New Zealand's largest gas user strikes deal to reduce pressure on strained energy market

Methanex methanol plant, Waitara, New Zealand. The company will idle a plant over winter to free up gas for electricity supply. Photo / Ross Setford

New Zealand's largest gas user struck a deal to give up almost a third of its contracted supply over winter to relieve pressure on the strained energy market.

Methanex, which produces methanol from plants in Taranaki said it will idle another of its facilities as part of a deal under which it would sell 3.4-4.4 petajoule of gas to Genesis, owner of the Huntly Power Station, New Zealand's largest thermal electricity generator.

Friday's deal also included smaller swap agreements under which Genesis may buy gas in winter from Methanex in return for summer supply in 2022 and 2023.

Meridian has also recently announced agreements with the Tiwai Point aluminium smelter under which the smelter will cut electricity use to increase supply to the national grid, although the Genesis deal with Methanex is many times larger.

No financial terms of the deal were provided, however analysts said it would reflect current pricing of a market where fuel for electricity generation is in short supply.

"This will help support electricity generation through winter and ensure electricity and gas supply to our customers and other market participants", Genesis chief executive Marc England said.

As part of the deal, Methanex will idle one of its Motunui facilities for around three months. At the start of April it said it would close another one of its plants permanently, with the loss of 75 jobs.

A spokeswoman for Methanex said Friday's announcement would result in no job losses.

"Methanex plays an important role by underpinning the long-term development of New Zealand's upstream gas sector," Methanex New Zealand managing director Dean Richardson said.

"We are pleased to have reached this collaborative agreement with Genesis to demonstrate and support the country's energy stability and security."

The deal was hailed by the industry which has warned that current conditions in the energy market are putting jobs at risk.

"[Methanex] is making a notable contribution to New Zealand by foregoing gas that it has a contract entitlement to use in its own business," Gas Industry Company chief executive Andrew Knight said.

In recent weeks the Gas Industry Company has begun consultation about the future for the gas market which warned that as soon as 2026 there may not be enough gas to support electricity generation.

Currently the lakes which fuel New Zealand's hydroelectricity stations are at unusually low levels, while production from Pohukura, New Zealand's largest producing gas field, has been dropping sharply.

Enerlytica analyst John Kidd said the deal would remove some of the fuel stress in the electricity market, which was currently pricing the risk of supply shortages.

"It's not going to make the risk go away, and I'd still expect a solid risk premium to be built into near term pricing, and in fact it's being built into long term pricing as well."

Major electricity users have been warning the current wholesale prices are putting thousands of jobs at risk.

Already the Whakatane Mill has announced plans to close, while in nearby Kawerau Norske Skog is consulting with workers about a possible closure of its paper mill.

Other major industrial users are understood to have lobbied the government directly for an intervention in the energy market to reduce prices.