Statement on Castalia’s Report: Switching off the Gas Distribution Network – Response to the Heat Pump Suppliers Association of New Zealand (HPSA)

This statement responds to the Heat Pump Suppliers Association of New Zealand’s (HPSA) open letter dated 17 October 2025 on Castalia’s report “Impact of switching off the gas distribution network” (September 2025).

—

We appreciate HPSA’s engagement and share its commitment to supporting New Zealand’s efficient, affordable, and equitable energy transition. Like HPSA, we recognise that efficient electric technologies—including heat pumps—have an important role in reducing emissions and improving household energy performance.

Our report was commissioned by the Gas Industry Company (GIC) to examine the whole-of-system implications of a potential switch-off of the gas distribution network. It uses detailed, transparent modelling based on current market and policy settings. GIC and Castalia agreed on the final scope. Inputs and assumptions were workshopped and revised across several rounds of review by the Energy Efficiency and Conservation Authority (EECA) and the Ministry of Business, Innovation and Employment (MBIE). Stakeholders of course can have different views about the future trajectory of energy prices, technological developments and solutions to the energy transition challenges. The final output is Castalia’s analysis and reflects a balancing of the feedback we received and our expert judgement. Below, we address HPSA’s main points.

HPSA 2.a: Domestic solar and behind-the-meter storage are effectively absent from consumer benefit calculations

In Castalia’s view, home system solar PV and batteries are not relevant for a system-wide analysis of energy costs. While household solar adoption may benefit individual consumers in the short-term, current household solar pricing is not relevant for system-level electricity supply.

HPSA argues that Castalia’s report omits household solar and storage benefits. We agree that rooftop solar, batteries and other distributed generation/storage will be relevant in a future energy system. However, it is important to distinguish short-term individual household economics from system-wide costs.

Our modelling focuses on delivered electricity cost including generation, firming, transmission, and distribution. These costs must be recovered across all consumers in a grid-connected system. Even if some households self-generate part of their demand, almost all will remain grid-connected. The system must maintain capacity to meet that demand. Therefore, while household solar adoption can benefit individual consumers, it does not materially change the system-wide outcomes modelled in our report.

Our analysis of the costs of utility-scale vs home system solar PV generation in Australia shows that in almost all situations, grid-scale solar is lower cost than home mounted systems. This is supported by international evidence showing that utility-scale solar PV is lower cost than home-based systems, even including the cost of transmission, distribution and system losses. If home-based systems increase as a share of generation, those consumers’ grid connection costs (to pay for the option of having access to on-demand grid power at any given time) will have to be recovered. Transmission and distribution costs are currently recovered in consumers’ fixed and variable charges and therefore tariff structures will need to be redesigned.

Furthermore, our analysis also found that distribution network upgrades are a minor component of the total costs under the Switch-off scenario. As such, the value of solar and batteries in deferring network upgrades by reducing net demand on the grid during peak periods is likely to be minor.

HPSA 2.b: Heat pump adoption is underestimated in the base case, and their performance is powerful in lowering operating costs

We think that full heat pump adoption is an unrealistic assumption in the near term. In any case, even assuming full heat pump adoption would not significantly affect the results of the analysis.

HPSA argues that 100 percent adoption of space heat pumps and heat pump water heaters (HPWHs) should be treated as a central plausible pathway rather than a sensitivity. We recognise the efficiency benefits of heat pumps. However, several practical and economic factors limit their universal adoption.

The higher capital cost of HPWHs is unlikely to be justified for households with low hot water usage, where savings on operating costs are modest. Additionally, in cities such as Wellington, physical constraints—steep terrain, limited side access, and closely spaced houses—often make installation impractical, which limits the achievable uptake of HPWHs. HPSA’s quoted data show that HPWHs remain an emerging product in the New Zealand market.

For space heating, resistive systems remain cost-efficient for small or intermittently heated rooms, where the marginal efficiency gains of a heat pump are minimal. Additionally, HPSA’s quoted data show that heat pump sales for space heating have declined in recent years.

Together, these factors demonstrate that assumptions of full or near-full heat pump adoption are unrealistic in the near term and should be treated as sensitivity scenarios rather than central pathways.

In any case, the Castalia report explains that different technology adoption rates do not significantly affect the results of the analysis. Our sensitivity scenario of 100 percent adoption of space heat pumps and HPWHs showed that the Switch-off remains more expensive overall costing consumers an additional $795 million.

HPSA 3: Economics of “locking in” legacy systems and price volatility risk

HPSA notes that using gas appliances exposes consumers to commodity price volatility. We agree that while gas prices can be partially hedged through contracts, households are still exposed to market fluctuations. However, rooftop solar is also not immune to volatility. Generation depends on weather, and cloudy days or seasonal variation can reduce output. Most households with solar remain grid-connected, meaning they continue to face variability in on-grid electricity prices. Additionally, to the extent that gas-fired generation is used to firm variable renewable energy in New Zealand’s energy system, wholesale electricity prices—and by extension household bills—remain linked to gas prices, including their volatility. Together, these factors demonstrate that both gas and grid-connected solar expose consumers to energy price risk.

Castalia’s concluding remarks

HPSA’s response provides valuable perspective on technology potential. However, modelling must be grounded in evidence of current technologies and adoption rates. Throughout the process, EECA provided challenge on underlying assumptions, appliance performance, costs, adoption rates, and provided feedback on sensitivity scenarios. We therefore think the best possible information available at the time the report was prepared has been included. We would gladly collaborate with HPSA and other stakeholders on future work to ensure that any analysis of New Zealand’s energy future captures the best available information and supports an affordable, secure, and low-emissions energy transition.

Follow us on LinkedIn to stay current on our work.