With energy policy and the cost of power in the headlines this week, here’s a timely guest post by regular reader, and freelance Business Analyst specialising in pricing and operations management, Stephen Reynolds. (Header image: Wikimedia, CC-BY-SA4.0)
Many New Zealanders view exhausting our fossil fuel reserves as inevitable and enabling us to move on from the emissions they generate.
Our previous (left-leaning) government introduced a ban on new gas and oil exploration which was well supported. Our current (right-leaning) Government has appointed Shane Jones, whose stance on climate-change is less than reassuring, as Minister of Resources and Associate Minister for Energy.
Jones has led the charge to reverse the gas and oil exploration ban and created a contingency fund of $NZ200M for co-investment in new gas fields. This is despite the fact that in the ten years prior to the ban there had been very few new gas discoveries of significance.
While Jones is gung ho and charging ahead into a new gas age, the New Zealand Ministry of Business Industry and Energy (MBIE) is rapidly writing down New Zealand’s known gas reserves.
As Radio New Zealand reported in June this year:
MBIE also said as of January this year, natural gas reserves were down 27 percent compared to last year – also falling faster than previously estimated. “In 2024, natural gas proven plus probable reserves reduced from 1300 PJ to 948 PJ,” MBIE head of data service delivery,” Karlene Tipler said.
New Zealand uses about 150 PJ (Petajoules) of gas per year, so 948 PJ is about six years’ supply.
Naturally, Jones said the decline in gas reserves was a ‘stark reminder’ of why the government was seeking greater investment in exploration and production, according to RNZ. He is of course correct that we have to do something (dramatic) as the 2200km stretch of water between us and Australia precludes the simple option of a pipeline to our nearest neighbour.
A better pathway for the Government would be to rapidly ramp up solar+battery generation to substitute for generation from our limited gas reserves, buying time to enable business and consumers to transition to electric appliances through lower-cost routine replacements.
In the meantime, what do the markets think? Are they betting for or against Jones finding more gas? Specifically, are prices increasing above what would be expected? Do gas traders see an opportunity to extract a scarcity premium?
My data source here is the New Zealand Consumer Price Index data. Every quarter, Statistics New Zealand publishes comprehensive price index data across 149 data series – including Electricity, Gas, Petrol and Other vehicle fuels and lubricants (my proxy for Diesel).
In a perfect world, we would expect that:
- Petrol and Diesel prices track world oil prices, more or less
- Electricity tracks the overall index – as it is all internally generated and mostly from renewable hydro resources
- Gas, being all locally produced, should track electricity more or less, as most uses are substitutable with electricity over the medium horizon.
The first chart is CPI Reporting for 77 quarters from June 2006 to June 2025, neatly straddling the GFC years and the Covid years.
Petrol (blue) and Diesel (green) bounce around quite a lot, especially in the recent Covid years. The lines for Electricity (purple) and Gas (red) are less volatile, and are aligned until mid-2022.
The second chart shows Petrol and Diesel plotted against the Dubai Crude price in NZ Dollars.
Since 2015, these three lines have followed the same pattern throughout – and the same magnitude for Diesel, particularly. This supports my first ‘perfect world’ view: Petrol & Diesel prices are tied to the world market.
The third chart shows Electricity & Gas price indexes against the CPI All Groups index for the same period. Also shown (for clarity) is the annual CPI rate by quarter. As you can see, the CPI All Groups has been relatively benign up until 2021, when it increased significantly – responding to the looser Covid-era monetary policies that sparked the ‘cost of living crisis’.
Gas and electricity march together, and pretty well match the All Groups CPI index between 2012 and 2021. At this point, two things happen:
- Electricity price increases don’t keep up with the ALL Groups CPI index
- The Gas price index increases faster than both electricity and the ALL Groups index
That the gas index is diverging from and growing ahead of both electricity and the index says to me that gas scarcity is beginning to be baked into the domestic gas price.
The rapidly increasing gas price says the markets do not share Jones’ enthusiasm for oil and gas exploration, and this price divergence will soon become more than most consumers can bear.
Currently commentators and consumers see the gas price increase as a continuation of the ‘cost of living crisis’ when in reality the increase has more to do with scarcity, and can only get worse. Maybe much worse!
Eventually, people with gas appliances and gas water heating but no cheap or easy way to switch to electricity will rightly cry out, ‘Nobody told us!’
A 2024 study confirms that just under half of New Zealand households use gas, and most often they use it for both hot water and cooking. That’s a lot of potentially pissed-off voters if Jones is backing the wrong horse.
Of course, Jones’ efforts will find insufficient new gas in time, and the following step will be for New Zealand to ramp up LPG imports from Australia – moving us further away from de-fossil-fuelling our economy. Something we don’t want, and that can be avoided.
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Luckily, our minister of energy is also minister for climate change (and revenue, and local government) – Minister Watts.
Not many countries have climate action ministers tendering for LNG terminals.
He said on RNZ this morning, NZ will be exporting green electrons from our new (tiwai point size) AI datacenters. An export market he’s very excited for. The datacenters will be powered by renewables, the rest of NZ will be huffing aussie gas it seems.
Cognitive Dissonance is state of mental stress or discomfort that occurs when a person holds two or more conflicting cognitions (beliefs, ideas, attitudes, or behaviors). It is supposed to reduce a person’s ability to function. I wonder if Minister Watts is experiencing this.
“and the following step will be for New Zealand to ramp up LPG imports from Australia”
Doesn’t this assume that there is sufficient gas from the world’s second largest gas exporter? Most gas in Australia is already fulfilling long term contracts with other countries, I understand, so little old NZ will be competing with the big boys.
Great plan, Mr Watts.
For a really good insight into the details behind possible LNG imports refer to this and the two following parts. https://newzealandenergy.substack.com/p/is-lng-the-answer
I find it a little too biased towards the idea though it is a good explainer.
It baffles me why why anyone would accept a new house with gas connection!
Regardless, for most households is pretty easy to get off piped gas. Hot water cylinder outside wherever the gas heater is now. Switch the gas stove to use LPG from barbeque bottles, if you really want gas over induction.
Then comes the task of trying to get the gas co to actually stop sending you bills.
I wouldn’t get my hopes up about any effective action being taken before massive shortages are in effect. Arguably, we’ve already passed that point with industrial users facing closures, shutdowns or curtailment.
When gas runs short and households are caught out, Shane Jones’ answer will be blame the exploration ban and Labour/greens.
Sadly, many voters will believe it.
The prior Government Investment in Decarbonising Industry (GIDI) Fund, managed by EECA, which was discontinued at the end of 2023 was helping to get industry of gas and doing a good job, although a little slowly. It was ended by the current govt with around $600m still in the kitty which has gone back into the coffers. It could still be helping if this government wasn’t so against ‘handouts’ except when it’s for their mates.
On a blog that generally focuses on transport related issues I can’t help noticing that what works best for power is the opposite of what works best for transport, individual v collective. The more people that have individual sources of power on their property the better for us all, ( reduces costly infrastructure, is safer and healthier ) the more people that use collective transport the better for us all ( reduces costly infrastructure, is safer and healthier). Somethings are pretty simple eh!
Great point, vinny.
agreed. Transpower is around 25% of the power bill.
Getting “off grid” with solar and maybe an EV battery or two will make financial sense, but load up the costs on the remaining folks who are left on the grid. Chinese panels are so cheap, V2G is getting closer, and those power bills are only heading north.
Last one left on the grid pays for it all.
Good point, South Auckland! It’s even more so with gas. Going of grid for electricity will remain rare but going off the gas grid (or bottles) is easy. Problem is it loads those remaining with all the intrastructure costs and they’ll probably be lower income people who can’t afford new appliances. Gonna end in tears.
Transpower (the national grid) is 8% of your total electricty bill.
Vector (the distribution network operator or “lines company” in Auckland) is 27%.
The largest part of your bill is of course the electricty itself.
Then there is also the cost of your retailer, and GST and a few other charges.
https://www.vector.co.nz/personal/electricity/about-our-network/pricing
“the following step will be for New Zealand to ramp up LPG imports from Australia”
I’m confused by this, the rest of the article is talking about natural gas (methane), is this a typo? Isn’t the proposal to start importing LNG? Though I guess it makes sense domestic LPG production would also decline, it seems like a different issue more like diesel or petrol, much easier to import/export (indeed we’ve been doing both for decades).
Also MBIE maintains a much better datasource for energy price data here (including actual diesel prices) https://www.mbie.govt.nz/building-and-energy/energy-and-natural-resources/energy-statistics-and-modelling/energy-statistics/energy-prices. I’d use that instead of CPI data.
Hi Rob, I chose the CPI dataset as it is more widely known and uses the same methodology for all price groups. Yes, LNG is what they are talking about importing.
Yes, CPI and the MBIE weekly pricing monitoring measure retail prices, which isn’t where most usage is. Although non-retail diesel prices will match international prices well, most are set off international indices.
I can’t access the Gas NZ report that says that just under half of NZ households use gas, ‘most often’ for both hot water and cooking. That is counter to my personal experience, which may be non-typical. Is it including gas BBQs or something?
Exploring for oil and gas is really gambling with not so great odds. The same money spent on rooftop solar for daytime users (schools etc.) however is a guaranteed earner as the sun produces light to some level every day.
And we don’t really use much power at night.
Hmm..?
Peak demand in New Zealand occurs in winter before the sun rises.
The obvious answer to unlit peak demands being batteries.
It would be very expensive and not viable for the vast majority of households to avoid the collective problems of NZs electricity grid (such as dry year risk which costs every household $200 to $300 according to a recent article on Interest.co.nz).
Going off grid would require households invest in a massive redundancy of batteries.
It is not true that we “don’t use very much power at night”. It is an easily verified fact that the day and hour of peak electricity use in NZ is either an early evening day in winter just after dark or a winter’s morning just before sunrise.
I caution those advocating for more rooftop solar this only drives up the prices for the rest of us who can’t afford it. It’s ok on say a factory where they use more energy than the panels make but on a house where you’re putting lots of little micro generation into the grid this is not actually very efficient and requires costly grid upgrades. Focus should be on better utilising our batteries we already have (our hydro lakes!). Wind and solar should not be seen as a solution to baseload but a weak charger that stops our batteries(lakes) from draining, and if we really need backup we can use coal because if it isn’t being used there is no emissions unlike GAS.
Does it require costly grid upgrades? Isn’t one of the points of rooftop solar exactly to avoid costly grid upgrades?
Well I mean it’s a fair point both ways. Rooftop solar if not fed into the grid would probably be the way to go. Why are electricity prices higher in Queensland despite solar generating nearly half of the states power during the day.
The progress of technology is clear, for the first time this year Chinas CO2 emissions fell as they added 212 gigawatts of solar in the first half of this year. 26% of all power in China is wind and solar and increasing rapidly. Despite Trump the USA continues to add large renewables, simply because they are now cheaper than the alternatives.
You can see NZ start to get onboard with the recent solar projects in the Hawkes Bay. Combined with hyrdo and increased wind, we can develop energy security, live generation data suggests we’re at 95% renewables. At next years election, I’ll vote for a party with a policy to double our power generation capabilities over the next 10 years.
+1000
I would be happy with a 25 year goal to double electricity production by 2050. But it would have to be a genuine plan not just a performative announcement.
I would suggest any party wanting to make this policy commitment read Abundance by Ezra Klein and Dereck Thompson.
A final point was when engineer Max Harris was retired early after completing the Upper Waitaki hydro system in the 1980s which culminated the end of NZs last mass electrification building period he was if NZ could build this again and his response was “there is not enough paper in the country.”
He was *asked* if NZ could build this again…
It is noticeable when taking the train across Europe, that nearly every farmhouse, cowshed, pigsty, barn and chicken coop in Germany has solar PV on their roofs – all of them. It is how come Germany has closed down its nuclear reactors and effectively generates enough power at home. The weather is colder in winter and they get less sunshine than us, but their houses are warmer. And they don’t have gas, unless it is biogas generated by the pigs.
How do they do this? They have it written into law that the electrical companies must pay householders 3-4 times per unit, what the companies charge the homeowners.
We too could easily make a change, if we were politically motivated to. Our biggest users of electricity are, apparently, places like Fonterra, which use gas to help dry milk into powder. We too could change, if we really wanted to.
If we really wanted to is the reality of the problem .Kiwis are way too busy waiting for the fella next door to do it and saying we as a country only produce 1 % of world polution but as we see that will be a high % as countries like china ramp up their renewables .On a per capita basis we are high polluters
No the reality is despite climate change being real people are “over it” or fatigued is a better way to describe it. I mean look most of us secretly stopped caring a long time ago but too afraid to admit it you can’t fly in a plane then claim you are concerned about emissions. Clearly the first commenter and myself have both flew relatively recently. I’ll admit I’ve taken maybe 14 flights since the end of the pandemic and plan to take more. And the reality is sure chinas reducing emissions but India and Africa are going to continue to develop and require more baseload energy, (now ironically because of CC induced droughts they will probably have to burn coal or gas) but that is the reality. “Oh well” that is going to be the response of many we are all aware we f**ked up and did nothing to stop this but nothing we say on this blog is going to change that so we all just need to prepare for “climate adaption”(knowing this might trigger some) but it is the truth. Scientists already agreed it’s too late to stop it we had a chance 20 years ago when I hadn’t even started school yet (yes I’m Gen Z so don’t go playing the old codger card) but we blew it and we are just going to need to put money into preparing for the inevitable rather than trying to stop our tiny emissions.
Building an LNG terminal is any easy thing but it locks in supply of very expensive gas, thus also very expensive electricity. While this is better than letting the lights go out, it’s not helping the energy crisis or cost of electricity.
Government projections say electricity demand will increase from 40TWh p.a. to 60TWh by 2050. This means we need to build an equivalent to the Clyde dam every 2.5 years just to keep up. The price of electrify won’t come down until this is exceeded, and that we build generation capable of providing cheaper dispatchable generation.
Domestic use is only 10% of natural gas consumption, but it just needs to be banned, as its uses are all easily substituted with hot water heat pumps, space heating heat pumps, and induction cooking. The majority is industrial and it is not possible or economic to use electricity for many industrial processes. Fertiliser production, aluminium recycling, glass production and recycling, etc. Some might be able to switch to coal, but many more will close and dissappear from NZ, just like Paper recycling and all but 1 paper plant, Plywood plant, Methanex, etc
Well said Commuter. Add Visy Glass (previously OI) in Penrose to that list which btw pretty much recycles all of Auckland’s kerbside glass so imagine the landfill if that shuts down. Gas needs to be taken out of electricity generation and residential use within the next few years to save our industrial sector. And one thing we can do ASAP is take gas off baseload and let coal do that work especially now Huntly has a domestic supply of coal.
Often overlooked is the base load capacity from geothermal, some days this can be as high as 25% of total generation. As I write this geo thermal is providing 1100MW, Hydro 3000MW (Transpower live data). Even if Gas were at 100% Generation utilisation for Electricity its only 1200MW. Wind capacity is close to surpassing Gas. What if we put that effort for drilling for gas into geothermal steam. I’d hope were not also going to build a whole lot more of Gas peaking plants….
There are continuing incremental new finds and expansions of Gas fields, such as Turangi, being found onshore in Taranaki, but nothing the size of a new Maui.
Some people love cooking with gas. Perhaps they like spreading benzene through their house for their children to breath in.
https://www.news-medical.net/news/20250510/Using-gas-stoves-at-home-significantly-increases-cancer-risk.aspx
But it still makes sense to import gas so we don’t have to import as much coal.
Nah Coal is cheaper (even cheaper if we remove all the climate taxes) why bother importing gas. We’ve got increased domestic supplies of coal coming online for Huntly too. Strongly discourage new builds and Reno’s from installing gas stoves too. Why bother setting up the infrastructure for a gas import terminal if we are supposedly moving away from it anyway. When coal is not being used there’s no emissions from it too unlike gas where there will always be some leakage.
Is it increasing? if so by much? Most of Rotowaro’s coal was going to NZ Steel who are switching a chunk of their production to the electric arc furnace. Was under the impression it was a switch, and is a short term deal as Genesis is currently having issues getting export licenses from Indonesia. Huntly is fickle to supply because one in four years they need a the better part of a million tons, but most years they need a tiny fraction of that. Hard to build a mining business around it.
Stoves can easily be switched to LPG which we have plenty of underused import infrastructure for. A couple bbq bottles a year for those that can be bothered / happy to deal with the air quality issues isn’t going to move the needle. Hardly even worth thinking about.
Incorrect.
“responding to the looser Covid-era monetary policies that sparked the ‘cost of living crisis’.”
The inflation bump was the same across the western world and likely stemmed from post covid demand outstripping still covid supply levels which couldn’t be ramped up fast enough.
Also, as your graph shows, energy prices spiked post covid. Energy is an input to everything & thus goods & services prices spiked upwards as well.
Getting off the gas may take longer.
The New Zealand Government has formally committed to progressing an LNG (liquefied natural gas) import terminal as part of its new energy security strategy