Infometrics Rob Heyes points out that if energy demand doubles over the next 25 years as some expect, affordability and keeping a reliable supply are going to become more challenging to achieve, not to mention our environmental goals

Energy is fundamental to economic growth and living standards. It powers our businesses, and it heats and lights our homes. The energy trilemma refers to the challenge of balancing three competing priorities:

• energy security (a reliable supply),
• energy equity (affordability and access for all), and
• environmental sustainability (reducing carbon emissions).

Achieving success in one of these priorities can adversely affect the others. Here we look at how well New Zealand’s energy sector has been able to balance these three priorities, and the challenges it will face balancing them in the future.

New Zealand’s generation mix

New Zealand powers itself largely through renewable sources. Our high rainfall, mountainous terrain and numerous rivers create natural catchments and significant elevation drops that are ideal for harnessing water for power. We are also blessed with accessible geothermal energy due to us being located on a tectonic plate boundary. In recent years wind and solar generation has been increasing. Over the past five years, hydro has made up an average of 57% of our total energy generation, with other generation sources taking renewables’ share up to 85% (Chart 1).

Being above 80% renewable energy generation makes us fairly unique internationally. We sit alongside countries such as Norway, Denmark, Brazil, Iceland, Ethiopia, and the Democratic Republic of Congo. Many of these countries also have a large hydro generation sector (Chart 2).

Lowering emissions

Our abundance of renewable energy means emissions from our energy sector are low by international standards, and recently we have also been relatively successful in decoupling emissions from economic growth. Between 2010 and 2025, the size of New Zealand’s economy (measured as GDP in constant prices) grew 46%, while emissions from industry declined 10%. This means our emissions intensity, or emissions per unit of GDP, fell 37%.

We decreased our emissions intensity largely by increasing the amount of power that we generate from renewables—mostly wind and solar, and by reducing the amount of power generated with gas and other non-renewable sources. The closure of Marsdon Point Oil refinery, the increasing use of synthetic nitrogen fertiliser in farming, and increasing use of electric vehicles has also played a part.

Price rises

In the energy trilemma, we have been doing less well in terms of equity. Energy prices have increased significantly over the past three years. In the three years between September 2022 and September 2025, the average price households have paid for electricity rose 21%, and for gas 42%. To put that in context, over the previous 10 years between September 2012 and September 2022, electricity and gas prices both rose just 17%.1 This year in particular, households have increasingly been moved onto higher-cost power plans, low-user plans have been phased out, and fixed daily rates have been increased.

Energy poverty

The implications of these price rises can be seen in homes across the motu. As far back as 2019, the University of Otago Medical School found that 360,000 households were experiencing energy poverty. In 2025, Consumer NZ reported that one in five households struggle to pay their power bill, and 11% are living in cold homes to cut heating costs. Poor quality homes are certainly a factor, as poor insulation means it costs more to keep a home at a comfortable temperature. Living in cold, damp homes increases the risk of poor physical or mental health and excess winter deaths, which puts a strain on the health system.

Energy price spikes have also resulted in well-publicised business closures this year, such as Winstone Pulp International. Energy costs are also currently adding to inflationary pressure, which affects the Reserve Bank’s thinking about interest rate settings.

Low hydro lake levels increase spot prices

There are a mix of views as to why prices have increased so fast recently. The Electricity Authority points to low hydro lake levels. Low hydro generation has forced generators to use more expensive coal and gas to meet demand, which has led to higher spot prices on the wholesale electricity market. When hydro lakes are low, generators might also withdraw some of their hydro capacity from the market to maintain a minimum level of stored water, which further reduces the supply of cheaper hydro power.

Gas energy production has been falling since 2009 (see Chart 1), which further increases our reliance on expensive coal production when hydro lakes are low. Coal production is expensive because New Zealand imports a large proportion of the coal it uses for generation, which can be expensive when international demand is high and/or production is constrained, and because the New Zealand Emissions Trading Scheme places an additional cost on energy produced by coal.

With gas production falling, the electricity market performance review recently conducted by Frontier Economics confirmed that the energy market had failed to invest in the back-up fuel options during dry years when hydro lake levels are low.

Firming

Firming is critical to energy security. Firming refers to the process of converting intermittent renewable energy sources, such as wind and solar, into a reliable, consistent supply of power. Firming enables us to continue to provide power during high demand on cold, calm, cloudy mornings and evenings (when the wind isn’t blowing and the sun isn’t shining) and during dry winters when hydro lake levels are low.

Energy can be stored in lakes and batteries. The Lake Onslow scheme was one such example. The scheme was expected to work as a large source of energy storage, using electricity during times of excess supply to pump water to a higher reservoir. During dry periods or periods of high demand, water would be released to flow downhill through turbines to generate electricity. However, the scheme was scrapped by the Government in 2023 due to concerns about high cost and a long timeline.

Batteries are a short-term firming option. A 100MW battery can power a small city for around 1-4 hours. WEL Network’s 35MW Rotohiko battery has been in use since 2023. Meridian Energy’s 100MW Ruakākā battery, Contact Energy’s 100MW Glenbrook-Ohurua battery, and Genesis Energy’s 100MW battery at Huntly are all under construction.

Other firming options include biofuel generators, which can be fired up at short notice. There are plans to develop a biomass supply chain in New Zealand, which could provide the fuel for biofuel generators. To avoid power shortages and the resulting price spikes, large power users can be contracted to reduce their operations when demand peaks and supply is low. For example, in August 2024, Methanex temporarily halted production at its Taranaki plants and sold its natural gas to electricity generators, helping to relieve a shortage in the electricity market. This action, which was part of a deal with Contact Energy, freed up more gas to generate electricity during a period of high demand and low gas supply.

Investment needed

The distribution and transmission companies are facing higher costs, including the need to generate additional revenue to invest in aging infrastructure. The electricity grid needs investment to integrate decentralised generation from renewable sources such as wind and solar. Investment is also needed in new developments such as smart grid digital technologies including sensors and smart meters, which allow for a two-way flow of both electricity and information between generators, utility providers, and customers. The smart grid is expected to improve the efficiency, reliability, and security of energy supply but it requires a big up-front investment.

Power companies have also seen other costs rise such as materials, labour, generation costs, and debt repayments because of high interest rates.

A lack of competition?

A more contentious argument for why energy has become more expensive is a lack of competition in the energy market. New Zealand’s retail market is currently made up of 39 retailers, of which four are large gentailers (Mercury, Genesis, Contact, Meridian). The gentailers generate electricity and act as retailers. In 2023, the gentailers retail market share was 84%.

Consumer NZ points out that, since the power market was reformed 25 years ago with the intention of increasing competition, the four gentailers still dominate the market, make billions of dollars in profit every year, and don’t invest enough of that surplus back into the grid.

Arguing for a lack of competition based on company profits is always a challenging task. It’s the kind of thing the Commerce Commission typically looks at in its market studies, and the analyses invariably get very technical. There is an argument that the relatively small size of the domestic energy market in New Zealand does not support more than a handful of large providers. The 35 other power retailers might beg to differ.

Competition doesn’t need to come in the form of more competing businesses. If consumers can easily switch between power companies, it should help keep prices competitive. Over the past 15 years, the number of consumers switching power retailers has risen only very slowly, except for a notable spike this year when power bills started to increase (Chart 3).

Consumer NZ has argued for measures such as standardising power bills, which would enable consumers to easily observe whether they can save money by switching providers.

Government steps in

Prior to the Government announcing plans to reform the energy sector in the light of recent power price rises, there were hopes in some quarters that they would break up the four gentailers by splitting their generation and retail operations. However, this option was not taken up by the Government.

Instead, the Government has opted for several measures, the most eye-catching of which are to launch a procurement process for a liquified natural gas import facility, to accelerate the delivery of renewable energy by speeding up consenting and enabling offshore renewable energy, and setting aside a co-investment fund for gas fields.

Political tit for tat

Arguably, what the energy sector needs more than anything is certainty. This is a sector that, when it is working well, plans decades in advance. Power demand must be projected well into the future so that the infrastructure can be built well ahead of time. Certainty around policy and regulations for emissions, exploration of new coal mines and gas fields, government and market structure all support private sector investment.

Unfortunately, certainty is hard to come by with our two main political parties at odds as to what the future energy market looks like. Junior coalition partners are arguably even further apart.

Take the last two governments as an example. In 2018, the Labour Government banned oil and gas exploration and in 2019 they signed Net Zero Emissions into law. The current National-led coalition has reversed the 2018 ban on oil and gas exploration, passed the Fast-track Approvals Act 2024 which potentially makes it easier to get mining fast tracked for approval, pulled out of the international Beyond Oil and Gas Alliance, slashed funding for climate initiatives, and announced that they want to boost mineral exports to $3bn by 2035.

Although, to be fair the current Government has made it easier to get renewable energy projects commissioned and built through reforms such as the Fast-track Approvals Act and amendments to the Resource Management Act (RMA) and remains committed to Net Zero 2050.

Whichever side of the political spectrum you stand on, and whatever your attitude towards climate change and how to avoid it, political tit for tat is standing in the way of us securing our energy future.

The energy trilemma is not going to get any easier

Looking forwards, the energy trilemma is not going to get any easier. Future demand for electricity is dependent on government policy and regulations, the adoption of technology and the structure of the economy. Under some scenarios, demand is expected to double over the next 25 years. This demand growth means equity and security are going to become more challenging to achieve. And pressure to reduce carbon emissions from energy generation are only going to increase as the effects of climate change become more evident.

^{1 Source: Stats NZ, Selected Price Indexes}

This article was first published here. It is reposted with permission.