Analysis: At an energy summit hosted by Hawke’s Bay Chamber of Commerce on Tuesday morning, big local horticulture and post-harvest, wood processing and irrigation firms took to the stage to talk about how energy costs and supply reliability are affecting them on the ground.
But around the fringes, says Pan Pac Forest Products pulp general manager Roger Jones, the quiet chatter is about Energy Minister Simeon Brown’s big announcements further up-country, to the Auckland Business Chamber.
Brown has confirmed the Government will press on with its proposed $1 billion-plus liquefied natural gas import terminal, despite all-time high global LNG prices. And ministers will impose tougher regulation to manage energy supply in dry winters.
Phew, says Jones. With the demise of the Norske Skog mill in Kawerau, then Winstone International mill in Ruapehu district, Pan Pac is the last big power-intensive mechanical pulp mill still standing. It’s also the biggest user of hydrogen peroxide, which is made from gas.
And it’s been touch and go: in 2024 when electricity wholesale prices hit $800/MWh, they had to shut down the Whirinaki mill for a month and send their 140 workers home.
Now, power hedge prices have eased, but Pan Pac still operates with the knowledge that a couple of years down the track, another dry winter could drive spot prices up again. “It is incredibly threatening,” he says. “We look at electricity pricing all the time, and so do our shareholders.
“We can go from being the most competitive mill in the world, depending on the power price, to being the least competitive. So you think about that, in a market when we’re going out wanting to secure orders months in advance. It’s pretty concerning for the business.”
Jones is relieved the Government will go ahead with its plans to build an LNG import terminal in Taranaki. I ask him, will it help keep Pan Pac in New Zealand? “It will help, absolutely,” he replies.
Will it help other big power users from leaving New Zealand? “I think it will help,” says John Harbord, chair of the Major Electricity Users Group. “At the end of the day, somebody pays. It will be interesting to see if there is any restriction on the ability of the large generators to just pass through their added costs.”
So will it also help the big power companies, or residential power consumers? On those questions, the jury’s still out.
Last month, in a surprise reversal of its previous support for LNG, Meridian Energy told a parliamentary committee that New Zealand does not need to import LNG to cover electricity supply shortages in so-called dry years. “From everything we can see, the analysis shows dry-year risk is being managed through the next 10 years,” said Meridian chief executive Mike Roan. “So when we look at LNG… it is not necessary from an electricity perspective.”
Contact Energy boss Mike Fuge also says the dry-year risk is reducing. This is due to new strategies set in place after widespread power outages on the coldest night of winter in 2021, the low lake levels that drove power prices sky-high in 2024, and now the Middle East fuel crisis in 2026.
The new measures include the Huntly strategic coal reserve (a deal between the big power gentailers to buy in coal stockpiles that’s been signed off by the Commerce Commission) as well as demand response measures at Tiwai Point aluminium smelter, draft consents to lower Lake Pūkaki, and other generation.
The power companies don’t dispute that New Zealand’s running out of its own natural gas; even this Government now admits the end of gas is nigh. But Roan and others deny it’s an issue for the electricity sector.
This might well have been somewhat of a bluff, to offset the threat of a levy on all power bills to pay to build the terminal (and that’s even before consumers start paying for the actual gas that comes through it).
Whether or not it’s a bluff, the Government doesn’t care.
Because wham, bam, Simeon Brown has hit the power gentailers with a double whammy this week. They will pay for the LNG terminal through what Brown calls a “fair funding model” (which he insists is distinct from a levy) and they will face steeper fines if they fail to secure enough back-up energy ahead of dry years.
“Kiwis have been paying the price for an energy system run on the edge through higher bills and greater risk of shortages,” Brown says. “This Government is fixing that by making the electricity sector take real, permanent responsibility for keeping the lights on.”
Brown says the Government has asked two competing energy infrastructure firms (reportedly Höegh Evi and Hibiscus Petroleum) for proposals on how they might deliver the LNG import facility.
‘Fair funding’ means user pays
Newsroom’s understanding is that the minister’s “fair funding model” will mean the big power companies that buy more LNG will pay more of the build cost; that’s likely to be Genesis and Contact, the two gentailers with big gas-fired power plants. This user pays model would replace the original plan for a flat levy across all electricity sold.
In a tacit rejection of the LNG terminal as a solution in isolation, Contact Energy chief executive Mike Fuge says his company strongly believes the solution to dry year risk and other system risks is multiple energy sources to be held as strategic reserves. These can ultimately provide energy resilience if one source of energy comes up short.
He includes among these increased coal storage, increased flexibility at hydro operating ranges to allow companies to capture more water that is otherwise spilt and wasted, more diesel reserves to support the transport sector, demand response from big industrial power users – and “it may include right-sized LNG import”.
He adds: “We are in discussions about LNG with the Government. Nothing has been agreed. The details of those discussions are confidential.”
Genesis Energy referred inquiries to Bridget Abernethy, chief executive of the Electricity Retailers’ and Generators’ Association. She, in turn, declined to answer questions.
The Government’s view is that responsibility for managing dry-year risk sits with the electricity sector and, as the largest players, the gentailers should carry the lion’s share of that cost. But the process to confirm a funding model is still to take its course.
The net effect for power consumers is much the the same as with the derided LNG levy – the billion-dollar cost of building the terminal will ultimately fall on the country’s electricity consumers.
Pan Pac’s Roger Jones says: “Like for all of us in New Zealand, cost pressures are extreme. But it has to be paid for somehow, and hopefully socialised to the right people at the end of the day.”
Although the Government may wish to stop the power companies passing the cost through to consumers, any attempt to do so might be seen by global markets as an assault on property rights.
It’s also worth remembering that ministers may be quietly happy for the power companies to maintain their profit margins, because the Government is a majority shareholder in Meridian, Genesis and Mercury. Last year the three paid a total $564 million in dividends to the Crown.
Amid uncertainty about the impact of today’s announcements on the mixed ownership model power gentailers, both Genesis and Meridian’s share prices were down slightly on Tuesday morning. Mercury remained flat.
With Taranaki’s Maui gas field set to finally run dry this year, after 50 years of production, it’s expected that New Zealand’s biggest gas user Methanex will shut down and exit the country. Some say the small amount of remaining gas freed up by Methanex’s departure could have filled the transition gap for the power sector and industry, without the billion-dollar price tag for an LNG terminal. Others argue the last lingering whiffs of Taranaki gas will make little difference.
The LNG terminal will effectively impose a soft cap on wholesale power prices; spot prices shouldn’t rise above the cost of importing the gas from Australia, the USA or Qatar. But it’s also the case that whenever lake levels are low and the country is forced to turn to LNG, the price of low-cost power like hydro, wind and solar will rise to match the cost of imported LNG.
John Harbord argues the LNG imports will effectively add a fifth big player to the power market. “If you’ve got that LNG import facility there from effectively a generator outside of the Big Four, then all of our generators – whether they’re large or small – will effectively be pricing up to the LNG price, rather than pricing up to whatever price they decide they want to price up to.
“It will still be expensive,” he adds. “I’m not claiming this as a miracle cure, but I think it does introduce a soft cap on how high wholesale prices go in New Zealand, and I think that’s a really, really important thing.”
Gas v renewables
Today, the Government has changed its language on LNG. Rather than presenting it as an alternative to renewables, Brown emphasises that it complements the new wind, geothermal, and battery projects coming online. “Kiwis need a backup source of power when the wind isn’t blowing, the sun isn’t shining, and the lakes are low.”
He says sufficient renewable alternatives like geothermal and big batteries won’t be ready by 2028, to cover the weeks or months needed to back up New Zealand’s power system if we’re hit then by another dry winter.
Perhaps that’s true, though Mike Roan and Mike Fuge would disagree. What does remain indisputable is that turning to gas is also to turn away from years of singleminded focus on building out renewables, to help electrify the economy and reduce the country’s greenhouse gas emissions.
A third Mike – Electrify Aotearoa chief executive Mike Casey – cites last week’s Sapere report as evidence that the Govt would have been better to cover dry years with existing diesel generation, costly as that might be, while working rapidly on new renewables.
WWF-NZ’s Teall Crossen goes further, saying the Government is ignoring cleaner solutions, and taking a leap of faith on a major new fossil fuel project while refusing to explain how it will be paid for. “It’s a shockingly bad decision.”
And there’s one more seeming contradiction. Simeon Brown says that despite the Middle East war, LNG remains the fastest and cheapest dry-year solution that can be put in place this decade. “Recent events in the Middle East are a timely reminder that New Zealand needs secure, diversified fuel supplies,” he says.
Some would take a very different lesson from the war, and the missile strikes on three of the world’s biggest gas producers, Iran, Qatar and Saudi Arabia. LNG prices have been driven up 60 percent since the war started.
Newsroom has put this to the minister’s office. Through a spokesperson, he replies that the Government is committed to renewables and New Zealand is on track to have a 95–98 percent renewable electricity system. “But in a dry year, when renewables are insufficient to meet demand, shortages create unaffordable spot prices and dire economic consequences.
“Indigenous natural gas soon won’t be an option to cover the risk, hence the need to import LNG. This is a pragmatic response to a real-world problem that is currently putting a cost premium on every person’s power bill.”
This may be look like a “pragmatic response” to the minister. To others, the shortfall in LNG supply and the ensuing price rises might look like one more good reason to be moving away from reliance on drilling hydrocarbons.
To the extent that New Zealand can find a suite of quick, flexible and cost-effective ways to bridge the gap to full reliance on our own renewables, these would seem to provide greater energy security and sustainability than building a billion-dollar gas terminal that will, for generations, sit on the docks at New Plymouth as a reminder of the decisions we make today.
Perfect is the enemy of good
Rapidly building out renewables, geothermal energy and batteries might be the perfect solution. But of course, they say that perfect is the enemy of good.
Stockpiling coal at Huntly certainly isn’t perfect. Paying mining multinational Rio Tinto to shut down a pot line at Tiwai Point isn’t perfect. Lowering Lake Pūkaki by 5 metres isn’t perfect. Even groups like Electrify Aotearoa, in proposing diesel to bridge the gap, are acknowledging the need for some sort of good-but-not-great short-term transitional solution.
For Simeon Brown and major power users like Pan Pac, investing $1b in an LNG terminal is the imperfect solution that’s available now.
John Harbord says that on another day, New Zealand could have decided an LNG import terminal was unnecessary. “But if you’re wrong on that, you get deindustrialisation on a massive scale, and the harm to the economy, the loss of jobs is enormous,” he says. “I think the Government correctly identified that, because of the risk involved and the severity of that risk, you do want a final backstop to protect New Zealand Inc.”
In Hawke’s Bay, Pan Pac’s Roger Jones says it’s all well and good to talk about other renewable firming and bridging options, but we have to work with the options available to us now. “Doing nothing is not a solution,” he adds. “Certainly, we’re concerned that if it’s not an LNG import terminal, then what?”
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