New Zealand’s Energy Grid Faces Geothermal Push Amid Hydro Volatility and Fossil Reliance

New Zealand's energy system is at a crossroads, balancing a record-high renewable share with emerging pressures on its core generation sources. The baseline picture shows a supply chain that is both resilient and vulnerable. In 2024, 45.5% of primary energy supply came from renewable sources, a record high driven by growth in domestic production. Yet this overall trend masks a specific strain on the electricity grid. Renewable electricity generation fell to 85.5%, a notable decline from 88.1% the year before, signaling that the system is relying more on non-renewable thermal generation to meet demand.

This shift is occurring against a backdrop of subdued total energy demand. Total energy consumption dropped 2.1% to 524.8 PJ in 2024, primarily due to lower industrial demand. However, the picture is not uniformly weak. Key sectors are holding their ground: Aviation fuel use continued to increase, reaching 90% of pre-pandemic levels, and electricity consumption in the food processing sector continued to increase. This divergence highlights where the system's pressure points lie-industrial decarbonization efforts may be stalling, while transport and certain manufacturing activities are maintaining or growing their energy appetite.

Adding new capacity is a critical response to these dynamics. In early 2026, the system gained 95MW of new geothermal capacity from two projects, providing a much-needed source of steady, low-cost baseload power. This expansion is a strategic move to bolster firm generation, as geothermal is not subject to the weather variability that affects hydro. Yet the system's dependence on hydro remains a persistent risk. The recent decline in renewable electricity generation underscores how vulnerable the grid is when dry conditions limit hydro storage, forcing a greater reliance on thermal peakers. The new geothermal capacity is a step toward reducing that volatility, but the underlying variability of New Zealand's primary renewable source is a fundamental constraint that must be managed.

Demand Pressures and the Decarbonization Challenge

The stark gap between New Zealand's renewable electricity and its overall energy mix reveals the core challenge of decarbonization. While 86 percent of the country's electricity comes from renewables, that figure represents only a portion of the total energy consumed. When all forms of energy are considered, the renewable share drops to just about 40 percent. The remaining 60% is generated by oil, gas, and coal, a reliance that is concentrated in transport and industrial processes. This contrast means that electrifying the economy is a necessary but insufficient step; it simply shifts the fossil fuel burden from end-use to power generation.

The government's stated goal is to grow the share of renewable energy across the entire economy to 50% within the next decade. Achieving this will require a significant acceleration in renewable electricity generation, as the current 86% baseline is not enough to offset the fossil fuel use in other sectors. The path forward involves not just building more wind and solar, but also addressing the system's firming needs. As the University of Auckland's Professor Andy Philpott notes, reaching 100% renewable electricity will depend on a mix of technologies, including storage, stronger infrastructure, and market settings that ensure reliable capacity. The recent decline in renewable electricity generation due to dry years highlights the vulnerability of relying heavily on hydro, making the need for diverse, firm sources like geothermal and battery storage even more urgent.

In response to this complex transition, major electricity consumers are exploring strategies to manage risk and secure supply. Co-generation, where industrial plants produce both electricity and useful heat, is one approach to improve efficiency and reduce grid dependence. Another is entering into Power Purchase Agreements (PPAs) with renewable developers, which can lock in long-term prices and provide a stable revenue stream for new projects. These corporate actions are a practical adaptation to a system that is still evolving, where policy clarity and grid access remain key hurdles. The upcoming 2026 election year is expected to bring heightened focus on energy policy, with decisions on LNG infrastructure, hydrogen development, and market reforms all on the horizon. For now, the demand pressure is clear: the economy must grow its renewable electricity output even faster to meet the broader decarbonization target, while navigating the persistent reliance on fossil fuels for transport and industry.

Market and Policy Catalysts to Watch

The path to a balanced energy system hinges on a series of upcoming decisions that will determine whether supply growth can keep pace with persistent demand pressures. Three key catalysts stand out, each addressing a different facet of the supply-demand equation.

First is the decision on whether or not to proceed with procuring LNG infrastructure for an LNG import facility, expected by the end of 2025. This is a major near-term question for supply flexibility. With gas reserves dwindling and hydro storage vulnerable to dry years, LNG represents a potential bridge to secure thermal generation capacity. A go-ahead would provide a new source of dispatchable power, easing the pressure on the grid during peak demand or low hydro periods. Conversely, a delay or cancellation would leave the system more exposed to volatility and could dampen investor confidence in firming capacity.

Second, the Government's $50 million from the Regional Infrastructure Fund to "help de-risk and ensure geothermal projects are well positioned" is a targeted policy action to boost reliable renewable baseload. This fund directly supports the expansion of geothermal, which provides steady, weather-independent power. The recent commissioning of new projects like the 49MW TOPP2 and 46MW Ngā Tamariki expansion has already begun to increase geothermal's share of monthly generation. This financial de-risking is crucial for unlocking the next wave of geothermal development, which is needed to firm up the system without adding fossil fuel dependence.

Finally, the 2026 election year context introduces a layer of political and policy uncertainty. As energy security and affordability are expected to see a strong focus, the stability and direction of energy policy may become more prominent. The absence of a delivered energy strategy and lack of political consensus on key issues create a backdrop where policy clarity is a major risk. The decisions on hydrogen regulations, market reforms, and the Electricity Authority's powers, all slated for early 2026, will shape the investment environment. For now, the market is navigating this period of anticipation, where the outcome of these catalysts will define the balance between a resilient, decarbonizing grid and one still wrestling with supply constraints.