This story first appeared on The Post.
By EMA Head of Advocacy and Strategy Alan McDonald
Setting aside all the noise about how it will be paid for, the decision to build a Liquefied Natural Gas (LNG) terminal in New Plymouth is the right one to shore up our future energy supply in the nearer term.
Energy prices spiked to ridiculously high levels for business users last winter, and the likelihood of repeat spikes is high, especially when our energy price is reliant on full dams and a supply chain run on the edge of failing to meet demand.
You need thermal (gas, coal, biomass or even diesel) to back up our renewable assets (hydro, geothermal, wind and solar) in dry years or to meet peak demand.
Plans for more generation will take that edge off, but it takes time to build the new generation assets while our gas supplies are running out quicker than expected. The ill-considered decision to halt new exploration has exacerbated the problem.
Elsewhere in the world, gas is widely recognised as the better option for a transition fuel while economies electrify. In New Zealand, we were forced to stop exploring for it and will instead burn a three‑ million‑tonne, literal mountain of coal.
Importing LNG will give our energy supply additional thermal backing to support the existing renewable generation. It’s a cleaner option than coal for our emissions profile while, in the longer term, more renewable assets are built.
It will also flatten out the price curve for energy. It’s unlikely it will reduce the price, but it will flatten the curve on price rises which won’t go as high, or increase as fast as, current predictions. When it comes on stream in 2027/28, the landed price of that LNG is likely to be at least double the current price of domestic supply.
The fact that doubling the gas price is still the best option is an indictment of the state of our electricity market. Our prices have gone from being a competitive advantage that attracted international businesses to pricing that is shutting our own businesses.
Over the past few years, energy prices have gone from barely being mentioned by our EMA members to being the top-of-mind issue. For many of them, energy is their second or third highest cost of business, particularly for those in the manufacturing sector.
They have reported price rises for fixed or hedged contracts by anything from 20% to 100%, and they have had major difficulties accessing those contracts – particularly for gas.
Late last year, one of our members was just three weeks away from a decision to move to Australia, sparked by the fact his gas contract was about to run out, and no-one would offer him a new one, despite months of trying.
A number of large and well-known businesses shut last year, citing higher energy prices as a significant factor. That’s de-industrialisation happening before our eyes and it will continue to happen. It’s widely expected that, sometime this year, at least one of our major gas users will exit the market and shut down its plant.
That will have a multi‑ edged impact: job losses, the closure of a major industrial plant and the loss of the expertise that goes with it, and the freeing up of some gas supply for other users. But it will also leave a major gap in gas demand that will discourage future exploration for new fields. Developing new fields is unlikely when bigger potential customers exit the market.
The naysayers were quick to focus on the cost and who will pay. Frankly, we have been left without options in terms of securing our shorter-term energy supplies, which was highlighted in the report recommending the building of the LNG terminal. We’ve got to get used to the idea of paying for things we need.
In this case it’s user‑ pays, and – as highlighted by the National Infrastructure Commission report – New Zealanders can expect greater reliance on user‑ pays if we continue to demand new or improved infrastructure, or even if we simply want to maintain the infrastructure we already have.
The money tanks are dry, and May’s budget will reinforce that. Call it a levy, a tax, a user-pays charge, a congestion charge, or a toll – it doesn’t matter, we have to pay. And expect your local councils to apply more user charges as well if the rates cap legislation passes.
The levy for the LNG terminal is being applied to the electricity companies and gas users, it’s estimated to be between $2-$4 per MWh.
The chances of that levy not being passed on to consumers are about as high as a consumer seeing one of the electrons they’re paying for with the naked eye. The levy will, however, help flatten the forward pricing curve, which may mean consumers face less costly energy bills in the future. But prices will still continue to rise.
The flattening of the energy price curve will offer some relief to EMA members. In the meantime, if you are looking to renew forward energy contracts, you are probably best to take what’s available. A dry winter in the next couple of years will again drive the spot price sharply higher.