Chaos across the Tasman Sea: New Zealand’s energy crisis and its lessons for Australia

Abstract

New Zealand’s energy sector is at a critical crossroads, grappling with an acute supply crisis exacerbated by natural factors and policy decisions. Historically reliant on abundant hydropower, the country now faces growing vulnerabilities due to increasingly severe droughts, which have led to a sharp decline in hydropower output for 2024. Simultaneously, natural gas production has plunged to a 40-year low, with 2024 witnessing just 119 petajoules produced – approximately 20% drop compared to 2023. This shortage has driven electricity prices to record highs, nearing NZ$1000 per megawatt-hour. The drop in production has also forced major players like Methanex to scale back operations. The 2018 ban on offshore oil and gas exploration, designed to curb emissions, may have inadvertently hindered investment in domestic gas production, contributing to the current crisis. As natural gas supplies dwindle, New Zealand has increasingly turned to coal, a fuel with twice the carbon intensity of natural gas, complicating its climate ambitions. In a reactive move, the government is seeking to reverse the exploration ban and ease liquefied natural gas (LNG) import restrictions, raising the question: is it too little or too late? A more balanced and forward-thinking natural gas strategy might have averted New Zealand’s energy crisis, underscoring the need for a well-planned transition. This paper explores the lessons New Zealand’s challenges offer to Australia, which faces similar issues. Both island nations have experienced industrial shutdowns due to insufficient gas availability, are considering LNG imports, and maintain stringent exploration policies that need urgent reevaluation to secure domestic energy supplies.