Market update July 2021
The Wholesale Electricity Market
Spot prices reduced significantly during July. At the end of July average spot prices were around $130/MWh compared to average levels in excess of $250/MWh seen over the previous few months. High inflows provided considerable relief for spot prices though they remain stubbornly high, reflecting uncertainty around future gas supply for electricity generation. Kawerau Geothermal (104MW) returned to service from its unplanned outage earlier than expected – returning mid-July (originally planned for late August return). The following heat-map shows average spot prices for the month
The following chart shows spot prices over the last 5 years. The reduction in July pricing (extreme right of the graph) compared to the last few months can be clearly seen.
Electricity demand in July remained close to the levels seen in June as we progressed through the cooler, highest demand months. However demand was in line with recent years as shown in the following graph.
Electricity Generation Mix
Increased hydro generation continued through July with the welcome return of higher hydro inflows as discussed in following sections. Geothermal increased in the second half of the month with the return of Kawerau to operation, while thermal generation was able to back off from previous high levels. Wind output was higher at the start of the month but reduced later in the month.
Power transfers on the HVDC link connecting the North and South Islands are important both in showing relative hydro positions and also the reliance on thermal power to meet demand. High northward flow tends to indicate a good SI hydro position, whereas the reverse indicates a heavy reliance on thermal power to make up for hydro shortages.
July saw northward transfer return to levels not seen since November last year. There was almost no southward flow reflecting significant SI inflows and improved SI storage position.
The Electricity Futures Market
The Futures Market provides an indication of where market participants see the spot market moving in the future. They are based on actual trades between participants looking to hedge their positions (as both buyers and sellers) into the future against potential spot market volatility. They are also a useful proxy for the direction of retail contracts. The following graph shows Futures pricing for CY 2022, 2023 and 2024 at Otahuhu (Auckland) from the start of 2019 to the end of July.
Note that $100/MWh equates to 10c/kWh.
The increases in all calendar years over the last 12 months – over 60% for CY 2022 – is clear to see. Since June though prices have come back somewhat, particularly for CY 2022. In July this decrease continued with a 7% reduction in CY 2022, down to $139/MWh, and lesser reductions for CY 2023 and 2024.
The lower prices for 2023 and 2024 is due to the expectation of new generation being developed over that timeframe.
Hydro inflows were healthy again throughout July. SI inflows were well above the average levels for July and were at higher levels than they have been since November last year. NI inflows were at or above average for July.
Energy storage levels in New Zealand’s main hydro storage lakes increased again through July to end the month at 3,024 GWh or 68% full, up 207 GWh over the month.
As shown in the following graph, storage is now above the average for this time of year and well above the risk curves, meaning that the chances of supply shortages have greatly reduced.
Uncertainty around future gas supplies is still causing hydro generators to try to conserve storage by valuing it at higher than normal levels. Given the circumstances we would expect that to remain the case until either storage exceeds average levels by a significant amount, or until there is more certainty around gas supplies.
Snow pack is an important way that hydro energy is stored over the winter months and released as hydro inflows in the spring. The following graph shows that currently snow pack has increased over the last month and is now well above average for this time of year in the important Waitaki catchment (feeds approx.. 50% of the SI hydro generating capacity.)
Climate outlook overview (from the MetService)
The weather in early August looks very mobile, with frequent weather systems running in from the west interrupting brief settled periods under transient ridges of high pressure. There’s always a ridge near the Far North, so expect drier than average conditions for the upper North Island. Prevailing westerly winds further south mean that the western and lower portions of both islands will likely see wetter than average conditions, bearing the brunt of each system as it rolls in from the west. Conversely, eastern regions will likely run drier than average. Temperatures will likely fluctuate with above average conditions expected ahead of approaching weather systems thanks to mainly northwest winds, and cooler than average conditions in the lee of the passing lows. Snow is on the cards for the mountains of South Island.
There are signs that from mid-month the high pressure in the Tasman Sea will become more established and spread across Aotearoa bringing a more settled period. This likely brings a spell of little rain, cold frosty mornings, and fine afternoons. How long this spell lasts is a little up for debate, as further westerly weather systems are waiting in the wings. It’s looking likely that August will be bookended with westerly weather systems.
The Gas Market
Gas prices peaked in the middle of July at close to $40/GJ before dropping in the second half of the month to approx.. $14/GJ. Average prices for July were $19.3/GJ – 6% more than June.
On the supply side the following graph shows the continued decline in Pohokura production over the last month, continuing the trend over the last 12 months. However in July this has been offset by increased output from McKee-Mangahewa, resulting in overall production being close to last month. Overall output is still down 20% on what we would expect through the winter months. This may not improve significantly until Pohokura’s operators complete drilling to improve output, currently due to occur late 2022.
Lack of supply and high prices have resulted in continued demand destruction during July, as can be seen in the following graph. The Methanex Waitara Valley plant has been mothballed for some months now, while Motunui maintained reduced consumption through July to allow a gas swop with Genesis enabling them to use more gas at Huntly. Increased hydro inflows allowed Huntly to reduce gas consumption by about 10% in July. Huntly has already been operating its duel fuel Rankine units on coal for most of the last 12 months to help conserve scarce water and to free up gas to be used elsewhere.
The Coal Market
Like gas, the price of coal can flow through and have an impact on the electricity market. Also coal is an internationally traded commodity so what happens in international markets can be important. Genesis has been importing significant amounts of coal over the last 12 months for electricity generation at Huntly.
The following graph shows international prices for thermal coal over the last 10 years. Prices increased during July, peaking at $150USD/T before falling back at the end of the month to close at $139USD/T – a small increase over the month. Prices remain at the highest levels seen in the last 10 years
NZ has had an Emissions Trading Scheme (ETS) in place since 2008. It has been subsequently reviewed by a number of governments and is now an uncapped scheme closely linked to international schemes. Over the last few years the Carbon Price through the ETS has climbed as shown in the following graph. Prices are now almost twice what they were just over a year ago.
As the carbon price rises, the cost of coal, gas or other fossil fuels used in process heat applications will naturally also rise. Electricity prices are also affected by a rising carbon price. Electricity prices are set by the marginal producing unit – in NZ this is currently typically coal or gas or hydro generators, with the latter valuing the cost of its water against the former. An increase in carbon price can lead to an increase in electricity prices in the short- to medium-term, even when more renewable electricity is being added (as the marginal units set the price). A carbon price of $50/t adds about $25/MWh to electricity prices.
About this Report
This energy market summary report provides information on wholesale price trends within the NZ Electricity Market.
Please note that all electricity prices are presented as a $ per MWh price and all carbon prices as a $ per unit price.
All spot prices are published by the Electricity Authority. Futures contract prices are sourced from ASX. Further information can be found at the locations noted below.
- Transpower publishes a range of detailed information which can be found here: https://www.transpower.co.nz/power-system-live-data
- The Electricity Authority publishes a range of detailed information which can be found here: https://www.emi.ea.govt.nz/
- Weather and Climate data – The MetService publishes a range of weather related information which can be found here: https://www.metservice.com/
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