New Zealand is heading towards an electricity supply crisis.

Months of dry weather have led to low hydro storage and that along with falling gas reserves are being blamed for soaring wholesale electricity prices.

The crunch is already hurting businesses and forcing closures, with residential consumers next in line to feel the pinch.

RNZ explains how we generate electricity, why demand is increasing, how that affects the cost and what could happen next.

Where does our power come from?

In New Zealand, electricity is generated through hydropower, geothermal power and wind energy - with generation from the combustion of coal, oil, and gas providing base load or backup electricity supply.

Data from the Ministry of Business, Innovation and Employment (MBIE) showed that in 2023, 60 percent of New Zealand's electricity was generated through hydropower, 18 percent through geothermal, 9 percent through gas, 7 percent through wind and just over 2 percent from coal.

Hydroelectric power is generated by using a dam or structure to alter the natural flow of a river or other body of water.

It provides the majority of our electricity needs in Aotearoa through more than 100 hydroelectric generating plants, the largest of which are in the South Island in Mānapouri, Benmore and Clyde.

Geothermal power plants use steam to produce electricity.

The steam comes from reservoirs of hot water found below the earth's surface and most of New Zealand's geothermal generation comes from Taupō, with a small amount from Northland.

Wind energy is generated across 21 onshore farms, where large turbines connected to generators that convert the wind's energy into electricity.

Our largest wind farms are in Turitea, Tararua and the Hawke's Bay with construction underway on several more.

Natural gas is sourced from six main gas fields in the Taranaki region, three onshore and three offshore.

The electricity sector typically uses the most gas in winter when demand is highest.

Several of our gas fields are naturally declining as their fuel depletes and the government has a transition plan to move away from using LPG and natural gas, to reduce emissions.

Coal is used to generate electricity at the Huntly Power Station - the only coal and gas fired power plant in New Zealand.

In 2023, 270,000 tonnes of coal was used to generate electricity, while a further 322,000 tonnes were used in cogeneration (when waste heat produced in an industrial process is turned into electricity).

Electricity generation accounts for the largest amount of domestic coal use.

How much power do we use?

In 2023, New Zealand generated 43,474 gigawatt hours (GWh) of electricity and consumed 39,718 GWh.

Households were the largest consumers, accounting for almost 35 percent of our total electricity consumption.

The industrial sectors consumed nearly 33 percent, the commercial sector used 24 percent, while agriculture, forestry and fishing used six percent and transport, less than one percent.

Our biggest industrial users were the wood, pulp, paper and printing sectors and the basic metals sectors, with the New Zealand Aluminium Smelter, at Tiwai Point in Southland, being the single largest user of electricity in the country, accounting for around 12.5 percent of our total electricity consumption.

The Electricity Authority says so far in 2024, the monthly total electricity demand has been higher than the 2018-23 average.

A warm summer and cool autumn has resulted in higher demand for heating and cooling, there has been additional demand for irrigation as dry conditions persisted through the summer and into autumn (particularly in Canterbury) and further demand from the electrification of transport, industrial processes and homes.

The electricity generation mix also is subject to environmental changes. In the last week, hydro generation fell to 42 percent, while wind doubled to 12 percent.

Why is power getting more expensive?

New Zealand's electricity supply has come under immense strain in recent months as hydro lake levels drop after a dry summer and below normal rainfall, while falling gas reserves also contribute to driving up the cost of electricity.

Since September 2021, wholesale electricity prices have risen from around $100 per megawatt hour (MWh) to an average of around $700 per MWh in early August, before falling to around $450 per MWh this week.

Those rising costs are in part because New Zealand's hydro lake levels are at about 55 percent of the average of what they would normally be at this time of year, which is among the lowest levels in around 90 years of historic records.

It comes as our natural gas production continues to decline, with data from MBIE showing the country is not going to produce enough gas to meet expected demand in at least the next three years.

Electricity prices reflect the cost of the fuel used in their generation - so with a lack of hydro - the country is reliant using on more expensive fuel like gas, coal and sometimes even diesel to generate electricity.

But others say there are systemic underlying problems with the market.

Associate Energy Minister Shane Jones has accused the big power companies of profiteering and said advice was being sought on potential regulatory interventions.

Independent retailers have raised concerns the gentailers (companies that both buy and sell electricity) have too much market power because they generate the power and sell it to their retail arms, potentially at lower prices than they offer to the wider market.

Energy Minister Simeon Brown has called on the Electricity Authority to publicly report power data to ensure there is no price-gouging in the sector.

What does this mean for us?

If hydro lake levels remain low and high wholesale prices continue, the pressure will fall on retailers to increase their residential power prices in the coming months.

Households have been somewhat insulated from the recent hikes, with retailers having purchased electricity on the market when prices were low, but that will not last forever.

In response to the current high wholesale prices, some retailers had withdrawn from the market, or been less willing to take on new customers, rather than immediately putting up their prices.

Last month, Electric Kiwi stopped taking new customers because of the high prices and warned that high wholesale power prices could push more small electricity retailers out of business.

Meanwhile, businesses and households were being urged to go easy on electricity to avoid a supply crisis.

The Major Electricity Users Group, whose members include Fonterra, New Zealand Steel, Oceana Gold, Visy and Woolworths NZ, said the current situation was concerning.

Executive director Karen Boyes said a number of its members had rolling outage plans where a percentage of electricity was taken off to help manage tight supply and ideally they would be able to avoid a situation where households would start to feel the effects.

Households and businesses could help by avoiding using appliances at the peak times if they were able.

Winstone Pulp International announced on Tuesday its plans shut down Karioi Pulpmill and Tangiwai Sawmill indefinitely because of crippling electricity prices. It is the largest employer in the Ruapehu district, employing about 230 people.

A final decision on the closure is expected on 9 September.

What is being done about it?

Transpower - which owns and operates the national grid - announced on Thursday it would allow generators to take more water from lakes Pūkaki, Tekapo and Hāwea during September and October.

Executive general manager of operations, Chantelle Bramley, told RNZ in the worst case scenario, generators would be using that extra storage contingency from mid-September.

"This allows us about two months of additional electricity generation," Bramley said. "What this does is it buys us time for it to rain."

But if conditions continued to deteriorate, the next stage would be an "official conservation campaign", where New Zealanders were called on to voluntarily reduce their electricity usage.

"At lot can change, we are not at this stage forecasting the need for conservation until January," Bramley said.

Transpower must organise an conservation campaign, if hydro lake levels fall below what is known as the emergency risk curve and there is a 10 percent chance of running out of energy in the next 12 months.

It would then call on the community to make voluntary electricity savings, in order to slow the draw down on hydro lake levels.

If a conservation campaign was called, retailers would compensate consumers for reducing their electricity use.

The amount is determined by the Electricity Authority and the minimum weekly amount is currently $12 per week.

At that point, Transpower would consider if it had enough energy for the next 35 days and if not - would consider rolling outages.

Earlier this month, New Zealand's biggest gas user, Methanex, announced a temporary shutdown of operations in a deal with Contact and Genesis Energy, to add extra gas supply to the system.

The Tiwai Point aluminium smelter agreed to further reduce its energy use by another 20 megawatts (MW) to help ease the country's supply constraints.

In July, it agreed to reduce its usage by 185 MW, which was about four per cent of the country's energy use.

The Major Electricity Users Group was also conducting an investigation into what was driving high power prices and chair John Harbord said it had very low confidence the government and the Electricity Authority would address it.

It was hoped the analysis would provide more detail about what was behind the high prices and some of the options to address them.

Electricity Authority chief executive Sarah Gillies said there was no "silver bullet" for the country's fuel shortage issues.

In response to calls from the government, the authority was now releasing a weekly dashboard, which allowed people to see the energy margins generators were making when selling into the wholesale electricity market.

Gillies said it would give consumers much clearer visibility of which generators were doing well out of the electricity market each week and how New Zealand maintained security of supply.

She told RNZ there was no evidence gentailers were deliberately keeping supply low to boost prices.

"The wholesale market is very complicated and at the moment it is unusually volatile. In times of scarce hydro supply, New Zealand is reliant on coal and gas to keep the lights on."

Gillies said long-term investment in new energy production was crucial for New Zealand's future.