News

THE LNG STORY AND WHAT'S WRONG WITH IT

Summary

• The core economic claim is that the electricity market will not invest sufficiently in dry-year cover due to infrequency and risk allocation. It is claimed that this is the justification for Crown intervention and that what is proposed is “light touch” when in fact the Cab paper shows that this is a significant structural intervention.
• The paper simultaneously rejects other options for achieving the same goal, such as direct generation build, market-led LNG option, capacity market mechanisms and proposes a levy-funded Crown contract model.
• In terms of the veracity of the analysis – this project is presented as “insurance”. However, good practice requires that insurance analysis includes tail-risk modelling. That is seriously underdeveloped in this paper (may exist but you would have thought they would refer to it)
• In the paper, LNG is scored as:
  • Moderate capex
  • Moderate generation cost
  • High flexibility
  • Lower “lock-in” risk
  • Spillover benefits

But the weightings are not disclosed and the scoring is qualitative.  There is no full net-present-value comparison across scenarios which significantly weakens the analytical robustness of the proposal.

The Accelerated Legislative Pathway is extraordinary, as it bypasses every single established Government procurement process and is a highly unusual compressed decision pathway for a long-lived infrastructure intervention.

The paper proposes:

• Accelerated procurement (operational by winter 2027)
• New Enabling LNG Bill
• Potential urgency
• Levy powers embedded in legislation
• Ministerial group selecting provider
• No full RIS due to time constraints
• The QA panel explicitly states analysis “partially meets” criteria
  

This overrides normal RMA processes, uses, enabling legislation to put significant power into the hands of Ministers to procure, without appropriate accountabilities and transparency. This creates procedural integrity concerns, integrity and process risk with the accompanying litigation risk. These risks also create investor signal risk.
There is a strong chance that the fast-tracking may increase the chance of judicial challenge which would slow things up.

Specific policy gaps
The paper explicitly acknowledges:

• Risk of tying NZ gas prices to global LNG.
• Need to develop/ confirm a limited, infrequent usage model (doesn’t seem to be covered in the paper)

Further gaps are:

1. Risk Premium reduction is assumed, not proven
   This is the central fragility in the case. The entire economic case rests on an argument that LNG reduces forward prices by at least $10/MWh. But there is no behavioural modelling of potential hedge market response or of gentailer contracting behaviour.
   Also there is no empirical evidence that availability alone reduces risk premium and no discussion of potential market power dynamics.
   If the risk premium does not fall materially the benefit-cost ratio collapses and consumers will end up paying a levy without offsetting gains.
2. No System-Wide cost comparison under extreme scenarios.
   modelling includes some price scenarios and some LNG price scenarios but it is missing what I would consider to be necessary for good modelling, including:

• A high LNG price stress case
• Geopolitical shock scenario.
• A 2022 European-style gas price spike.
• 2 consecutive dry years scenario.
• Combined gas + coal outage scenario.
  

3. Domestic Gas interaction is underdeveloped 

The paper says LNG supports domestic gas, sustains pipeline viability and avoids deindustrialisation but it does not analyse:

• How LNG import parity affects upstream exploration incentives
• Whether LNG becomes a marginal price setter
• Whether domestic gas is displaced rather than supplemented
• Risk of long-term dependency

4. Fiscal Risk Is seriously understated
The levy is presented as cost neutral and a pass-through. But the paper also acknowledges:

• residual fiscal risk
• unknown working capital
• commercial revenue uncertainty
• contract termination clauses
  

There are a number of unexamined issues such as - what if demand falls, what if electrification accelerates? What if LNG is barely used as it is a higher cost fuel? What if prices don’t fall?
If any of the above occur, the Crown/ taxpayer becomes the counterparty risk holder and the volume risk holder. This is materially more than “no upfront capex”.

5. Regulatory alternatives are not properly evaluated
The paper states that a regulatory dry-year framework is being developed separately. There is therefore no integration between this “insurance solution” and capacity market options, strategic reserve models, reliability obligation models, demand-side firming mechanisms and long-duration storage comparison (pumped hydro, batteries). Without comparing LNG against a fully designed reliability market, this is arguably an incomplete economic test.

6. Emissions
Although modelling suggests emissions reductions vs coal fallback, the paper does not address long-term net-zero alignment, investor perception of fossil infrastructure extension and the lock-in risk beyond 15 years.

Business Case Gaps
Overall, there are real structural weaknesses in the business case and it is a really thin multi-decade infrastructure commitment.
The paper admits: “Timeframes were constrained” and there was “no independent stage gate review”. This is significant because there has been no independent peer review and the QA panel says analysis only partially meets criteria.
The option scoring lacks weighting transparency and the benefit calculation heavily dependent on one modelling input.
There is no disclosed Monte Carlo risk analysis or distributional analysis of levy impacts.

Governance Gaps
From a governance perspective, there are also some significant red flags as under the plan, the Crown contracts the facility, imposes the levy, influences wholesale market pricing and potentially alters investment signals. This moves the government into quasi-market-operator territory and should require clear governance separation, market neutrality safeguards and transparent trigger mechanisms for LNG dispatch. None of this is specified.