We are stoked to announce the highly anticipated sequel to our Generating Scarcity reports is now live – introducing “Methanexit – Should NZ be subsidising our largest gas user?”

Our new report, co-published with CICTAR and Common Grace Aotearoa, is additional evidence to show how high energy prices are caused by a decade of underinvestment in renewable energy infrastructure and subsidising fossil fuels, rather than a lack of available gas as the current government keeps trying to tell everyone.

The Methanexit report focuses on one major player in the New Zealand energy sector, a company called Methanex New Zealand Ltd, which is the biggest user of fossil gas in New Zealand. Throughout the last decade, Methanex used between 30 per cent and 45 per cent of all gas produced in the country. Methanex uses the gas to produce methanol, a product which is used to create other chemicals, such as formaldehyde and plastics.

Methanex New Zealand Ltd has a parent company in Hong Kong and the main Methanex Corporation is headquartered in Vancouver (British Columbia). Both places receive an eye-watering amount of money from Methanex NZ each year. The New Zealand branch appears to have used complex transactions to shift $257.4 million profit offshore, reducing income tax paid to the government by more than $46 million over the last decade. All the while, it is now operating a more emissions-intensive plant in New Zealand than the rest of its portfolio, to the detriment of the climate.

To make matters worse, Methanex gets a lot of help from our government to maintain its business model in the form of subsidies. Methanex received $60 million worth of free carbon credits last year under the Emissions Trading Scheme to subsidise its pollution. These are like special coupons the government gives companies to make pollution cheaper for them. We estimate Methanex’s free carbon credits over the last decade add up to about $300 million. That’s $300 million that our New Zealand government is giving to a wealthy overseas company to continue their polluting industry and shift profit offshore- outrageous!

Methanex’s revenue has declined dramatically over the last decade, and profitability has remained negative in four of the past five years (it’s not making profits in New Zealand, despite sending dividends offshore). The free carbon credits have helped alleviate this deteriorating financial situation, raising questions around the ongoing appropriateness of this system of free credits allocated to industry (e.g. it doesn’t seem to be working the way it is intended, like working to lower emissions!). Methanex is the second-largest recipient of free credits (behind New Zealand Steel), worth upwards of $60 million in each of the last two years. From 2010 to 2023, Methanex has received 14 percent of all the free carbon credits given out to major polluters. Over this period, its share of total free credits has more than doubled, from 8 percent in 2010 to 17 percent in 2023.

As company financials deteriorate and carbon prices rise, it appears this subsidy could be helping keep the company afloat. It may also distort the market, however, that is hard to know as weak reporting requirements make the impact difficult to calculate. It is possible that Methanex has stockpiled some of the credits it has freely received over the past decade, which are increasing in value over time. There is no requirement on companies to publicly report the estimated value of these assets, nor a central register where companies’ stockpiled carbon credits and their values are reported.

Methanex consumes a significant portion of New Zealand’s gas supply, creating a steady demand that sustains the fossil fuel industry and drives continued gas drilling. Without their guaranteed need for the gas there would be less certainty in the long-term gas market, and therefore it would be less appealing to sink more money into current gas infrastructure upgrades and for new companies to come drill here.

The reason that keeping gas in our country’s electricity system is bad is that it keeps electricity prices higher for everyone. Electricity generated from fossil fuels like gas and coal is expensive, which inflates overall electricity prices. It gets a bit technical, but let us try to explain…

In New Zealand, electricity prices work in a strange way: if one company uses expensive gas or coal to make power, it sets that price for all the cheaper renewable energy too. Weird, right?! So for example, if there is even a small amount of gas in use, it makes the wind power more expensive for us to buy. Bizarre!

And if we are thinking about how to move away from fossil fuels due to global climate breakdown, then what is the incentive for companies to exclude fossil fuels from the market here in Aotearoa and transition to fully renewable electricity? The answer is that there isn’t an incentive at all! Quite the opposite in fact.

The companies are instead incentivised to maintain fossil fuels in the system to keep those prices high, and then the government (as a majority shareholder in three of the four big generators) has no incentive to fix the system as it would reduce company profits! By reducing the profits of the energy generator companies, it would therefore reduce the amount that the government receives in dividends (payments to shareholders). The companies and the government keep getting more profits from higher energy prices, and round and round the messed up system goes.

As the costs of developing more renewable energy sources continue to plummet, these issues become more worrying for the electricity generators. As new wind and solar, as well as storage, become cheaper, they could flood the market if the proper investment was undertaken, and therefore there would be less need for gas (which would lower prices for electricity). New solar could be added to the grid much more quickly than new offshore oil or gas could.

Methanex will likely depart from the market by 2029 at the latest, when its gas contracts expire. It may not have elected to secure gas commitments through to 2029 if the subsidies weren’t propping up its financials. Methanex’s likely departure presents a critical opportunity for New Zealand to accelerate its transition to renewable energy and reduce reliance on fossil fuels. If Methanex is gone then it makes the financial case for new offshore gas drilling less appealing for investors as they would have lost a big customer. Existing MBIE modelling suggests that even in the quickest scenario, new gas wouldn’t reach the market until 2035 at the earliest so new exploration and drilling won’t stop our current energy worries. New Zealand must urgently plan for a future electricity system that is resilient without reliance on Methanex and fossil fuels.

So in summary, our local communities are worse off in two ways due to Methanex:

• Taxpayers subsidise Methanex heavily, while profits flow overseas to its parent company.
• Businesses and households have much higher electricity prices by fossil fuels staying in the energy system, and Methanex is a big reason why moving away from fossil fuels is not politically palatable.

So what can we do about it?

With significant new renewable electricity generation and storage projects committed, the sector’s reliance on (relatively expensive) gas supply is likely to decline in coming years. We need to keep the pressure on the government to reduce those subsidies and make those renewable electricity investments happen!

Join our call on Minister Watts to urgently review the industrial allocation scheme that benefits Methanex, ensuring that subsidies no longer prop up polluting industries at the expense of taxpayers, businesses, and households. By addressing these distortions, we can reduce energy costs, accelerate renewable energy adoption, and ensure a more equitable and sustainable energy system for Aotearoa.

Email Minister Simon Watts to ask him to review subsidies for the biggest polluters

Your voice helps hold decision-makers accountable and brings us closer to ending subsidies for polluting industries—together, we’re making a difference!