NZ productivity crisis is now an energy crisis

It is striking for an international economic outlook to single out a country’s electricity system so directly. But the message is simple: our economic future now depends on something most of us take for granted – whether or not the power stays on.

Households already know electricity costs are high. Bills climbed during recent winters. Wholesale prices spiked. Dry conditions have weakened hydro generation, and shrinking natural-gas supply is adding further pressure to the electricity system.

Businesses feel it too. Power is becoming not just another cost, but a growing risk. When the OECD highlights energy reforms as one of New Zealand’s key structural priorities, it confirms what many New Zealanders have been sensing: the system is under pressure.

That pressure is only set to grow. The most dramatic source is digital infrastructure. New Zealand already has more than 50 data centres, with at least 20 more being planned.

A recent national report suggests electricity use from these facilities could triple within a few years as demand for AI and cloud computing accelerates. These centres are drawn here by our relatively cool climate and clean energy mix, but they cannot operate if the grid becomes unreliable or prices swing unpredictably.

Electrification in industry is adding another layer of demand. Dairy factories, food processors and manufacturers are moving away from fossil fuels and onto electricity. More households are adopting EVs. The grid is being asked to do far more than it was designed for.

Supply, meanwhile, is not keeping up. Hydro generation in 2024 fell to its lowest level in more than a decade, forcing increased coal use to stabilise the system. Winter variability, from low wind, low hydro and high demand, is becoming increasingly normal. New renewable projects are coming through, but not quickly enough to counter both rising demand and a more volatile climate.

This is why the OECD’s warning about climate-related risks to hydro-electricity should not be ignored. New Zealand’s electricity system has long been admired for its high share of renewable generation, but that strength comes with vulnerability. Droughts reduce lake levels. Storms and floods disrupt transmission. A changing climate is reshaping the risks in ways we have not yet fully confronted.

These pressures constrain the entire economy. Innovation requires stability: tech firms need reliable power for servers, manufacturers need certainty for investment, and digital industries cannot expand if they face energy constraints.

When electricity becomes unreliable or unaffordable, it becomes harder for new technologies to scale and harder for high-value industries to grow.

But this is also where the opportunity lies. If New Zealand takes the OECD’s warning seriously, the country will need new technologies, business models, and ventures across the entire energy system.

That means storage solutions, grid stability tools, renewable integration software, industrial energy-efficiency systems and new approaches to geothermal and other forms of generation.

Our universities already house much of the expertise needed for this shift. Researchers in geothermal engineering, energy policy, economics, climate science, materials engineering and digital optimisation are working on the exact problems the OECD identifies. They understand how local geology affects geothermal potential, how hydro variability affects pricing and how regulatory settings shape investment.

Universities also train the engineers, data scientists and entrepreneurs who will build the solutions. The recently launched applied doctorates scheme, funded by the Ministry of Business, Innovation and Employment, in which PhD students are paired with industry problems, has chosen energy as the theme of its first cohort.

Energy innovators are already emerging. One example is Vertus, a clean-fuel start-up founded by a University of Auckland graduate who first developed entrepreneurial skills through campus programmes. It shows what can happen when research, talent and entrepreneurship collide. It is the kind of innovation New Zealand will need much more of.

The challenge is to scale innovations quickly. We need a faster build-out of renewable energy, increased storage capacity, and significantly more investment in transmission infrastructure. We need market settings that encourage new entrants and allow energy-tech ventures to grow. We need government, industry and universities working together on the same problem: making the energy system reliable enough and affordable enough to support an innovative economy.

The OECD has diagnosed the problem. Our productivity challenge is now an energy challenge. If we want competitive manufacturing, thriving tech companies, climate-resilient food production and modern public infrastructure, we must build an electricity system that can support them.

If we treat energy as a traditional utility, New Zealand will continue to struggle. But if we approach it as a strategic platform for innovation, the country can turn a looming constraint into an opportunity.