Dry year power shortages may need LNG but could it be cheaper?
Thursday, 12 March 2026
ANALYSIS It is understandable that people who are keen on phasing out fossil fuels are up in arms that the Government is considering spending $2 billion over 15 years financing the construction of a terminal to import LNG.
The Government has found itself on a sticky wicket making the case that a levy it plans to put on electricity to recover the outlay would not be a “tax”, and has been fighting a rearguard battle over its commitment to renewables.
It is understood the pressure has come back on the Ministry of Business, Innovation and Employment (MBIE), from the Beehive, to explain the thinking behind the whole investment.
But even if importing LNG may be a necessary short-term evil, there are legitimate questions over whether the Government is pursuing the cheapest option, and the quality of all the advice it has received from the ministry.
Read more:
Inside Cabinet’s case for importing LNG ‒ and the puzzles that remain
Home solar systems or grid-connected solar farms, which make most sense?
The goal of facilitating imports of LNG is to ensure there is sufficient supply of gas to keep the gas turbines at the Huntly Power Station running, while avoiding starving industry of dwindling supplies of domestic gas and risking a repeat of the 2024 energy crunch.
MBIE officials estimate that the country could be short of between 3 and 5 terawatt-hours (TWh) of power during a “dry year” when hydro inflows were low — about 10% of the country’s total annual electricity demand.
The 600,000 tonne “strategic coal stockpile” at Huntly is capable of generating about 1.5 TWh, and the LNG imports the Government is proposing to facilitate could produce another 1.5 TWh to help the market squeak through a dry year in the absence of much domestic gas.
Master Electricians NZ, whose members do of course have an incentive to encourage rooftop solar installations, has suggested the country could follow Australia and invest more heavily than it is in solar energy instead.
It may be worth taking a bit of a reality check, though.
Because of its generally low cost, solar power will have a place in any electricity market.
But the fact that electricity demand in Australia peaks between about 3pm and 9pm, during summer heat waves, when the air conditioners are full blast is even more important than it might seem.
New Zealand’s demand peaks instead during dark winter mornings and evenings, usually when Kiwis get home from work and stick on the heating.
That doesn’t just mean that solar is generally producing energy in Australia when the price of electricity would otherwise be high, rather than low as is the case in New Zealand.
It also means that, in Australia, solar can reduce both the number of other power plants that need to be built and the peak load on power lines, which determines how much needs to be invested in the power network.
In New Zealand — without some way to store solar power — it does neither; the electricity system still needs just as many hydro, geothermal, wind or thermal power plants and solar doesn’t reduce the peak load on the grid.
Batteries in the home change the above equation. But no more than they would if they weren’t connected to solar panels at all and were just recharged, off-peak, from the grid with wind or any other form of power.
The unique benefits of solar, which are more about resilience and enabling people to go “off-grid”, and home batteries are often conflated.
Another way of effectively storing solar power — or any other form of electricity is to use it to displace hydro generation, saving more of the water in lakes for use in those darker winter evenings, for example.
To some extent that is already happening, with hydro increasingly being held back for times it can be sold at a higher price.
But New Zealand’s deepest hydro lake — Lake Pukaki — holds only about 1.6 TWh of power when the lake is full.
Forgoing cheap hydro from the lake and using solar or wind power to keep it permanently topped up to the brim, just in case there’s dry weather ahead, might be a tough economic proposition — or that seems to be MBIE’s assumption.
But do we really need to spend $2b on facilitating imports of LNG? It certainly seems a huge outlay for a piece of infrastructure that the Government is promoting as hopefully only “insurance” for keeping the lights on.
A report published in November by Boston Consulting Group (BCG) would seem to raise some doubts.
It estimated that a “full-scale” LNG import terminal capable of importing 12 petajoules of gas — enough to generate that 1.5 TWh of dry-year power — would cost up to $800m to construct and up to $75m a year to operate.
The very top-end of that range roughly matches Cabinet’s estimate and is the option it settled on. It would involve importing LNG in large tankers capable of carrying 4PJ to 5PJ at a time.
But the consultant also identified a cheaper “small-scale bespoke” option that would allow the annual import of 9PJ of gas and that it estimated would involve only a $300m capital outlay and would cost just $3m to $6m a year to operate.
That would involve importing LNG in much smaller 0.4PJ shipments.
Cabinet appeared to reject the option based on a concern that LNG needed to be imported in “fewer, larger shipments that can be called on only when needed” in order to prevent the availability of LNG “linking domestic gas prices to global markets”.
MBIE’s concern was that if LNG was “drip-fed” into the market all year, every year, the price of domestic gas would rise to match the price it was sold at.
Officials have so far struggled to justify the advice, which has flummoxed at least two senior chief executives in the industry spoken to by The Post.
The law of supply and demand would appear to dictate that simply having additional supply in a market, even at a higher price than the prevailing market price, can never raise the market price of that product — meaning, in this case, raise the price of domestic gas.
Energy analyst John Kidd stops short of saying MBIE got it wrong, but says “I don’t think, practically, it wouldn’t work out that way.”
It is normal to have gas selling for different prices in a market, he notes.
Industrial companies such as Methanex and fertiliser-maker Ballance that buy large volumes of gas on a regular basis, “could quite reasonably expect to see a significant discount to LNG”, he says.
Ballance “can only bear a low gas price”, he notes. “LNG pricing just will not work for them. Suppliers understand that and will need to meet a price that keeps the larger part of the market intact.”
Officials are understood to be shifting a bit on their feet about the reasons for their advice and querying whether BCG’s costings for the bespoke small-scale option that MBIE dismissed were in fact reliable.
MBIE may well be right on that, and Kidd suggests it may be plumbing for the right option, regardless.
“If I was designing an LNG receiving facility in the country, I’d want to make it as ‘vanilla’ as I possibly could,” he says.
“The reason for that is you want to be able to accept cargoes at very short notice or be able to contract cargoes long term — whatever works for you — and you need to fit with the global supply chain to be able to do that.
“Once you start talking about small-scale LNG, you immediately eliminate probably 90%-plus of international carrier vessels.”
At the same time, if MBIE has made a dodgy assumption about the effect importing LNG could have on the domestic gas price, that does raise the question of what else it might have got wrong, or might get wrong in future, as it moves to the procurement stage.
The ministry acknowledged there had been very limited time to develop its proposals and no time for consultation.
The Government wants to sign a contract by July because it is understandably keen to facilitate the importation of LNG as soon as it can — by the winter of 2027, ideally, in case that proves to be a dry year.
Cabinet has acknowledged it would need to pass legislation to implement its planned levy under urgency in order to meet its timetable, and that the terminal itself would need to bypass even its Fast-track regime consenting process to be built on time.
Political discourse on LNG is likely to remain centred on the levy and the wider debate over the role of renewables in the generation mix.
That might not be a recipe for making certain any investment is carried out in a way that best bang for the buck.