What’s happening with New Zealand’s Natural Gas and Decarbonisation Markets?

27 July 2021

All businesses need electricity. All people in a modern society like ours need electricity. The trouble lies in finding balance between combatting climate change and generating enough electricity to sustain our population.

We all know and understand the importance of decarbonizing given the ominous challenge posed to us by climate change globally. But, New Zealand is a small, remote country which only accounts for 1/15th of 1% of the world’s population of 7.5 billion.

New Zealand’s electricity and natural gas markets are inextricably inter-linked. Electricity and gas compete as alternative energy sources, but rely on each other for production. Electricity generation is the second biggest user of natural gas after methanol production by Methanex. Gas is the second biggest source of electricity generation after hydroelectricity. 

With this intricate dependence on one another, the effective management of our national energy strategy (including electricity and gas etc) is critically important to our continuing economic health and hence to the well-being of all 5 million kiwis.

What impact does prohibiting natural gas exploration have on New Zealand’s energy supply?

The outright prohibition three years ago of all new offshore oil and gas exploration, is having a profoundly negative impact on the natural gas sector and hence on the health of the electricity sector. 

No matter how well intentioned this original decision was, it was not thought through properly at the time. The recent apparent softening of the Government’s stance on the role of natural gas as a transition energy source on the road to 100% renewability is, however, to be commended. 

Coal-based electricity generation in 2020 was the highest for a decade.

It’s unfortunate that, as a result of these policies, coal-based electricity generation in 2020 was the highest for a decade. This coincided with the lowest gas-based electricity generation for nine years.

Given that coal emits +/- 1.9 times more CO2, on a gigajoule-for-gigajoule basis than natural gas, this is an environmental step backwards. In this regard, coal imports of +/- 1 million tonnes from Indonesia in 2020 are currently on course to triple in 2021 as we understand it.

What other factors impact New Zealand’s energy mix?

The negative impacts of the above prohibition have unfortunately been compounded by various other negative electricity supply and demand factors since then.

These factors have included:

  1. Rebounding electricity demand following the Global Financial Crisis in 2008.
  2. Back-to-back very dry summers in 2019/20 and 2020/21.
  3. The retirement of thermal powers stations like Otahuhu B and Southdown.
  4. The inability of new renewable power stations to meet the combined challenge posed by growing electricity demand and reduced thermal generation.

Gas and geothermal energy supply in New Zealand is struggling

Pohokura has been our biggest natural gas field for some years. During the past two years however, production has fallen sharply for unspecified technical reasons. This decline in gas production has reduced gas supplies available both for gas users and for electricity generation.

The prohibition of all new offshore oil and gas exploration, has also meant that there will be no offshore oil rigs available in NZ waters until 2022, at the earliest, to identify let alone resolve the ongoing production problems at Pohokura.

Other gas supply options have been constrained in the longer term by the non-renewal by the Government of existing offshore field permits for undeveloped fields, once their initial term had expired. Previously, successive Government’s lead by both major parties renewed these permits unless there was a compelling specific reason not to.

Power companies are passing costs on to businesses

Seriously damaged gas industry morale has also resulted in a combination of reduced/delayed/cancelled capex in existing gas fields.

Competition has essentially collapsed at the big end of the gas market.

The profound uncertainty surrounding the shorter term, let alone longer term, future of the natural gas industry has already resulted in Contact Energy vacating the time of use (TOU) part of the gas market as TOU agreements covering supply to larger customers expire. Two other gas retailers have also declined to quote for supply to various existing TOU customers.

We are also well aware of other very large TOU gas users (not our clients) who have to use natural gas and have been forced onto punitive spot market-related gas pricing. Major electricity-users like Whakatane Board Mills have also had a huge question-mark over their future due to huge gas-related electricity price hikes.

There is still some limited competition in the non-TOU part of the market (impacting smaller customers), albeit at much higher prices. To all intents and purposes, competition has essentially collapsed at the big end of the gas market.

What would Total Utilities recommend?

Looking to the future, New Zealand must formulate an integrated supply/demand energy strategy covering the transition period until 100% renewable energy is achieved in practice. Much like the cross-party Superannuation Accord in the 1990’s, we need a similar cross-party accord now in this vitally important area.

As such, the Government should:

  • Reverse its previous ill-advised decision not to extend existing gas field permits on undeveloped fields.
  • Greatly extend the scope of the existing EECA GIDI Fund/ETA initiatives.
  • Extend the separate Genesis Energy decarbonisation funding initiative to include Mercury and Meridian too.

To conclude, the appetite for future investment in the gas infrastructure is key to improving certainty in the market. Not only does it send signals to the sellers of natural gas but also to major users who are often multinational organisations. If it becomes more apparent that investment will be very limited, these organisations could very well leave NZ prematurely, obviously impacting employment, business activity and tax revenue.

Business and media enquiries can be made to Total Utilities.