Government's LNG terminal plans didn't model global price spike

Modelling done for the Government on its plans for an LNG terminal did not consider the effect of an international price spike, documents show.

By Kate Newton of RNZ

A climate advocate said the decision not to model price volatility was "remarkable" and raised further questions about whether the planned facility was a good idea.

However, officials said although the current conflict in the Middle East had created volatility in LNG prices, longer-term price projections were still in line with the information the Government based its decision on.

The Government announced in February it would proceed with plans for a liquefied natural gas (LNG) import facility in Taranaki, with the billion-dollar plus cost paid for through an electricity levy.

The proposal, widely criticised at the time, has attracted renewed opposition after Iran's closure of the Strait of Hormuz prompted the price of fossil fuels - including LNG - to spike.

Gentailer chief executives expressed doubts at the energy sector's conference last month, prompting Prime Minister Christopher Luxon to say the Government would not proceed if the business case did not stack up.

The Ministry of Business, Innovation and Employment (MBIE) said in a statement last month that the LNG terminal was selected from a shortlist of five options that it considered "timely, feasible and of sufficient scale to meet dry year needs".

It would also be beneficial to major industrial gas users, who had been forced to limit production or shut up shop altogether in recent years as domestic gas supply dwindled, the ministry said.

The announcement had already had an effect on the prices electricity suppliers were paying for supply later this year, MBIE said.

"While forward prices will move around in response to a range of factors, electricity forward prices dropped substantially in the weeks following the Government's LNG announcement."

Documents released to RNZ under the Official Information Act outline how consultants contracted by the ministry modelled the effect of an LNG facility on New Zealand energy prices.

The variables they tested included whether two or three coal- and diesel-burning Rankine turbines at Huntly are working over winter, how fast future renewable generation is built, and whether a private joint venture to build gas storage beneath the Tariki gas field in Taranaki goes ahead.

The model tested various scenarios with two international LNG prices: $20 and $25 per gigajoule.

It did not look at any higher pricing.

"[This] modelling has not considered the potential impact of international fuel price volatility," the document said.

Undertaken before the current fuel crisis, the modelling said that, at the moment, New Zealand's electricity system was currently "relatively insulated" from international energy prices.

That had been beneficial when international prices, especially LNG, spiked during 2021 and 2023 - when Russia's invasion of Ukraine affected supply.

International natural gas prices have now increased again, after Iran blocked the Strait of Hormuz, and Goldman Sachs recently said prices could increase by another 50 to 100% if the conflict with Israel and the US dragged on.

Lawyers for Climate Action executive director Jessica Palairet said the modelling reinforced "real questions about whether the LNG import facility is going to deliver".

"The analysis did not consider the risk of international LNG price ... which is quite remarkable."

The model also assumed that supply of LNG would be unlimited and uninterrupted, an assumption that was being tested by the current situation, she said.

An MBIE spokesperson said the current conflict had created only "short-term volatility" in LNG markets.

"LNG futures prices for 2028/2029 remain consistent with the price assumptions that fed into earlier Cabinet analysis on LNG," they said.

"Importantly, events in the Middle East do not impact the cost of the LNG import facility itself, nor the benefits of having reliable dry year cover in New Zealand."

The modelling documents showed that having access to LNG had the greatest effect on New Zealand's electricity system in scenarios where electricity demand was much greater than supply, the Tariki gas storage project did not go ahead, and LNG prices were low.

"If LNG is significantly higher priced than NZ gas, LNG will likely result in cost," the documents said.

Savings were also much lower when supply and demand was in balance, and if there was additional gas storage available through Tariki - which emails between officials and consultants concluded would have a "high impact".

An agreement to develop the Tariki project was signed by NZ Energy Corp and Genesis late last year, and early work has begun.

A Genesis spokesperson said there was no timeline yet for "this potential project".

Significant parts of the documents were redacted, including the introductory pages of the final presentation outlining the results.

Jessica Palairet said what appeared to have been redacted was the full executive summary, including any conclusions the Concept Consulting consultants - who she said were "well-regarded" - had drawn from the modelling.

"We don't have the interpretation of the consultants of their own modelling, In some ways, they're ... the most important information in the entire analysis."

"What's been redacted appears to be what the modellers actually thought about their model."

MBIE said those sections of the document, along with multiple smaller redactions, were held back to protect the "free and frank exchange of opinions".

Official Information laws allow for such redactions, provided they are not outweighed by the public interest.

Palairet - who also received a redacted version of the same documents - said her organisation was challenging that decision with the Ombudsman.

"There's a really strong public interest in releasing the full document. We're talking about a huge expenditure in the middle of an energy crisis."

RNZ has laid a separate complaint with the Ombudsman, asking for the redactions to be reconsidered.