Determination of the 2025 Electricity Allocation Factor

The Electricity Authority Te Mana Hiko has published its Determination of the 2025 Electricity Allocation Factor. This report documents our calculation of the electricity allocation factor.

The electricity allocation factor estimates the increase in electricity prices resulting from the requirement in the Emissions Trading Scheme (ETS) to place a price on the carbon used in electricity production. The electricity allocation factor is used as an input to calculate eligible industrial producers’ annual allocation of emissions units.

Around one-third of the annual industrial allocation is set using the electricity allocation factor.

The 2025 electricity allocation factor will inform decisions to be made by Cabinet later this year on industrial allocation settings, which will be implemented by the Environmental Protection Authority in early 2026.

The electricity allocation factor for the 2025 calendar year is 0.516t CO2e/MWh.

The EAF for 2025 is almost 7% lower than the value of 0.554tCO₂e/MWh in the 2024 calendar year. This is because of low average wholesale electricity prices during the period.

Wholesale electricity spot prices were elevated during the first part of the 2024/25 financial year due to a combination of low hydro inflows, reduced wind generation and a shortage of natural gas.

But high prices over July and August 2024 were followed by a sustained period of low prices from September 2024 to January 2025 due to higher inflows and hydro storage, lower industrial electricity demand (eg NZAS demand response), and an increase in gas made available for electricity generation.

As a result, overall wholesale prices in the 2024/25 financial year were frequently well below the short-run marginal costs incurred by generators. In the EAF methodology, these generation offers are not adjusted for the cost of carbon; factors other than the cost of emissions are influencing the offer behaviour of generators.

We are required to calculate the electricity allocation factor under the Climate Change Response Act 2002. As part of our statutory requirements, we are required to make publicly available the market model used to determine the electricity allocation factor, and any input data necessary to operate the model.

Our methodology has changed only slightly from that used in our EAF determination in 2024, including some minor changes relative to last year to incorporate battery energy storage systems, and some minor changes to update emissions factors.

The Authority will be assessing the methodology’s gas data inputs for the determination of the 2026 EAF.

The gas data used currently is from one source. We are interested in exploring the accuracy of alternative sources; and in ensuring the sustainability of our methodology by possibly having multiple sources.

We will engage with the sector on this work.