NZ Electricity Prices Fall: Is New LNG Terminal to Credit?
The New Zealand government’s plan to build a new liquefied natural gas (LNG) import terminal is already impacting energy futures markets, according to signals from the government and industry participants, though the extent of that impact remains a subject of debate. The initiative, announced last week and funded by a levy on power companies estimated to be between $2 and $4 per MWh, aims to address concerns about energy security and price volatility, particularly during dry years when hydroelectric generation is constrained.
Finance Minister Nicola Willis stated on that the announcement has already led to a decrease in future pricing, suggesting the market is responding positively to the increased fuel supply resilience. “Already we have seen that in response to the Government’s announcement about an LNG proposal to provide that reliable fuel supply, we’ve seen the future pricing come down and that reflects risk being removed from the equation,” she said. The government estimates the terminal will save New Zealanders around $265 million annually by reducing price spikes and lowering risk premiums, with households potentially seeing savings of approximately $50 per year.
However, the plan has drawn criticism, with Labour leader Chris Hipkins labeling it a “gas tax” and vowing to halt the project if a contract isn’t signed before a potential future Labour-led government takes office. This opposition highlights a broader debate about the long-term role of natural gas in New Zealand’s energy mix, particularly as the country pursues ambitious renewable energy targets.
The core argument for the LNG terminal rests on mitigating the “dry year risk” – the potential for electricity shortages and price surges when rainfall is insufficient to maintain hydroelectric dam levels. The government believes the terminal will provide a reliable backup fuel source, reducing the need for expensive emergency measures and stabilizing prices. The estimated reduction in dry-year risk factored into electricity prices is at least $10/MWh.
Genesis Energy chief executive Malcolm Johns acknowledged the significance of the recent fall in futures prices, describing it as substantial “in the context of where we’ve been.” However, he cautioned against attributing the change solely to the LNG terminal announcement, noting that increased generation capacity from other sources is also contributing. “I can’t relate it [the drop in prices] to any deal. There’s a lot of generation that’s being built at the moment but the more fuel resilience you have, the more certainty there is in being able to generate electricity in the future,” Johns said.
Industry body Energy Resources Aotearoa supports the terminal, viewing it as a crucial component of New Zealand’s energy security. John Carnegie, the organization’s chief executive, described LNG as a “vital part of the overall puzzle,” capable of dampening price volatility when renewable energy sources are unavailable. However, the organization previously cautioned that relying on LNG should be a last resort, as highlighted in last year’s Frontier Report, which warned against the economic viability of using it solely to address dry year risks due to the high fixed costs.
Economist Gareth Kiernan of Infometrics agrees the terminal is likely having some effect on prices, but suggests the impact may be overstated. He noted that while wholesale electricity prices have fallen recently, 2027 futures prices remain comparable to mid-2024 levels, indicating the market still anticipates potential supply constraints. “So given that wholesale prices have eased to their lowest levels in about 16 months over the last fortnight, it seems likely that the Government’s LNG announcement is having some effect on the market,” Kiernan said in an email. “However, I’d note that the effect on 2027 prices might be a bit overblown, given that the Government themselves has said that the LNG facility ‘could be operational as soon as 2027 or early 2028’, which hardly fills me with confidence that it will be up and running by winter next year.”
The government has opted for a standard-sized LNG facility, with a price tag “north of a billion dollars,” despite previous consideration of a smaller-scale solution deemed more cost-effective last year. The construction costs and annual operating expenses will be borne by the electricity sector, while the cost of the gas itself, including transportation and processing, will be passed on to consumers. This cost structure is central to the debate surrounding the project’s overall economic benefits.
The success of the LNG terminal in delivering promised savings will depend on a complex interplay of factors, including future power and gas prices, the effectiveness of renewable energy integration, and the assumptions underpinning the government’s economic modeling. The modelling compared the LNG scenario with four others, all designed to address dry year shortfalls. The details of the government’s underlying advice remain unpublished, adding to the uncertainty surrounding the project’s financial implications.
The comparison to the NZ Steel deal, as highlighted by some commentators, raises questions about the government’s approach to large-scale infrastructure projects and the potential for cost overruns and unforeseen consequences. The LNG terminal, like the NZ Steel arrangement, involves significant public investment and carries inherent risks. Whether the benefits will outweigh the costs remains to be seen, and will be closely scrutinized as the project progresses.