The argument is that if there is more gas available for use, there is less risk, and therefore the “risk premium” will be reduced.
However, documents reveal officials admitted, “the extent to which this downward pressure actually results in a reduction in electricity bills will depend on a range of market dynamics”.
The Government has said New Zealanders will benefit to the tune of $265 million per year – the expected savings minus the expected cost – equivalent to $50 per household per annum.
Watts told the Herald he expected the Electricity Authority, the industry regulator, will monitor the situation “to ensure the savings do flow through to households”.
“The Government has clearly signalled that we need to increase the powers of the Electricity Authority to be a more effective regulator,” Watts said.
“We’re already taking steps to do that, and we’ll make legislative change to give them those powers, such as the ability for them to fine and/or criminality, so absolutely giving a large, larger stick.”
Labour’s energy spokeswoman Megan Woods said the official advice was clear.
“This is a gas tax – the Government knows that. Here in black and white is advice that retailers will pass on the cost to anyone who turns a light on.”
The Government on Monday announced it would impose a levy on power companies to fund the construction of a liquified natural gas (LNG) import facility. It provided an indicative estimate of the levy as between about $2 and $4/MWh.
It was expected, however, that this would be offset by the price reduction in forward prices, due to the lower risk, of at least $10/MWh. That would mean a net saving, which the Government said would result in lower power bills for Kiwis.
But the levy took many by surprise and was quickly labelled a “gas tax” by the opposition, which argued it was an additional charge on New Zealanders who were still feeling the pain of cost-of-living pressures.
Watts’ Cabinet paper, released publicly, said the expected benefits of the project “significantly outweigh the costs”.
“The mere availability of LNG as dry-year insurance cover is expected to reduce forward electricity contract prices by at least $10/MWh, saving consumers around $400 million annually – materially outweighing the anticipated $2.05-$4.10/MWh levy to recover costs.”
He explained to his Cabinet colleagues that the levy, if fully passed through and with no commercial revenue, “would add around $15-$30 to the average annual household electricity bill (but is expected to be more than offset by lower electricity prices)”.
The levy is discussed at length in officials’ Cost Recovery Impact Statement (CRIS), which described it as being “akin to an insurance premium for electricity users”. They would pay it to have the insurance of having LNG available during dry years.
The benefits of this would be a reduction in spot prices during dry years and a reduced dry-year risk premium, officials said. The risk premium is currently estimated to be between $30-50/MWh.
Officials said a levy was appropriate “to capture the collective benefits that arise specifically from security of supply infrastructure and generation, rather than the alternative option of funding through general taxation”.
“A levy can be charged per MWh, and this reflects that the benefits are also proportional i.e. larger users get more benefit from dry year cover (compared with general taxation which would not necessarily be proportional).”
While the final cost of the LNG project will be determined through contract negotiations – another document says “additional costs are likely to emerge” – officials said it was expected the levy would be up to $4/MWh, which would generate $170 million per year.
Officials said that if the project led forward contracts to reduce by $10 (a 20%-30% reduction in the risk premium), this would “more than offset” the levy.
But this is where they advised, “the extent to which this downward pressure actually results in a reduction in electricity bills will depend on a range of market dynamics”.
Speaking on the levy on power companies, the officials said, “these charges will likely be passed on to end electricity consumers”. But they “will benefit in the form of reliable electricity and lower long-term electricity prices”.
Another document also highlights the possibility the LNG facility could generate commercial revenue by providing services to direct gas users. This isn’t explored in depth, but could be used to offset the levy charges (though it wouldn’t recover a significant proportion of the costs).
Mercury Energy chief executive Stew Hamilton told RNZ on Wednesday the details of how the levy will be imposed is unclear, but “if we have to absorb it, we need to work out how we actually maintain the level of investment we keep making in the grid”.
“It is going to be a cost for New Zealand overall,” he said, though he also acknowledged the LNG project might lead to prices being lower than they might have been in the long-term.
Prime Minister Christopher Luxon has rejected his Government is introducing a new tax on Kiwis.
He faced questions from Labour leader Chris Hipkins in the House yesterday about “why should New Zealand households pay an extra gas tax every time they pay their power bills, while electricity companies continue to make billions of dollars of windfall profits, and his Government will do nothing about it?”
“That is not happening,” Luxon responded. “New Zealanders are going to pay lower power bills as a function of us opening up an LNG importation facility. It’s that simple. Either support it, and if you don’t, you’re supporting higher power bills—it’s that simple.”
Jamie Ensor is the NZ Herald’s Chief Political Reporter, based in the Press Gallery at Parliament. He was previously a TV reporter and digital producer in the Newshub press gallery office. He was a finalist in 2025 for Political Journalist of the Year at the Voyager Media Awards.
