The government today reiterated its intention to force investment in an LNG terminal, and to make electricity users, not gas users, pay for it. The new proposal is that payment would be indirect (via charging gentailers) rather than direct via a levy, but electricity users’ wallets are still the target. Today’s announcement is political smoke and mirrors.

But there's no analytical case to support the electricity sector paying at all: rapid renewables growth has shrunk the dry-year gap meaning that existing thermal plants and fuels provide adequate cover for the next few years, even with reduced gas. 

There is now an opportunity to slow down and improve the process, and not rush into a costly solution that prolongs New Zealand’s dependence on fossil fuels that raise both costs and emissions. 

1. The situation has changed. There is no evidence of electricity security risk in 2028 that would justify a rushed decision to import LNG.

Electricity sector experts and gentailers see the near-term dry-year situation easing, not worsening, as the current rapid build of renewables creates a significant supply buffer in all years including potential dry years.

Here’s one example: suppose 2024 dry-year inflows were repeated in 2028. On the left is 2024 generation, on the right EnergyLink modelling for the New Zealand Climate Foundation in a scenario for 2028 assuming 2024 inflows reoccur. The need for thermal is around halved even though demand has increased. And the annual price in that 2024-repeat is no higher than in an average year.

Data from EnergyLink modelling for NZCF: medium demand scenario, 2028 gas $19/GJ, carbon $95/GJ in today's $.

This modelling shows that closing the energy “gap” if 2024 inflows were repeated would not require 3000GWh of extra thermal generation across winter, it would only require 750GWh above a normal year even in a stressed high-demand scenario. And even in a very dry winter (2012 inflows) the gap is only an extra 1400GWh of thermal, not 3000GWh. This is manageable with the Huntly firming option. 

Separate more detailed scenario modelling by Concept Consulting (in their new “Outlook for the New Zealand Gas Market”) shows the same result -  that even in a stretched scenario with low production, high demand and no new gas storage, there is no shortfall that would require LNG prior to 2030. The case for forcing an LNG terminal into the market does not stack up.

2. The government’s claim that falling prices are due to their LNG announcement doesn’t hold water.

Wholesale futures prices on the ASX are steadily falling, and are now reaching long-run marginal costs. Falling prices indicate that the sector does not see security risk in the near-medium term that would require any intervention. The Minister today claimed credit for this price fall, saying:

“Since the Government announced the LNG facility in February, wholesale electricity prices for 2028 and 2029 have fallen by around $20/MWh, delivering savings of up to $800 million a year that will flow through to Kiwi households and businesses.” 

However this fall is a long-term trend due to renewables build, as shown in the following figure from the Electricity Authority. The fact that 2027 futures have fallen as much as later years reinforces that it is not related to the LNG announcement, as LNG would not be in place in 2027. The Electricity Authority also throws some shade at the government’s claim:

"Since futures prices fluctuate day-to-day and week-to-week, it is sustained trends or changes that hold meaning as opposed to short-term fluctuations. This is especially true for the long-dated futures. It is often difficult to understand which changes are meaningful changes in sentiment and which are just usual market volatility without waiting to see the long-term trend." 

3. Subsidising LNG results in a $6.2 billion net cost to New Zealand, increased emissions, and higher power bills.

Concept Consulting’s latest detailed analysis of future gas and electricity scenarios calculates an NPV cost to New Zealand of $6.2 billion for a cross-subsidised LNG terminal. 

The financial winners of a cross-subsidy would be gas pipeline owners, gas field owners, and those few industrial users who cannot easily switch fuels (although the report suggests these few industrial users be helped in developing dual-fuel capability with LPG or diesel as part of a much lower cost transition). The losers would be electricity consumers and New Zealand as a whole.

Concept also calculates that emissions increase by 29.6Mt, due to prolonged gas use stimulated by the availability of subsidised LNG. The government’s published assessment of climate impacts only considered electricity emissions - and found that within the electricity sector there would be little impact as LNG could substitute for coal. However the government failed to model emissions consequences of increased direct gas use outside of electricity - that is where the increase occurs. 

And to top it off, cross-subsidy raises, not lowers, electricity prices. Concept Consulting finds that forcing an LNG terminal (paid for by electricity consumers) is modelled to raise electricity prices by 3% out to 2035.

4. The real key to lower prices and better electricity security is advancing renewables build.

Bringing forward generation by just one year has an outsized impact on lowering average and dry-year electricity prices. EnergyLink modelling for the New Zealand Climate Foundation shows prices across both average and dry years reduced by around $30-$40/MWh by bringing forward build to create a greater buffer in the system. Conversely, a delay of a single year adds $30-$50/MWh to prices. The key to a more stable and low-priced electricity system is to focus on providing greater certainty that supply will be in place in good time to meet growing demand.

If there is still government concern about 2028 security, advancing near-term build would most easily be achieved by accelerating uptake of embedded solar and batteries rather than grid-scale projects. Adapting gas peakers for dual-fuel capability could be a further prudent backstop, in case domestic gas proves even more unreliable than it has been so far.

5. If the government chooses to proceed with LNG, terminal costs should be paid for by gas users, not the electricity sector.

As noted above, the argument that electricity prices benefit due to an “insurance” effect is not backed by the evidence - gas users benefit and gas users should logically pay if the terminal proceeds.

Gas users have touted the idea of subsidised gas at $20/GJ, which sounds appealing, but that embeds a cross-subsidy from the electricity sector. Concept Consulting calculates that an unsubsidised cost of LNG (including terminal costs) would be more like $33/GJ and probably more.

Those who the government proposes will bear the cost (electricity consumers, not just gentailers) should be consulted, and I am confident that New Zealand electricity consumers will not want to pay for gas users’ benefit.

6. Energy market price distortions, caused by the proposal to separate terminal costs from delivered LNG prices, will have a chilling effect on investment in low-carbon alternatives and create uncertainty for LNG users. Any LNG imported should enter the market at full, unsubsidised cost. Alternatively, competing technologies/fuels should receive an equivalent subsidy (~$15/GJ) to re-level the playing field for as long as the LNG subsidy is in place.

Paying for an annual terminal lease and related charges separately from the gas price effectively subsidises the delivered LNG price by around $10-$15/GJ, compared to the market situation where annual fixed costs would be embedded in the fuel price. Many low-carbon alternatives (electrification and biomass boilers in industry; use of black pellets at Huntly) have lower or similar cost to LNG’s full price (~$35//GJ), and under a market approach gas users would rationally switch to these options. However if LNG is subsidised to ~$20/GJ, these alternatives are locked out of the market, with the incentive being for inefficient over-use of gas due to the subsidy.

The solution - if the government proceeds with the terminal - is for any LNG imported to enter the market at full price. This could be achieved by including terminal costs based on a nominal import expected import volume (e.g. 8PJ/yr). For example:

• Annual costs would be paid by a levy on gas users if there are no imports.

• When LNG is imported, a fee to cover terminal costs would be added based on the nominal expected import volume. For example, if annual costs were $120M spread over a nominal volume of 8PJ, then each PJ imported would have a fee of $15/GJ on top of the wholesale price. 

• The levy on other gas users who do not use imported LNG could be reduced in those years when LNG is imported. 

This would maintain (approximately) the correct prices at the margin and avoid competitive disadvantage to non-LNG alternatives.

If on the other hand users of LNG do not see the full marginal price of the fuel, then re-leveling the playing field could also be achieved through an equivalent (~$15/GJ) subsidy to alternatives such as biomass and electric heat pumps.

7. Gas users are better assisted by helping them transition, not providing subsidised gas. 

The Sapere report “From Faultlines to Resilience” makes a clear case for how commercial gas users can be assisted to transition to alternative fuels, providing a long-term solution not the band-aid of subsidised fuel. The government’s new programme to provide loan funding helps switching, but will be undermined if the gas price is subsidised.

The Green Building Council has separately calculated the benefit to households and small businesses of getting off gas - for those smaller consumers it is a clear-cut benefit.

A subsidised price also creates uncertainty for LNG users, because subsidies only last as long as politicians decide to keep them: this risks sudden future changes in LNG users’ cost structure.

8. If the terminal proceeds, the government should build in contract reviews.

Given high uncertainty about whether LNG will be needed, and how long the terminal may be needed for, it is critical to build in regular reviews that enable ending the terminal lease early if it is genuinely not needed. This could for example be every five years, rather than a fixed fifteen-year lease.

9. Health and Safety concerns must be addressed before contracts are signed, including involving affected members of the public - particularly for a Port Taranaki location.

While I am not an expert in this space, my understanding is that for a major hazards facility such as an LNG terminal, the Health and Safety and Work Act requires some Worksafe process to occur before contracts are signed, including involvement of other affected parties such as New Plymouth communities within the hazard zone.

The consideration of public safety should not be rushed or legislated over, and must involve affected communities. Can the government rule out a location within 2km of residential areas?

10. It’s a fossil fuels subsidy that risks New Zealand’s trade arrangements.

Analysis by Lawyers for Climate Action Inc shows that a cross-subsidised terminal is a fossil fuel subsidy, and conflicts with New Zealand’s international trade agreements and commitments to reduce fossil fuel subsidies. The reputational and legal risks of this should be fully understood before proceeding. Shifting the levy onto gas users, and ensuring that any LNG imported enters the market at full (not subsidised) cost would reduce the risk.

11. There is now an opportunity to slow down and improve the process, and not rush into a costly solution that prolongs New Zealand’s dependence on fossil fuels. 

It is understandable that the Government wanted to take quick action after the 2024 energy crisis to address dry year risk. However, as outlined above, experts advise that the situation has changed and there is time to assess wider options. The success of renewables build over the last two years has changed the game.

We are also at a point in time when there is wide concern of policy processes being conducted behind closed doors. There needs to be better and more open consultation on this proposal, including on what problem the LNG terminal is addressing, who benefits, who supports the terminal, the costs, benefits and risks of the terminal, who pays, and alternative solutions for lowering New Zealand electricity prices and improving energy security for gas users. 

It is also very close to an election and the main opposition party has publicly stated they do not support the LNG terminal. A rushed decision now risks appearing political, rather than evidence-based in New Zealand’s interests. Given the closeness to the election, we strongly advise delaying the decision.

Note: Findings from Concept Consulting’s “Outlook for the New Zealand Gas Market” are shared with permission.

Christina Hood is chief advisor New Zealand Climate Foundation