Inside Cabinet’s case for importing LNG ‒ and the puzzles that remain
Sunday, 15 February 2026
ANALYSIS: Spending about $2 billion over 15 years on a terminal to import liquefied natural gas might seem a crazy way to the keep the lights on in a country blessed with abundant, cheap renewable sources of energy.
More puzzling still, given the price of domestically-produced natural gas averaged $9 a gigajoule (GJ) on the spot market over the past three months, while LNG is expected to cost about $20 to $25 per GJ ‒ even disregarding the cost of the terminal.
A Cabinet paper confirms a levy on electricity that the Government intends to introduce to fund the cost of the terminal will add around $15 to $30 to the average annual household’s electricity bill, if that was passed through to consumers, which officials believe it will be.
But given the advice officials provided Energy Minister Simon Watts about the energy scenarios the country could be facing from 2027 and the options he had, it is easy to understand why he might have felt he had little choice but to persuade Cabinet to green-light the investment.
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The alternatives Watts was presented with by officials to plug the gap left by dwindling gas included converting some power plants to burn even more expensive diesel, or building a new coal-fired power station at a cost of at least $4.5 billion.
Some technical aspects of the officials’ advice do appear puzzling. Successive governments could also be criticised for getting into the situation in the first place where importing LNG has become a necessary insurance policy.
And figures presented by officials suggest ministers have been hasty to snipe at the likes of the Lake Onslow pumped hydro scheme, which appears a cheaper way to shore up the electricity system than burning fossil fuels over the long run.
What is the scenario the country is facing in 2027?
Watts’ Cabinet paper said that while a report by consultant PwC on the gas outlook was still being finalised, initial modelling showed there was likely to be insufficient supply from 2027, especially if there is “a dry year” when hydro generation is constrained.
Officials estimated the domestic supply of gas was likely to shrink by more than a third, from 107 petajoules (PJ) in 2025 to 67 PJ in 2030, with a possible a rapid rise in natural gas prices as consumers competed for the dwindling resource.
Watts notes the country got a glimpse into what that can look like in 2024, when a fall-off in gas supply and an autumn drought combined to force up the price of both gas and electricity, causing some factories to close or cut production.
The largest gas-fired turbine at the Huntly Power Station, Unit 5, which would normally have helped plug the gap left by a lack of renewable power was only able to run at 65% capacity because of a lack of gas, he says.
And the information provided to Cabinet said the country was actually “lucky” in some respects.
“In 2023 (a wet year) two of our ageing thermal generation plants had significant outages. If this had happened in 2024 with its dry conditions, the situation would have been far worse.”
In essence, the plan to import LNG is about ensuring there is enough gas overall in the market to fuel Genesis’ two gas turbines, units 5 and 6 at Huntly, without starving the other gas users of the commodity.
What about the alternatives?
Ministry of Business, Innovation and Employment (MBIE) considered, but quickly ruled out, significant solar subsidies as an alternative to LNG, noting it would “not provide substantive additional energy during the winter, when we are most likely to experience the dry year problem”.
The wider use of battery storage got the same short shrift as insurance for a “dry winter”, given it drains flat over a few hours. “This type of technology has not progressed sufficiently to meet long term duration cover needs.”
Building more renewable power to allow more hydro storage to be held back for a dry winter could be an option, but there is a question of how much more capacity could be built in time and the option involves forgoing more of New Zealand’s largest, and cheapest, form of electricity generation in more normal times.
The Interim Climate Change Committee (ICCC) — the forerunner of the Climate Change Commission — described so-called “renewable overbuild” in 2019 as very costly and likely to lead to much higher electricity prices.
MBIE also looked at pumped hydro, which the ICCC saw as more promising.
Instead of Lake Onslow, the ministry revisited the possibility of Meridian raising the water level of Lake Pukaki by 30 metres to create a similar energy store, or a smaller pumped hydro scheme that was mooted by former Genesis Energy chief executive Marc England on the Upper Moawhango, near Taupō.
But the big issue there is neither could be ready before 2035, by which time a fuel shortage could have ravaged the economy.
Labour leader Chris Hipkins has suggested one faster option might be to make more use of “biomass” for fuel.
The snag is that the officials’ scenario-planning assumes the three Rankine units at the Huntly Power Station that could be converted to burn waste wood for electricity would already be burning coal in an energy crunch — so that’s not extra power.
Watts’ assumption is that the strategic coal reserve at Huntly could provide 1.5 terawatt-hours (TWh) of power in a dry year — equivalent to all the electricity the country uses in an average fortnight — while LNG imports would provide the other 1.5TWh needed to let the country squeak through all but all but the very worst dry years.
It could probably be worse for environmentalists
While Greenpeace executive director Russel Norman labelled the decision to import LNG “dumb, dirty and expensive”, the alternatives more seriously considered by MBIE could have locked the country more deeply into a thermal future.
The Government ran the ruler over building a whole new thermal power station that could burn enough coal or biomass to roughly equal the existing coal-fired generation at Huntly, but the estimated upfront cost of $4.5b to $5.1b and the risk that might not be ready until 2033 made that unattractive.
And it considered building and converting some large power plants — with a total capacity a little over half that of Huntly — to burn diesel for electricity.
While that would have been cheaper upfront than financing an LNG import terminal, the fuel itself costs twice as much.
Long-term advantage, pumped hydro?
It would cost $2 billion to build and operate an LNG import terminal over 15 years, plus about $250m for the 12PJ of LNG that it would supply each year it was fully utilised.
About $5b for a new coal power plant that might last 40 years, with only about a third of the energy storage capacity and two-thirds of generating capacity of the Lake Onslow pumped hydro scheme — plus upwards of about $50m a year for the coal if it needed to be fired up as frequently as Huntly is now.
Put it together, and the estimated $16b price tag of building the Lake Onslow pumped hydro scheme to shore up the electricity system for the next 100-plus years with almost free fuel from off-peak renewable electricity might not look so exorbitant.
Watts is dialling down the rhetoric on Lake Onslow now that it is being considered as a private sector investment rather than a government-led one.
“The private sector proposal for Lake Onslow is working its way through the fast-track process. Our issue was the ‘Labour Party version of Onslow’, which was the Government writing a cheque to, in effect, fund it,” he says.
“What we’ve got on the table now is a proposal where the market funds it. That’s the point of difference.”
LNG and hydro are complementary, he suggests. “We've got lakes that, if you increased the amount that they could hold, then that’s a thing. It's not one or the other.”
The remaining policy puzzles
Some questions remain over how the Government intends to import LNG.
The current assumption appears to be that LNG would be shipped in bulk, perhaps three times a year in a dry year, to a floating regasification ship that would be moored at the Port of Taranaki for several months a year each winter, and from which gas would be injected into the gas network.
MBIE’s advice appears to hint that receiving smaller supplies of LNG more regularly through the year might reduce the capital costs of a terminal, which might mean a lower levy on electricity.
But officials voiced concern in their advice to Watts that the year-round availability of LNG would result in the domestic gas price rising more commonly to the price of imported LNG — without appearing to explain their logic. On the face of it, that seems curious.
If an importer decided they would import tomatoes at $10 a kilo through the year, that wouldn’t be expected to result in the price of home-grown tomatoes rising to that price in the tomato season, after all.
The only safe takeaway may be that while imported LNG should lower the cap on peak wholesale electricity prices, you’d have to be the world’s greatest expert in game theory to be confident about the exact effect it will have on the broader energy market.
As Energy Resources Aotearoa chief executive John Carnegie, put it, there “any number of scenarios about how an investment in an LNG terminal could play out”.
One issue on which Watts admits the Government still has work to do is settling on the arrangements for importing LNG itself.
Genesis chief executive Malcolm Johns says LNG could be complementary to its existing flexible generation and gas portfolio, but “any involvement by Genesis would be based on commercial discipline and a clear focus on managing energy costs for New Zealanders”.
It not clear the Government intends to be hands-off though.
The levy-funded model for the terminal is based on the premise that there is a “market failure” that prevents gas users directly funding that investment, and Watts says MBIE is now considering how best to secure and procure gas importation contracts.
“From an energy security point of view — and from a national security perspective — I will want to be convinced that if we need gas, we can get it,” Watts tells The Post.
Would Labour cancel the LNG contract?
The Opposition has no incentive to help sell the Government’s LNG plan to the public and Hipkins’ decision to label the electricity levy a “gas tax” is just deserts for National’s disingenuous labelling of the Clean Car Discount Scheme as a “ute tax”.
But Hipkins is already hosing down any speculation he might seriously consider ripping up any contract for an LNG import terminal.
“Whether we would stop a project will very much be determined based on how far that project is advanced before the election,” he said on Tuesday.
“I don't want more Interisland ferry-type debacles where a project is well-advanced a new government cancels it and the taxpayer ends up spending hundreds of millions of dollars because of that short-sighted decision.”
So while Hipkins hasn’t ruled it out — seriously — no chance.