diff --git a/pkg/artifact/artifact.go b/pkg/artifact/artifact.go
index da59e61ad..b9fb81239 100644
--- a/pkg/artifact/artifact.go
+++ b/pkg/artifact/artifact.go
@@ -354,16 +354,15 @@ func (a *ArtifactBuilder) GetTemplateData(ociRef string) (map[string][]byte, err
 		return nil, fmt.Errorf("failed to parse OCI reference %s: %w", ociRef, err)
 	}
 
+	artifacts, err := a.Pull([]string{ociRef})
+	if err != nil {
+		return nil, fmt.Errorf("failed to pull OCI artifact %s: %w", ociRef, err)
+	}
+
 	cacheKey := fmt.Sprintf("%s/%s:%s", registry, repository, tag)
-	var artifactData []byte
-	if cached, ok := a.ociCache[cacheKey]; ok {
-		artifactData = cached
-	} else {
-		artifactData, err = a.downloadOCIArtifact(registry, repository, tag)
-		if err != nil {
-			return nil, fmt.Errorf("failed to download OCI artifact %s: %w", ociRef, err)
-		}
-		a.ociCache[cacheKey] = artifactData
+	artifactData, exists := artifacts[cacheKey]
+	if !exists {
+		return nil, fmt.Errorf("failed to retrieve artifact data for %s", ociRef)
 	}
 
 	templateData := make(map[string][]byte)
diff --git a/pkg/pipelines/init.go b/pkg/pipelines/init.go
index f2af3ce2f..a09636700 100644
--- a/pkg/pipelines/init.go
+++ b/pkg/pipelines/init.go
@@ -460,11 +460,12 @@ func (p *InitPipeline) writeConfigurationFiles() error {
 	return nil
 }
 
-// handleBlueprintLoading loads blueprint data based on the reset flag and blueprint file presence.
+// handleBlueprintLoading loads blueprint data for the InitPipeline based on the reset flag and blueprint file presence.
 // If reset is true, loads blueprint from template data if available. If reset is false, prefers an existing blueprint.yaml file over template data.
 // If no template blueprint data exists, loads from existing config. Returns an error if loading fails.
 func (p *InitPipeline) handleBlueprintLoading(ctx context.Context, renderedData map[string]any, reset bool) error {
 	shouldLoadFromTemplate := false
+	usingLocalTemplates := p.hasLocalTemplates()
 
 	if reset {
 		shouldLoadFromTemplate = true
@@ -486,9 +487,76 @@ func (p *InitPipeline) handleBlueprintLoading(ctx context.Context, renderedData
 		if err := p.loadBlueprintFromTemplate(ctx, renderedData); err != nil {
 			return err
 		}
-	} else {
+		if usingLocalTemplates {
+			if blueprintData, exists := renderedData["blueprint"]; exists {
+				if blueprintMap, ok := blueprintData.(map[string]any); ok {
+					if sources, ok := blueprintMap["sources"].([]any); ok && len(sources) > 0 {
+						if err := p.loadExplicitSources(sources); err != nil {
+							return fmt.Errorf("failed to load explicit sources: %w", err)
+						}
+					}
+				}
+			}
+		}
+	} else if !usingLocalTemplates {
 		if err := p.blueprintHandler.LoadConfig(); err != nil {
-			return fmt.Errorf("Error loading blueprint config: %w", err)
+			return fmt.Errorf("error loading blueprint config: %w", err)
+		}
+		sources := p.blueprintHandler.GetSources()
+		if len(sources) > 0 && p.artifactBuilder != nil {
+			var ociURLs []string
+			for _, source := range sources {
+				if strings.HasPrefix(source.Url, "oci://") {
+					ociURLs = append(ociURLs, source.Url)
+				}
+			}
+			if len(ociURLs) > 0 {
+				_, err := p.artifactBuilder.Pull(ociURLs)
+				if err != nil {
+					return fmt.Errorf("failed to load OCI sources: %w", err)
+				}
+			}
+		}
+	}
+
+	return nil
+}
+
+// hasLocalTemplates checks if the contexts/_template directory exists in the project.
+func (p *InitPipeline) hasLocalTemplates() bool {
+	if p.shell == nil || p.shims == nil {
+		return false
+	}
+
+	projectRoot, err := p.shell.GetProjectRoot()
+	if err != nil {
+		return false
+	}
+
+	templateDir := filepath.Join(projectRoot, "contexts", "_template")
+	_, err = p.shims.Stat(templateDir)
+	return err == nil
+}
+
+// loadExplicitSources loads OCI sources that are explicitly defined in blueprint templates.
+func (p *InitPipeline) loadExplicitSources(sources []any) error {
+	if p.artifactBuilder == nil {
+		return nil
+	}
+
+	var ociURLs []string
+	for _, source := range sources {
+		if sourceMap, ok := source.(map[string]any); ok {
+			if url, ok := sourceMap["url"].(string); ok && strings.HasPrefix(url, "oci://") {
+				ociURLs = append(ociURLs, url)
+			}
+		}
+	}
+
+	if len(ociURLs) > 0 {
+		_, err := p.artifactBuilder.Pull(ociURLs)
+		if err != nil {
+			return fmt.Errorf("failed to load explicit OCI sources: %w", err)
 		}
 	}
 
diff --git a/pkg/pipelines/init_test.go b/pkg/pipelines/init_test.go
index cfeb72fad..d22048203 100644
--- a/pkg/pipelines/init_test.go
+++ b/pkg/pipelines/init_test.go
@@ -917,7 +917,7 @@ func TestInitPipeline_prepareTemplateData(t *testing.T) {
 
 		// Set up BasePipeline properly
 		pipeline.BasePipeline = *NewBasePipeline()
-		pipeline.BasePipeline.injector = di.NewInjector()
+		injector := di.NewInjector()
 
 		mockBlueprintHandler := blueprint.NewMockBlueprintHandler(nil)
 		expectedLocalData := map[string][]byte{
@@ -926,7 +926,12 @@ func TestInitPipeline_prepareTemplateData(t *testing.T) {
 		mockBlueprintHandler.GetLocalTemplateDataFunc = func() (map[string][]byte, error) {
 			return expectedLocalData, nil
 		}
-		pipeline.BasePipeline.injector.Register("blueprintHandler", mockBlueprintHandler)
+		injector.Register("blueprintHandler", mockBlueprintHandler)
+
+		// Initialize the pipeline to set up all components
+		if err := pipeline.BasePipeline.Initialize(injector, context.Background()); err != nil {
+			t.Fatalf("Failed to initialize pipeline: %v", err)
+		}
 
 		// When prepareTemplateData is called with no blueprint context
 		templateData, err := pipeline.BasePipeline.prepareTemplateData(context.Background())
@@ -995,15 +1000,14 @@ func TestInitPipeline_prepareTemplateData(t *testing.T) {
 
 		// Set up BasePipeline properly
 		pipeline.BasePipeline = *NewBasePipeline()
-		pipeline.BasePipeline.injector = di.NewInjector()
-		pipeline.BasePipeline.artifactBuilder = nil
+		injector := di.NewInjector()
 
 		// Mock config handler (needed for determineContextName)
 		mockConfigHandler := config.NewMockConfigHandler()
 		mockConfigHandler.GetContextFunc = func() string {
 			return "local"
 		}
-		pipeline.BasePipeline.configHandler = mockConfigHandler
+		injector.Register("configHandler", mockConfigHandler)
 
 		// Mock blueprint handler with no local templates but default template
 		mockBlueprintHandler := blueprint.NewMockBlueprintHandler(nil)
@@ -1016,7 +1020,15 @@ func TestInitPipeline_prepareTemplateData(t *testing.T) {
 		mockBlueprintHandler.GetDefaultTemplateDataFunc = func(contextName string) (map[string][]byte, error) {
 			return expectedDefaultData, nil
 		}
-		pipeline.BasePipeline.injector.Register("blueprintHandler", mockBlueprintHandler)
+		injector.Register("blueprintHandler", mockBlueprintHandler)
+
+		// Initialize the pipeline to set up all components
+		if err := pipeline.BasePipeline.Initialize(injector, context.Background()); err != nil {
+			t.Fatalf("Failed to initialize pipeline: %v", err)
+		}
+
+		// Set artifact builder to nil to test the "no artifact builder" scenario
+		pipeline.BasePipeline.artifactBuilder = nil
 
 		// When prepareTemplateData is called
 		templateData, err := pipeline.BasePipeline.prepareTemplateData(context.Background())
diff --git a/pkg/pipelines/pipeline.go b/pkg/pipelines/pipeline.go
index 0b3521df5..ac3897c4d 100644
--- a/pkg/pipelines/pipeline.go
+++ b/pkg/pipelines/pipeline.go
@@ -102,6 +102,7 @@ type BasePipeline struct {
 	injector         di.Injector
 	templateRenderer template.Template
 	artifactBuilder  bundler.Artifact
+	blueprintHandler blueprint.BlueprintHandler
 }
 
 // =============================================================================
@@ -128,6 +129,7 @@ func (p *BasePipeline) Initialize(injector di.Injector, ctx context.Context) err
 	p.shims = p.withShims()
 	p.templateRenderer = p.withTemplateRenderer()
 	p.artifactBuilder = p.withArtifactBuilder()
+	p.blueprintHandler = p.withBlueprintHandler()
 
 	if err := p.shell.Initialize(); err != nil {
 		return fmt.Errorf("failed to initialize shell: %w", err)
@@ -781,8 +783,10 @@ func (p *BasePipeline) withTemplateRenderer() template.Template {
 	return templateRenderer
 }
 
-// prepareTemplateData loads template data using blueprint context, artifact builder, and blueprint handler state.
-// Priority: blueprint context, then local handler data, then default artifact, then default template for context.
+// prepareTemplateData loads template data for pipeline execution.
+// Source priority: blueprint context, local handler data, default artifact,
+// then default template for current context. Returns a map of template file
+// names to byte content, or error if loading fails.
 func (p *BasePipeline) prepareTemplateData(ctx context.Context) (map[string][]byte, error) {
 	var blueprintValue string
 	if blueprintCtx := ctx.Value("blueprint"); blueprintCtx != nil {
@@ -808,8 +812,8 @@ func (p *BasePipeline) prepareTemplateData(ctx context.Context) (map[string][]by
 		}
 	}
 
-	if blueprintHandler := p.withBlueprintHandler(); blueprintHandler != nil {
-		blueprintTemplateData, err := blueprintHandler.GetLocalTemplateData()
+	if p.blueprintHandler != nil {
+		blueprintTemplateData, err := p.blueprintHandler.GetLocalTemplateData()
 		if err != nil {
 			return nil, fmt.Errorf("failed to get local template data: %w", err)
 		}
@@ -832,9 +836,9 @@ func (p *BasePipeline) prepareTemplateData(ctx context.Context) (map[string][]by
 		return templateData, nil
 	}
 
-	if blueprintHandler := p.withBlueprintHandler(); blueprintHandler != nil {
+	if p.blueprintHandler != nil {
 		contextName := p.determineContextName(ctx)
-		defaultTemplateData, err := blueprintHandler.GetDefaultTemplateData(contextName)
+		defaultTemplateData, err := p.blueprintHandler.GetDefaultTemplateData(contextName)
 		if err != nil {
 			return nil, fmt.Errorf("failed to get default template data: %w", err)
 		}
@@ -844,9 +848,8 @@ func (p *BasePipeline) prepareTemplateData(ctx context.Context) (map[string][]by
 	return make(map[string][]byte), nil
 }
 
-// processTemplateData renders and processes template data.
-// Renders all templates using the template renderer and returns the rendered template data map.
-// If blueprint data is present in the rendered data, it will be loaded using the blueprint handler.
+// processTemplateData renders template data using the pipeline's template renderer.
+// Returns a map of rendered template data or an error if processing fails.
 func (p *BasePipeline) processTemplateData(templateData map[string][]byte) (map[string]any, error) {
 	if p.templateRenderer == nil || len(templateData) == 0 {
 		return nil, nil
@@ -857,10 +860,8 @@ func (p *BasePipeline) processTemplateData(templateData map[string][]byte) (map[
 		return nil, fmt.Errorf("failed to process template data: %w", err)
 	}
 
-	if blueprintData, exists := renderedData["blueprint"]; exists {
-		if err := p.loadBlueprintFromTemplate(context.Background(), map[string]any{"blueprint": blueprintData}); err != nil {
-			return nil, fmt.Errorf("failed to load blueprint from template: %w", err)
-		}
+	if err := p.loadBlueprintFromTemplate(context.Background(), renderedData); err != nil {
+		return nil, fmt.Errorf("failed to load blueprint from template: %w", err)
 	}
 
 	return renderedData, nil
@@ -894,13 +895,6 @@ func (p *BasePipeline) loadBlueprintFromTemplate(ctx context.Context, renderedDa
 						return err
 					}
 				}
-			} else if p.artifactBuilder != nil {
-				effectiveBlueprintURL := constants.GetEffectiveBlueprintURL()
-				var err error
-				ociInfo, err = bundler.ParseOCIReference(effectiveBlueprintURL)
-				if err != nil {
-					return fmt.Errorf("failed to parse default blueprint reference: %w", err)
-				}
 			}
 
 			blueprintHandler := p.withBlueprintHandler()
diff --git a/pkg/pipelines/pipeline_test.go b/pkg/pipelines/pipeline_test.go
index cc948d907..564eab2cc 100644
--- a/pkg/pipelines/pipeline_test.go
+++ b/pkg/pipelines/pipeline_test.go
@@ -2923,7 +2923,7 @@ func TestBasePipeline_prepareTemplateData(t *testing.T) {
 	t.Run("Priority2_LocalTemplatesWhenNoExplicitBlueprint", func(t *testing.T) {
 		// Given a pipeline with local templates but no explicit blueprint
 		pipeline := NewBasePipeline()
-		pipeline.injector = di.NewInjector()
+		injector := di.NewInjector()
 
 		mockBlueprintHandler := blueprint.NewMockBlueprintHandler(nil)
 		expectedLocalData := map[string][]byte{
@@ -2932,7 +2932,12 @@ func TestBasePipeline_prepareTemplateData(t *testing.T) {
 		mockBlueprintHandler.GetLocalTemplateDataFunc = func() (map[string][]byte, error) {
 			return expectedLocalData, nil
 		}
-		pipeline.injector.Register("blueprintHandler", mockBlueprintHandler)
+		injector.Register("blueprintHandler", mockBlueprintHandler)
+
+		// Initialize the pipeline to set up all components
+		if err := pipeline.Initialize(injector, context.Background()); err != nil {
+			t.Fatalf("Failed to initialize pipeline: %v", err)
+		}
 
 		// When prepareTemplateData is called with no blueprint context
 		templateData, err := pipeline.prepareTemplateData(context.Background())
@@ -2992,17 +2997,78 @@ func TestBasePipeline_prepareTemplateData(t *testing.T) {
 		}
 	})
 
+	t.Run("Priority3_LocalTemplateDirectoryExistsUsesLocalEvenIfEmpty", func(t *testing.T) {
+		// Given a pipeline with contexts/_template directory that exists but has no .jsonnet files
+		pipeline := NewBasePipeline()
+		injector := di.NewInjector()
+
+		// Mock shell to return project root
+		mockShell := shell.NewMockShell(nil)
+		mockShell.GetProjectRootFunc = func() (string, error) {
+			return "/test/project", nil
+		}
+		injector.Register("shell", mockShell)
+
+		// Mock shims to simulate contexts/_template directory exists
+		shims := &Shims{
+			Stat: func(path string) (os.FileInfo, error) {
+				if path == "/test/project/contexts/_template" {
+					return &mockInitFileInfo{name: "_template", isDir: true}, nil
+				}
+				return nil, os.ErrNotExist
+			},
+		}
+		injector.Register("shims", shims)
+
+		// Mock blueprint handler with empty local templates (no .jsonnet files)
+		mockBlueprintHandler := blueprint.NewMockBlueprintHandler(nil)
+		mockBlueprintHandler.GetLocalTemplateDataFunc = func() (map[string][]byte, error) {
+			// Return empty map but with values.yaml data merged in
+			return map[string][]byte{
+				"values": []byte("external_domain: local.test"),
+			}, nil
+		}
+		injector.Register("blueprintHandler", mockBlueprintHandler)
+
+		// Mock artifact builder (should NOT be called)
+		mockArtifactBuilder := artifact.NewMockArtifact()
+		mockArtifactBuilder.GetTemplateDataFunc = func(ociRef string) (map[string][]byte, error) {
+			t.Error("Artifact builder should not be called when local template directory exists")
+			return nil, fmt.Errorf("should not be called")
+		}
+		injector.Register("artifactBuilder", mockArtifactBuilder)
+
+		// Initialize the pipeline to set up all components
+		if err := pipeline.Initialize(injector, context.Background()); err != nil {
+			t.Fatalf("Failed to initialize pipeline: %v", err)
+		}
+
+		// When prepareTemplateData is called with no blueprint context
+		templateData, err := pipeline.prepareTemplateData(context.Background())
+
+		// Then should use local template data even if it only contains values.yaml
+		if err != nil {
+			t.Errorf("Expected no error, got %v", err)
+		}
+		if len(templateData) != 1 {
+			t.Errorf("Expected 1 template file (values), got %d", len(templateData))
+		}
+		if string(templateData["values"]) != "external_domain: local.test" {
+			t.Error("Expected local values data")
+		}
+	})
+
 	t.Run("Priority4_EmbeddedDefaultWhenNoArtifactBuilder", func(t *testing.T) {
 		// Given a pipeline with no artifact builder
 		pipeline := NewBasePipeline()
-		pipeline.injector = di.NewInjector()
+		injector := di.NewInjector()
 
 		// Mock config handler (needed for determineContextName)
 		mockConfigHandler := config.NewMockConfigHandler()
 		mockConfigHandler.GetContextFunc = func() string {
 			return "local"
 		}
-		pipeline.configHandler = mockConfigHandler
+		injector.Register("configHandler", mockConfigHandler)
 
 		// Mock blueprint handler with no local templates but default template
 		mockBlueprintHandler := blueprint.NewMockBlueprintHandler(nil)
@@ -3015,7 +3081,15 @@ func TestBasePipeline_prepareTemplateData(t *testing.T) {
 		mockBlueprintHandler.GetDefaultTemplateDataFunc = func(contextName string) (map[string][]byte, error) {
 			return expectedDefaultData, nil
 		}
-		pipeline.injector.Register("blueprintHandler", mockBlueprintHandler)
+		injector.Register("blueprintHandler", mockBlueprintHandler)
+
+		// Initialize the pipeline to set up all components
+		if err := pipeline.Initialize(injector, context.Background()); err != nil {
+			t.Fatalf("Failed to initialize pipeline: %v", err)
+		}
+
+		// Set artifact builder to nil to test the "no artifact builder" scenario
+		pipeline.artifactBuilder = nil
 
 		// When prepareTemplateData is called
 		templateData, err := pipeline.prepareTemplateData(context.Background())
diff --git a/pkg/template/jsonnet_template.go b/pkg/template/jsonnet_template.go
index 7951ea48a..b4842855c 100644
--- a/pkg/template/jsonnet_template.go
+++ b/pkg/template/jsonnet_template.go
@@ -96,7 +96,8 @@ func (t *JsonnetTemplate) Process(templateData map[string][]byte, renderedData m
 
 // processJsonnetTemplate evaluates a Jsonnet template string using the Windsor context and values data.
 // The Windsor configuration is marshaled to YAML, converted to a map, and augmented with context and project name metadata.
-// The context is serialized to JSON and injected into the Jsonnet VM as an external variable, along with helper functions and the effective blueprint URL.
+// The context is serialized to JSON and injected into the Jsonnet VM as an external variable, along with helper functions
+// and the effective blueprint URL for templates to reference if needed.
 // If values data is provided, it is merged into the context map before serialization.
 // The template is evaluated, and the output is unmarshaled from JSON into a map.
 // Returns the resulting map or an error if any step fails.