Yesterday the government-owned Meridian Energy surprised the nation and said it was abandoning the project to develop hydro-electricity on the South Island's lower Waitaki River. It said uncertainties over water rights contributed to its decision.

Project Aqua was the largest renewable energy project on the horizon - 570MW - and estimated to provide a third of new renewable capacity. It was also central to the government's long-term strategy for increased contributions from renewables.

While Energy Minister Pete Hodgson says Meridian has abandoned the project early enough for other power companies to change their investment plans, some commentators are wondering where on earth an extra 13,000 gigawatt hours a year, the equivalent of five Project Aquas, are going to come from and at what price.

McDouall Stuart executive director Chris Stone told EnergyReview.net that the canning of Project Aqua had turned New Zealand's energy supply-demand equation into "a simply huge challenge" if this country continued even modest power growth of 1.7% a year.

"It will certainly be a fossil fuels future for New Zealand, and the rest of the world, for at least the next 25 years. The future we now face is quite a stark choice between the cheapest or cleanest solutions, he told ERN today from Wellington.

New Zealand had one of the greatest renewable energy capacities of any developed nation apart from Norway, but the failure of Project Aqua now meant that most incremental growth would have to come from non-renewables such as gas and coal.

"That must be of concern for government officials in the light of New Zealand signing the Kyoto Protocol and the associated carbon tax," he said.

Contact Energy chief executive Steve Barrett said the cancellation of Project Aqua sharply focused the debate on New Zealand's future energy options.

"To keep the lights on in New Zealand, it is clear we will need to put more emphasis on exploring thermal options, using gas or coal to meet growing energy demand. Contact will be intensifying existing efforts to explore alternative sources of fuel for thermal power stations and on new renewable technologies such as a wind, geothermal energy and small-scale hydro."

However, Barrett said details on the proposed carbon tax remained a key source of uncertainty, "decisions on thermal plant will be seriously hampered without certainty on this crucial issue."

Hodgson admitted there would always be a need for extra generation capacity, and that price would determine what new generation was built first. "The second main determinant will be the availability and price of gas ten years from now," he conceded.