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It is also promising new restrictions on the major power generators requiring them to sell electricity "at affordable rates" to smaller retailers through the wholesale market.
The changes are just some of a suite of recommendations outlined in the Electricity Price Review's final report released today.
In a statement, Energy Minister Megan Woods said the electricity market was not delivering for everyone, as many people were paying higher-than-necessary bills and struggling with the cost.
"We can't fix it overnight or in one fell swoop, but there are a range of practical things we can do to tilt the balance in favour of consumers while adding more competition to the marketplace to take pressure of the monthly power bill."
Residential power prices have risen almost 50 percent since the year 2000 and more quickly than for industrial and commercial users.
In one of the most significant changes for power companies, the large "gentailers" - companies which both generate and sell electricity - are to have limits imposed on the price they can sell electricity into the wholesale market.
Ms Woods said the aim was to "level the playing field" for smaller companies.
"It can be too hard for small and independent retailers to compete and survive, meaning fewer choices for consumers and less innovation in the market. We are changing the market to level the playing field and boost competition."
A similar system already exists in the United Kingdom and is being introduced in parts of Australia.
Ms Woods said the government was putting the industry "on notice" and would review the changes in its second term to ensure savings were being passed on to the public.
Other changes include a moratorium on so-called "win-back" offers which benefit customers who shop around, but hurt those who don't.
Prompt payment discounts are also to be scrapped with the hope retailers will pass those rates on to all customers.
"When Meridian did this, it put $5 million back into the pockets of consumers, and the EPR estimates that $45 million would come off power bills when other companies follow suit," Ms Woods said.
A pilot scheme will also be set up to help customers who have not switched power providers before to shop around for better deals.
The Electricity Authority is responsible for now making the changes, but the government has warned it will pass legislation allowing it to bypass the authority if required.
In a statement, the Electricity Retailers' Association (ERANZ) welcomed the majority of the recommendations and said it looked forward to working with the government to develop further details.
"The review shows the electricity sector is delivering for Kiwis. Retail competition between 40 power companies is driving innovation and keeping prices down," ERANZ Chief Executive Cameron Burrows said.
"The annual average power bill is down $120 since 2015, we have the 12th cheapest electricity in the OECD, and customer switching is at the highest level in eight years."