Market Update August 2021
The Wholesale Electricity Market
August was notable for the blackouts that occurred on the evening of Monday 9th August. National demand was very high (7,142MW) with a cold front causing temperatures to plunge and demand to soar. Media and political commentary on the event was predictably heated and tended to reflect the vested interests of the people who held those views. As with any event such as this, they tend to be caused by more than one thing in the system going wrong. Demand was more than forecast ahead of the event, gale force winds earlier in the day had pushed weeds into Tokaanu hydro intake, taking more than 100MW offline, and then a sudden drop in wind in the evening reduced NI wind generation. Some thermal units with long lead times to start-up were not available as their owners had not thought they would be needed.
Exacerbating the problem, a Transpower error made the outages worse than they needed to be by instructing some distributors to shed more load than required. This meant some customers had a disproportionate load shedding.
There are currently a number of reviews into what happened on the 9th including those by Transpower, the Electricity Authority (EA), and the Ministry of Business, Innovation, and Employment (MBIE). An Undesirable Trading Situation (UTS) has also been claimed by a number of participants, now being investigated by the EA. Watch this space on all of these!
The other notable event this month has been the Covid lockdown across all of NZ. This has reduced demand and spot prices in the second half of the month.
Spot prices on average reduced significantly again during August, but it was a roller-coaster ride. Daily prices started the month averaging around $170/MWh, peaked at almost $1,600/MWh on the day of the black-outs (9th), before ending the month at lows of around $65/MWh in the last two lockdown weeks.
The following chart shows spot prices over the last 5 years. The high prices around when the blackout occurred on the 9th dwarf other price periods. Less obvious is the decline in spot prices after this date.
Electricity Demand
Electricity demand in August dropped off rapidly with the advent of the Covid lockdown in the middle of the month as can be seen in the following graph. The impact is similar to what was experienced during the first lockdown in April 2020, though starting from a higher level.
Electricity Generation Mix
The reduction in generation in the last two weeks of August is clear to see in the following chart. The largest declines have been in hydro generation, being able to conserve more water to use later, and thermal generation.
HVDC Transfer
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.
August saw northward transfer remain at the high levels observed in July. There was 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 August.
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 had come back somewhat, particularly for CY 2022. In August prices reversed that recent trend with a 6% increase in CY 2022, up to $148/MWh, and smaller increases 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 Storage
Hydro inflows were healthy again throughout August. SI inflows remained at similar high levels as July, well above the average levels for August. NI inflows dropped back to below average for the time of year.
Energy storage levels in New Zealand’s main hydro storage lakes increased again through August to end the month at 3,232 GWh or 72% full, up 208 GWh over the month
As shown in the following graph, storage is now well above the average for this time of year and well above the risk curves, meaning that the chances of supply shortages this year are now minimal.
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
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 remains 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)
Meteorological spring begins with high pressure sitting across South Island pushing a low away to the northeast, with heavy rain for Northland on the 1st. This brings a drier than average start of the month for most of New Zealand, although the top and tail of the country will see easterly showers, and weak westerly fronts respectively. Temperatures will feel classically spring-like with large diurnal (day-night) variation, and a few chilly nights yet to come. This will be felt most keenly where the winds are lightest – the upper South Island and lower and central North Island.
During the second week of September we start to see more activity in both the Southern Ocean and the Tasman Sea, the two conspiring to throw an area of low pressure our way. Expect a marked uptick in temperatures as northerlies move in, followed by rain, which may well be heavy in the north and west. Temperatures are likely to take a dive again in the wake of the system with a southerly change, then southwesterlies as the next high rolls in to settle the weather down mid-month.
The second half of the month will likely be mainly settled with high pressure diverting weather systems around the fringes of Aotearoa. This also means we’re back to large diurnal temperature swings which may be bad news for growers trying to get a head start on the season.
The Gas Market
Gas prices dropped through August with reduced gas demand for electricity generation followed by Covid lockdown demand reduction pushing prices down. Average prices for August were $14.8/GJ – 23% less than July.
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 August this has been offset by increased output from Maui, McKee-Mangahewa, and Kupe, 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.
Reduced requirements for gas for electricity generation during August saw TCC’s gas usage drop to zero. Some of this was picked up by other generators early in the month, but with the drop in demand due to lockdowns the second half of the month saw Huntly as the main gas generation required to meet electricity demand. Additional gas at favourable prices saw Methanex Motunui increase its gas usage by almost 50% from around 100TJ to nearly 150TJ per day. The Methanex Waitara Valley plant remains mothballed. The following graph shows trends in the major gas users over the last 3 years.
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 continued to increase during August, ending the month at a fresh 10 year high of $174.6USD/T – a 25% increase over the month. Prices have more than doubled in 2021.
Carbon Pricing
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 over 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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