Bringing Transparency and Liquidity to Aotearoa’s Electricity Hedge Market

Principal Economics is delighted to release our new report for the Electricity Authority, evaluating market-making parameters for a standardised super‑peak hedge contract. This analysis supports regulatory design that promotes price transparency, market liquidity, and robust consumer outcomes.

Key Findings

• Tiered Spread Cap Recommendation:
  We suggest a responsive cap structure with a 3.5% spread during normal conditions, and up to 8% during high-volatility or stress periods, ensuring a balance between affordability for hedge-takers and sustainable participation by market makers.
• Optimal Quote Depth Identified:
  Market-maker net benefits peak between 10–15 MW of quote depth. Beyond this range, marginal benefits decline, reflecting diminishing returns.
• Evidence-Based Elasticity Insights:
  Regression results show that in high-volatility environments, a 1% increase in volatility increases spreads by ~0.37%, while doubling depth lowers spreads by ~8%, highlighting the trade-off between risk and liquidity.
• Real-World Spread Benchmarking:
  Analysis of super‑peak auction data reveals median effective spreads around 3%, with the 95th percentile reaching 9–10%, supporting the recommended cap framework.
• Policy Framework Based on an Optimal Frontier:
  We apply an optimal frontier approach, plotting trade-offs between spread and depth to identify efficient market-making combinations. These choices deliver targeted liquidity at minimal cost—supporting the Electricity Authority’s public-interest objectives.

Why This Matters

The findings inform regulatory calibration of market-making in New Zealand’s super-peak hedge markets—helping ensure resilience amid volatility and price shocks, while avoiding onerous caps that stifle market participation. Our evidence-based design framework is meant to support durable, fair, and cost-conscious policy choices.

Read the full report for a comprehensive breakdown of our methodology, data, simulations, and policy implications:
Download the report PDF here.

Our report provides advice on the Government’s final decision about the second emission budget. In addition to a wide range of policies considered in our earlier (May) report, the current report further investigates the impact of:

• alternative carbon pricing policies,

• the Electrify NZ policy,

• the EV charging network investment, and

• the Carbon Capture, Utilisation and Storage (CCUS) and the Refrigerants Regulated Product Stewardship scheme assumptions.

Our high-level results suggest that:

• the high carbon price of the Fourth Pathway scenario leads to larger adverse economic and equity impacts.

• a decrease in GDP is associated with lower household consumption, lower real wages and lower exports (volume). As will be discussed, the short,
  medium and long-term dynamics of these effects are important for households (as well as the emission and
  economic outcomes).

• the emission targets are achievable, but there is a significant adverse
  impact on economic and equity outcomes.

We sensitivity tested the results for seven different Nationally Determined Contribution (NDC) scenarios.

Our extensive modelling of the government policies provides a comprehensive database for various policy and investment assessments as well as the ESG planning. For further information refer to our latest article here.

The Emissions Reduction Plan 2 (ERP2) delineates Aotearoa New Zealand’s strategy to attain its emissions reduction objectives for the 2026-2030 period, alongside setting a path towards achieving long-term emissions reduction objectives. ERP2 aims to reduce annual average emissions from 72.5 MtCO2e to 61 MtCO2e. The Ministry for the Environment (MfE) engaged Principal Economics Limited, the Centre of Policy Studies, and Infometrics Limited to evaluate the comprehensive impact of the proposed policies. This includes:

• Assessing the comprehensive economic repercussions of emissions mitigation policy packages within ERP2.

• Estimating and understanding of secondary or indirect consequences.

• Carrying out distributional analysis of these ramifications.

The critical policies investigated in our report include:

• Increasing renewable energy through Electrify NZ

• Targeting 10,000 public EV chargers

• Lowering agricultural emissions

• Investing in resource recovery

• Improving public transport

• Investigating carbon capture, utilisation and storage.

Cite this article

Torshizian E, Adams P, Stroombergen A. 2024. Economic Impact of New Zealand’s Second Emissions Reduction Plan. Report to Ministry for the Environment by Principal Economics Limited in collaboration with the Centre for Policy Studies and Infometrics Limited.

The Commerce Commission is in the process of the 2025 reset of the electricity default price-quality path in a time of uncertainty and high-inflation. The Commission tasked Principal Economics to provide a solution for dealing with supply chain and economic uncertainty for regulating $25 billion of assets of the electricity distribution businesses over the DPP4 (2025-2030) period. For that work, we used a combination of methods, including stakeholder engagement, CGE analysis (for the impact of climate policy on cost categories), econometric analysis and forecasting. The work included significant stakeholder engagement and inputs from the electricity distribution businesses from their submissions (to the Commission). The outputs are adopted in the Commission’s latest decision and are available here.