Market Update January 2022
The Wholesale Electricity Market
Spot prices in the wholesale electricity market increased dramatically during January. Average spot prices for the month ranged from $147 ($45 in Dec) in the far South, to $168 ($67 in Dec) at the top of the North Island as depicted in the following chart.
The following chart shows average weekly spot prices over the last 5 years. The lower prices in December are just visible on the far right The following chart shows average weekly spot prices over the last 2 years. The significant increase in prices in January are clearly visible on the far right of the graph.
Electricity demand increased in January back to levels seen in 2019/20. The normal post-summer shutdown increase can be seen in recent weeks. (Note – I believe there is an issue with this Transpower graph that I have raised with them in that I think they deleted 2021 data at the start of this year but renamed the other years – so what is labelled 2019 is actually 2018, etc.)
Electricity Generation Mix
Increasing demand and attempts to conserve water have fed through to reduced hydro and increased thermal generation in January as shown in the following graph. Wind generation has also been down compared to recent months.
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.
January saw reduced northward transfer as SI hydro generators tried to conserve water. There was also a small amount of southward transfer.
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, 2024 and 2025 at Otahuhu (Auckland) from the start of 2020 to the end of January.
Note that $100/MWh equates to 10c/kWh.
In January, CY 2023 prices increased at the start of the month peaking at $148.5 before dropping later in the month, closing at $144 – a 2% increase for the month. CY 2024 also increased throughout the month peaking at $131 before finishing the month at $127 – a 3% increase. CY 2025 is shown for the first time this month – it was largely flat ending the month at $105/MWh.
Lower prices for CY 2023, CY 2024 and CY2025 are based on an expectation that a new generation is developed over that timeframe – known projects shown below.
Note that Mercury has completed commissioning the Northern section of Turitea wind farm – 119MW. However, the Southern section (102MW) may not be completed until mid-2023. Also, Genesis has announced that FRV Australia will be its joint venture partner to build 500 MW (750GWh pa) of solar generation by 2025 mainly in the North Island. The first location will be confirmed in early 2022.
Meanwhile, on the demand side of the equation, expectations are increasing that the Tiwai aluminium smelter will continue to operate beyond 2024. High aluminium prices and the relatively low emission content of aluminium produced at Tiwai is likely to lead its owner, Rio Tinto, to want to extend operations past the current contracts end date. Accounting for about 12.5% of national electricity demand the aluminium smelter has a significant impact on national electricity prices. Any negotiations are likely to start as early as this year.
The story of the last month has been the historically low Hydro inflows during January. A four week period in January saw the lowest inflows on record in the NI and the second-lowest on record in the SI.
Energy storage levels in New Zealand’s main hydro storage lakes decreased through January. Storage ended the month at 3,455 GWh or 78% full, down 417 GWh over the month.
As shown in the following graph, storage has plummeted over the last month losing more than 15% of total (full) storage in just over a month! On the current trajectory, storage will very quickly become a problem and with concerns remaining around thermal fuel supply, the ability to suppress this decline may be constrained. With the potential for below-average inflows over the next few months, it is understandable that some red flags are starting to be raised.
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 snow pack has decreased over the last month as you would expect through summer. Storage remains close to the mean level we would expect 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 2 Feb 2022)
Climate Drivers — A maturing La Niña event in the tropical Pacific is close to its peak. A return to neutral El Niño–Southern Oscillation (ENSO) conditions is likely this autumn. The persistent positive Southern Annular Mode (SAM) phase is predicted to continue through the first half of February. This supports Highs over the South Island and southern latitudes and reduces the chance of Southern Ocean weather systems sweeping up the country. In contrast, an ‘active’ tropics, with humid northerlies and Tasman Sea lows, should prevail this week and into early next week, before Highs build back in across most of New Zealand by mid-month.
February 2022 Outlook – Rainfall Extremes – Extreme rainfall is signalled to start February – then forecasts show a return to an extended dry run. A Red Warning for Heavy Rain is currently in force for Westland and Buller. Red Warnings are reserved for the most significant weather events. This is only the fifth Red Warning MetService has issued since the colour coded system was introduced in 2019. Rain accumulations are forecast to be 500-750mm about the Westland ranges over 2 days, and disruptions are expected.
For all other areas, a burst of rain is expected between now and early next week (7th February), associated with two weather features moving across the country. Expect more rain in the next 7 days, than seen across all of January, in your region. Many North Island areas should also see locally heavy falls and decent totals, but picking who sees the best of the rain is challenging so far out. After the middle of next week, expect another extended drier-than-normal run, as prevailing Highs build back in across the country, with easterly winds returning to Auckland and Northland.
February is forecast to be hotter than usual, overall. The exceptions are the eastern areas of both Islands, where monthly temperatures are expected to fall closer to February normal.
The Gas Market
Gas prices rebounded in January. Average prices were $11.51/GJ – 18.9% up in December.
On the supply side, the following graph shows a decline again in January. Pohokura output decreased slightly, producing 88TJ/day for the month, down 2% in December. The recent gas injection program has had some success at improving flows above the 80TJ/day in October though production is again waning over time.
Maui production started the month strong, peaking at over 100TJ/day in the middle of the month before easing back to closer to 90TJ/day. Maui’s average for the month was 94.5TJ/day down 3%. McKee / Mangahewa decreased output as well – down 7% to 83TJ/day while Kupe maintained output averaging 69TJ/day.
Long term the situation at Pohokura will not improve significantly until the operators complete drilling to improve output, currently due to occur in late 2022. Drilling programs are also currently ongoing at Maui and Kapuni, however, we do not expect the supply/demand balance to improve significantly until late 2022 or early 2023.
Increased requirements for gas for electricity generation during January saw Huntly’s gas usage lift by 23% over the month while Stratford was also generating solidly for most of the month. A Maui pipeline shutdown over the last weekend in January limited gas usage north of Mokau in the Waitomo area – restricting gas supply to Huntly and to a number of other large users in the North. Methanex Motonui maintained high gas usage in the first half of the month but reduced in the second half to around 178TJ per day. Average use was 180TJ per day, up 5% on the month. Methanex Waitara continued to operate at 6TJ per day until the 22nd of January when it shut down. The following graph shows trends in the major gas users over the last 3 years.
Global energy prices remained high during January as the ongoing lack of gas storage/supply in Europe and geopolitical disputes impacting supply out of Russia have continued to result in elevated wholesale prices for gas and electricity. Companies heavily reliant on gas and/or electricity have scaled back production or, in some cases, ceased operations completely.
LNG netback prices reduced slightly but remained high at $39.11/GJ – a 5% decrease on last month. Prices for next year are expected to average $36.3/GJ (compared to $34.46 last month) while 2023 netback prices increased to $23.71/GJ ($18.66/GJ last month.)
New Zealand does not have an LNG export market so our domestic prices are not directly linked to global prices. However, some of our large gas users deal in international markets which are impacted by global gas prices and they may try to produce more in NZ (increase demand) to take advantage of lower gas prices. Methanex recently announced that they expected to produce 10% more methanol in 2022 in NZ than they did last year driven in part by “robust methanol prices.”
The Coal Market
The global energy crisis has been almost as much about coal as it has gas. After a quadrupling of prices through most of 2021 followed by the large falls in October driven by the Chinese Government intervening in their market, coal prices rose again sharply through January. Indonesia, the world’s largest exporter of thermal coal used for power generation, banned all exports of coal for January to protect their domestic supply. This caused a spike in international coal prices up to $223USD/T in recent trading – an increase of 30% over the month. These prices are well above the levels seen in the last 10 years as shown in the following graph.
Like gas, the price of coal can flow through and have an impact on the electricity market. Genesis has been importing significant amounts of coal over the last 2 years for electricity generation at Huntly, though Genesis has pointed out that most of this has been purchased at contract prices significantly below international spot prices. When running, these units often set the marginal price. Even when Huntly is not setting the market price, hydro generators factor in increasing fuel costs in determining the prices they will offer into the market, again flowing through to higher electricity prices.
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” price scheme closely linked to international schemes. However, there are “upper and lower guardrails” set up to prevent wild swings in carbon price that act as the minimum and maximum prices. Currently, these are set at $70 and $20 respectively. 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 and have risen again during January to $76/t – well above the $70 upper guardrail requiring the Government to release additional units in an attempt to dampen prices.
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 (as the marginal units set the price). A carbon price of $75/t is estimated to currently add about $37.5/MWh (or ~3.75c/kWh) to electricity prices. In the long term, the impact should reduce as money is invested in more low-cost renewables and there is less reliance on gas and coal-fired generation.
European greenhouse gas emission rights increased markedly again in January. They are now about three times the price they were a year ago, as concerns about the amount of coal likely to be burnt during the European winter flowed through to increased demand for EUAs. It will be interesting to see if governments intervene in the market as these higher EUA prices start to impact more on energy 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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