As part of its five part consultation on advancing New Zealand’s Energy Strategy, the Ministry of Business, Innovation and Employment (MBIE) has released a Gas Transition Plan Issues Paper seeking feedback on key issues and opportunities facing the gas sector as New Zealand seeks to achieve its goal of net zero emissions by 2050. A transition away from the use of natural gas is required if New Zealand is to achieve its net zero emissions targets.

In this article, we take a look at the main issues MBIE is consulting on, and what you need to know. 

The outcome of this consultation will be the preparation by MBIE of a final Gas Transition Plan, which is a critical document that will set the strategic direction of the natural gas sector in New Zealand out to 2035 (across the next three emissions budgets), while signalling the longer-term direction for the sector out to 2050. 

This consultation will be relevant to a wide variety of participants in the gas and electricity sectors, as well as industry participants in emerging technologies that can supplement or replace natural gas in New Zealand, such as green hydrogen and carbon capture, storage and utilisation (CCUS) technology.

Simpson Grierson is providing analysis on all five consultation documents, available (when published) on our website, see the links at the bottom of this page..

Submissions on the consultation close on 2 November 2023, with full details and documents available at MBIE’s website.

 

The consultation in more detail

Further details of the main aspects that MBIE is seeking feedback on, in relation to the two key issues set out in the Issues Paper, are set out below.

Issue 1: The role of natural gas during transition

Although the Issues Paper covers a variety of issues facing New Zealand’s energy market and economy relating to the gas transition, we consider that the most important of these are as follows:

• Gas will play an important role in New Zealand’s electricity system until an alternative is ready for market:  Arguably the most important role that natural gas will continue to play in New Zealand’s energy mix is supporting energy security in the electricity system.  Given its fast start capability, natural gas plays a key “peaking” role (such as covering seasonal increases in demand when there is an extended reduction in hydro generation due to low rainfall) and a “firming” role (providing supply in the case of variable supply from solar and wind generation when it is not sunny or windy).
  
  While the overall share of electricity generation from natural gas will decrease as the share of renewable electricity generation in New Zealand’s electricity system increases, it is unclear whether a reliable substitute will be available across the next 10-15 years to provide these “peaking” and “firming” roles.
• Gas plays a critical role in New Zealand’s economy as a “feedstock” for New Zealand’s petrochemical sector: New Zealand’s petrochemical sector currently makes up a significant portion of natural gas demand. For example, methanol producer Methanex currently uses around 40% of New Zealand’s natural gas supply. Petrochemicals manufacture uses natural gas for process heat and as a “feedstock” - a raw material that is directly converted into the product. 
  
  MBIE’s Interim Hydrogen Roadmap consultation considers the issues of whether green hydrogen can be used as a replacement feedstock for these sectors.
• There is a risk of underinvestment as gas demand declines: Investment in gas development and production is underpinned by long-term supply contracts with electricity generators and large industrial gas customers, which provide stability of demand. This demand certainty underpins the significant investment that is required to maintain New Zealand’s gas production fields and associated infrastructure. It is estimated that investment required across all of New Zealand’s gas fields alone is $200 million per annum. As demand for natural gas declines, there is a real risk of underinvestment in the natural gas sector leading to an inadequate supply of natural gas during the transition.
  While opportunities to improve the flexibility of our gas supply are developed (eg increased storage capacity), producers and owners of gas infrastructure will need certainty of demand to maintain the level of investment that is required to support gas supply during the transition.
• New Zealand’s gas market has limited flexibility: Supply of natural gas is closely matched to domestic demand and New Zealand has limited gas storage facilities. As New Zealand transitions to an economy with lower gas supply and demand, and with demand for natural gas becoming more variable, New Zealand’s gas market will need to become increasingly flexible. New Zealand currently has limited storage capacity for gas, and developing increased storage capacity is a potential solution to this issue.

Consultation: There are 15 questions in the Issues Paper relating to role of natural gas during transition. The key areas that MBIE is seeking feedback on include:

• Transition to a smaller gas market: how can New Zealand transition to a smaller gas market, what is required to ensure gas availability over the transition period and what factors will drive decisions to invest or reduce gas production (including what is Government’s role);
• Role of gas in electricity market: what is gas’ role in the electricity system going forward, what is needed for gas to play this role and are there alternative technologies offering credible options to replace gas in electricity generation;
• Option for increasing supply flexibility: what is the role of gas storage in a low-emissions economy, how important is gas storage capacity in the transition and what is the role of Government in the gas storage market?

Issue 2: Opportunities for low-emissions technologies in the natural gas market

The Issues Paper presents an initial view on three potential technologies that can play a strategic role in reducing emissions from the gas sector in New Zealand. Each of these technologies will require private sector investment and potential regulatory changes to encourage development:

• Biogas - small quantities of biogas can play a key role in the transition: Biogas is produced from bacterial digestion of raw materials such as manure, municipal waste and plant material.  Once impurities are removed, biogas can be used in an identical manner to natural gas.  MBIE considers it unlikely that a complete transition to biogas could be achieved in the short to medium term given the potentially high cost associated with the production of large volumes. MBIE is optimistic that biogas could be used to reduce the emissions profile of key areas of the gas sector through blending with natural gas in distribution networks. However, its viability as a fuel will require substantive development in the way in which biogas is produced in New Zealand.
• The Government is supporting green hydrogen’s role in the gas transition: While the Government’s principal focus is on the replacement of gas uses with electrification, it sees green hydrogen having a key role to play in reducing emissions in hard-to-abate sectors, such as certain industrial processes and heavy transport.  The Government does not support the development of a “blue hydrogen” economy, which would use gas (instead of renewable sources) to produce hydrogen (utilising CCUS technology). The key hydrogen use cases as they relate to New Zealand’s gas sector are: (1) blending hydrogen in the existing gas network (as with biogas), (2) replacing existing gas uses with hydrogen, with hydrogen being deployed through the existing gas network in hard to abate sectors; and (3) deploying green hydrogen as a replacement feedstock for “grey hydrogen” (hydrogen produced using emissions intensive production methods). Further detail on hydrogen’s role in the energy transition is explored in further detail here.
• Carbon Capture Storage and Utilisation is viable in specific circumstances: MBIE considers that CCUS technology is technically and economically viable for specific use cases, particularly upstream oil and gas production and is seeking to support the development of CCUS technology in New Zealand during the transition.  Two key legal developments that are likely required to support the development of CCUS in New Zealand are: (1) an enabling regulatory regime to incentivise investment in CCUS in New Zealand; and (2) recognising removal of carbon through CCUS as a removal activity in the NZ Emissions Trading Scheme through the second Emissions Reduction Plan 2026-2030 (with the Climate Change Commission’s final advice to Government on this plan due to published by 31 December 2023).

Consultation: There are 11 questions in the Issues Paper relating to how these alternative technologies could be used to reduce emissions in the gas sector. At this time, MBIE is not seeking specific feedback on regulatory options or specific investments, but rather the strategic role that each technology could play. The key areas that MBIE is seeking feedback on are:

• Importance of technology: how important is each technology for reducing emissions from gas;
• How can the technology be used: how can the relevant technology be used to reduce emissions from gas;
• What else can be done: what else can be done to accelerate the replacement of gas with low-emissions alternatives;
• Government’s role in developing a renewable gas certification: what is the role that Government can play in developing a renewable gas trading regime (but feedback is not sought on Government’s role in the development of the other sectors)?

Conclusion: a shift in attitude towards the place of natural gas in New Zealand’s energy mix and an opportunity

• The Issues Paper addresses head on the difficulties with transitioning the gas sector, and some of the current limitations of alternative solutions. This represents a shift in the Government’s attitude towards the strategic role that natural gas plays in New Zealand’s energy mix.
• The consultation is broad in the feedback it is seeking and appears to represent a genuine desire by Government to obtain input from industry to help set the direction of New Zealand’s gas industry for the next decade and beyond. 
• It is promising to see that the Government is considering CCUS technology as part of the potential mix of solutions that will be required to achieve the gas transition, alongside alternatives such as green hydrogen and biogas.  As the Issues Paper makes clear, a wider range of technical solutions will be required to achieve the gas transition and we welcome the Government’s plan to support the development of as many technological solutions as possible.
• It is also clear that MBIE recognises the inter-connected nature of the various elements of New Zealand’s energy system. For example, the development of a green hydrogen sector to support the reduction of gas as a fuel source is itself contingent on the development of significant sources of new renewable electricity in New Zealand.
• Simpson Grierson is considering each of the consultation papers forming part of MBIE’s consultation on New Zealand’s energy transition, with publications on each consultation to be published separately and made available on our website at www.simpsongrierson.com.

If you wish to discuss any of the issues arising from MBIE’s energy market consultation, or would like assistance in developing submissions, please contact any of our experts.

Thanks to Stefan Baldwin, Solicitor, for his assistance in preparing this article.

Simpson Grierson Energy System Consultation Series:

MBIE consults on New Zealand’s energy system #2: Interim Hydrogen Roadmap

MBIE consults on New Zealand’s energy system #3: Measures for Transition to an Expanded and Highly Renewable Electricity System

MBIE consults on New Zealand’s energy system #4: Developing a Regulatory Framework for Offshore Renewable Energy

MBIE consults on New Zealand's energy system #5: Base ban on gas fired baseload generation