Moderate rain and a Methanex gas deal will help New Zealand avoid repeating last year’s electricity crunch, but analysts are less optimistic about 2026

In August last year, the country narrowly avoided blackouts after low hydro lake levels, limited wind generation and tight gas supplies forced officials to ask businesses and households to reduce electricity consumption.

Large industrial users had already switched off production, either due to high prices or to sell their energy supply back to electricity generators. Some businesses used the opportunity to shut down for good.

The episode sparked a political storm at the time. But winter passed, wholesale electricity prices fell to very low levels over summer, and the headlines faded.

The crisis, however, never really went away. Prices began to creep up again this year as winter approached and familiar problems threatened another supply crunch.

This continued until May, when electricity producers struck a deal to buy natural gas from Methanex and, right on cue, rain topped up the critical hydro lakes.

Crisis averted (again)

Forsyth Barr electricity analysts Andrew Harvey-Green and Hugh Lockwood said in a note on Friday that the likelihood of an energy shortfall in 2025 was now minimal.

“A combination of a Methanex gas deal and moderate rainfall has alleviated any lingering risk that winter 2025 will mirror the challenges of winter 2024,” they wrote.

“Attention now turns to winter 2026. It is likely to be more challenging than winter 2025, both in terms of meeting [megawatts] peak demand and [gigawatt hours] energy.”

To get through winter 2026, hydro lakes will need to be kept above average levels, NZ Aluminium Smelters may again need to cut demand, Methanex will likely need to sell gas to generators, and a third coal unit at Huntly will need to be fired up.

It would mark a third consecutive winter of reduced industrial output, increased coal use and elevated electricity prices — all driven by an unexpected drop in natural gas production.

Data released on Thursday by the Ministry of Business, Innovation and Employment (MBIE) showed natural gas reserves were down 27% in January 2025 compared to a year earlier, and were falling faster and sooner than forecast.

Much of the reduction was due to gas being reclassified from “proven plus probable” reserves to “contingent” reserves — gas that is in the ground but cannot currently be extracted.

New Zealand remains dependent on domestic natural gas to meet peak electricity demand in winter and relies on extraction from six mature fields. Partly because Labour, NZ First and the Green Party voted to end new offshore exploration in 2018, chilling investment in the sector.

At the time, it was expected that existing gas fields and exploration permits would provide enough supply to support a gradual transition to 100% renewable energy. But it didn’t go exactly as planned.

Companies handed back exploration permits, and while new renewable generators were built, older plants were also retired. This increased the grid’s reliance on the few remaining gas-fired plants to meet peak demand.

Now, with a gas shortage, every winter is a gamble — at least until more batteries are built or there is enough wind and solar to reserve hydro lakes for cold mornings.

Betting on gas 

But this is not where the Coalition Government is putting its money. Instead, it has set aside $200 million to buy a 10% to 15% stake in new gas fields, hoping to lure investors back to New Zealand.

Forsyth Barr analysts said this was positive for the electricity sector but unlikely to have much impact unless a major gas discovery is made soon.

“Historically, an onshore field takes one to two years to develop from a final investment decision, while offshore fields require at least two,” they wrote.

There are no fields currently being explored in New Zealand, let alone nearing a final investment decision. By the time a new field starts producing, the worst of the energy shortages is likely to have passed.

Electricity companies are building significant new capacity, and analysts are now more concerned about eventual oversupply than long-term shortages.

But the Government has promised action and is awaiting a Ministerial Review of the Electricity Market to advise whether regulatory or structural changes are needed.

Separately, an Energy Competition Taskforce led by the Electricity Authority and Commerce Commission is examining how to improve competition and access to affordable hedging products.

Inaction, please

Forsyth Barr analysts said they expect action from these reviews, given the strong rhetoric from politicians and regulators, but believe it would likely be a mistake.

The fundamental problem, they argued, is a shortage of flexible generation that can be switched on at short notice to cover supply shortfalls. Regulatory intervention can’t fix that—at least in the short term—and would only push prices higher for electricity users.

Smaller electricity retailers and other critics would disagree. They argue the major power companies have deliberately underinvested in capacity to protect profits — and have now been caught with their pants down.

Associate Energy Minister Shane Jones sits in that camp. He said last year that the sector’s rules let big firms profit from scarcity and needed to be reformed to promote security and affordability.

“It gives priority to corporate profit. And, I don't care if you think that I sound like a Soviet saying that; I don't like that system, if it's driving New Zealanders into hardship,” he said.

But while he wants serious intervention, NZ First holds only three votes at the Cabinet table. It will have to contend with ACT’s free marketeers and a National Party majority.

Time is ticking. The ministerial review is due this month, but winter 2025 began a week ago.