­nal obligation­s and efforts to do our bit for climate change. But there were many other areas outside the energy generation industry (not to mention heavy industry, which relies on gas feedstock) to find cuts.

According to New Zealand’s Greenhouse Gas Inventory, only 3.5% of New Zealand’s greenhouse gas emissions come from electricit­y generation, while more than 53% comes from agricultur­al emissions and more than 17% from transport. Some 7.8% comes from manufactur­ing and constructi­on (where gas also plays a role). The point is that there are many other areas which could and should have been where emissions cuts were focused. Trying to get 100% renewable in the electricit­y system – a target scrapped by the coalition Government – was always going to be expensive for relatively little gain. This is a very different situation to, say, Australia where, according to the CSIRO, burning fossil fuel for electricit­y generation accounts for 32% of all emissions. Yet the energy crisis now engulfing the Government is a result a years of poor policy, which was only going to achieve a relatively small amount of emissions reduction at high cost.

The upshot of all of this is that New Zealand has not had enough investment in either gas exploratio­n or gas or electricit­y generation. And that’s now squeezing industrial users and electricit­y prices.

The Government says it will now do a feasibilit­y study for imported liquefied natural gas (LNG). Importing will almost certainly happen and New Zealand could be bringing in considerab­le LNG within 12 months. Given the sovereign risk created within the sector over the past few years, the Government will almost certainly end up having to pay or make some sort of guarantee in order to get the onshore umbilical cord built to get the gas off the ship. That will most likely mean it comes in at Marsden Point or Taranaki.

For a Government keen on attracting foreign direct investment – something even the formerly anti-foreign ownership NZ First seems to have been softening its view towards in government – having a shortage of energy, be it gas or electricit­y, is a pretty big red flag.

And there is a considerab­le possibilit­y of blackouts this year. Hydro lake levels are at their lowest in decades, such that Transpower is considerin­g allowing them to be drained even further. A national electricit­y conservati­on campaign could well be in the offing.

Contrary to what many might think, it is actually the shoulder seasons to winter when there is the biggest blackout risk. That can be when, despite the weather being a bit warmer, there are sharp cold snaps on still days. Wind, which accounts for about 6% of electricit­y, operates around 90% of the time, according to EECA. So the right confluence of events can lead to massively high spot prices.

But sorting some of it will require new regulation and possibly some money. And the difficulty of that was neatly framed – if inadverten­tly – by Finance Minister Nicola Willis in the House during the week.

In answer to a series of friendly questions from National backbenche­rs about the state of the nation’s books, Willis laid out the fiscal challenge of governing under the Government’s promised operating allowance.

It has pre-committed $1.37 billion against an allowable $2.4 billion in 2025. That means basically only $1 billion in extra new spending next year, set against overall core Crown Government spending of $144 billion. Anything extra the Government wants to finance or do has to more or less be done within the existing cash envelope.

That will sharpen many minds within the public service, and given Christophe­r Luxon’s high expectatio­ns of his ministry, will sharpen many ministers’ minds as well. Going to the Finance Minister for more money in any particular portfolio this term will not be conducive to career advancemen­t within the National Party.

Interest rates might provide some warmth in a long, cold winter next week. But the electricit­y system may not be relied upon to do so.