Market Update February 2022
The Wholesale Electricity Market
Spot prices in the wholesale electricity market decreased during February, especially in the South Island. Average spot prices for the month ranged from $110 ($147 in Jan) in the South, to $165 ($168 in Jan) at the top of the North Island as depicted in the following chart.
The following chart shows average weekly spot prices over the last 2 years. The significant decrease in prices, especially in the South Island, in February are clearly visible on the far right of the graph.
Electricity demand decreased in February – less than the levels seen at the same time in the last 4 years. (Note that the Transpower error observed last month has been corrected this month)
Electricity Generation Mix
Continued attempts to conserve water has maintained the reduced hydro and increased thermal generation observed last month as shown in the following graph.
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.
February saw a continuation of 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 February.
Note that $100/MWh equates to 10c/kWh.
As foreseen in this report last month Rio Tinto announced at the start of February that it wanted to keep the Tiwai Aluminium smelter going after its planned closure in 2024. Accounting for about 12.5% of national electricity demand the aluminium smelter has a significant impact on national electricity prices. The market response was immediate with all calendar years’ increasing, but particularly the later years of 2024 and 2025. CY 2023 prices increased throughout the month, closing at $156 – an 8% increase for the month. CY 2024 also increased throughout the month finishing at $145 – a 14% increase. CY 2025 showed the largest increase ending the month at $129/MWh – a 23% increase!
Trying to balance this on the supply side a number of new projects were announced during February. Meridian announced plans for a battery / solar installation at Ruakaka and a wind farm at Mt Munro, Mercury is looking at adding capacity to its Ngatamariki geothermal power station, and Contact is looking to expand its Tauhara geothermal station. A number of other solar schemes are also being worked on which could be up and running very quickly if approved. Known projects are 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.
Genesis also announced a biofuel trial at Huntly that could have a major impact on the life of the ageing station. In the trial, they are looking to use advanced wood pellets to replace coal on one of the 4 Rankine (250MW) units at the site. If successful it could allow Huntly to provide a renewable dry-year energy storage solution and extend its life beyond 2040.
After January’s record low inflows, rainfall returned with a roar in February. Early February saw over a metre of rain in 24 hours in some South Island catchments, while in mid-February ex Tropical Cyclone Dovi crossed the North Island delivering high winds and flooding in some areas. Many areas set new record rainfall levels for February. The impact of these events can be seen in the following hydro catchment inflow graphs.
As a result of these high inflows, energy storage levels in New Zealand’s main hydro storage lakes increased through February. Storage ended the month at 3,883 GWh or 88% full, up 428 GWh over the month.
A month is a long time in the NZ electricity sector – highlighted in this case by the dramatic turnaround in energy storage and the reduced risk of future supply shortages. In January the plummeting storage was a real concern for energy security for 2022. The high February inflows have eased a lot of those concerns for now although, with dry weather expected to continue, this reprieve could be short-lived.
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 — La Nina has now peaked in the tropical Pacific and is declining. A return to neutral El Nino–Southern Oscillation (ENSO) conditions is likely for autumn. The tropics to the north of New Zealand remain active, with moderate potential for another Tropical Cyclone to form this week over the Coral Sea. However, an intense High remains stubbornly in charge over New Zealand this week and should fend off any tropical visitors. The Southern Ocean remains relatively settled across the first half of March, meaning cold outbreaks and autumnal fronts will be infrequent and mostly lacking oomph. Seas around the New Zealand coastline remain abnormally warm, with temperatures running near 2 degrees above the normal for the time of year.
March 2022 Outlook — A high prevails over Aotearoa this week, bringing a drier spell with somewhat cooler conditions. A cold front tries to break this pattern early next week, to deliver rain over the far south of the country, but it may not progress well against the intense High. Ditto for any tropical easterlies to the north of New Zealand. For most of the country, next week continues on the dry side, with a return to well above average March temperatures.
For the second half of March, temperatures remain well above average. Highs are also likely to remain prevalent over our weather maps, especially over the South Island, but at this time of year, the odd front will make inroads (and bring passing rain). Intermittent easterlies are likely to continue across the upper North Island for the back half of the month, with top-up showers possible there.
Overall, a warmer than usual March is forecast. Below normal March rainfall is forecast for most regions, with the exception of Westland, Fiordland, Southland and Otago (near normal tallies there).
The Gas Market
Gas prices were up again in February. Average prices were $12.54/GJ – 8.9% up on January.
On the supply side, the following graph shows a slight pickup in February. Maui production increased again with a number of days exceeding 110TJ. Maui averaged 105TJ/day, up from 95TJ/day in January.
Pohokura output was largely steady at 88TJ/day for the month apart from a couple of days at the start of the month when there appeared to be a shutdown. Due to the outage average output was 79.5TJ, down 10% in January. McKee / Mangahewa decreased output as well – down 2% to 81.5TJ/day while Kupe maintained output averaging 69.5TJ/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 February saw Huntly’s gas usage lift by a further 15% over the month (after a 23% increase in January). Stratford was also generating at similar levels to January. Methanex Motonui backed off gas usage to around 171TJ/day on average – down 4% on the month while Methanex Waitara started back up in early February operating at 6TJ per day. The following graph shows trends in the major gas users over the last 3 years.
Global energy prices remained high during February as the ongoing lack of gas storage/supply in Europe has continued to result in elevated wholesale prices for gas and electricity. On top of that, the war in Ukraine and the potential for sanctions on critical gas supplies from Russia has added to the uncertainty and therefore further added to energy prices.
LNG netback prices reduced in February as the European winter drew to a close, but remained high compared to historical levels at $30.06/GJ – a 23% decrease on last month. Prices for the remainder of 2022 are expected to average $36.3/GJ (the same as last month) while 2023 netback prices increased to $25.80/GJ ($23.71/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 as much about coal as it has gas. After the increase in prices last month due to Indonesia (the world’s largest coal exporter) banning all coal exports, this month saw that ban overturned at the start of February. However this provided no price relief as the outbreak of the war in Ukraine has seen a refreshed rally in prices – now exceeding $US300/T – a further 35% increase in the month over levels that were already at record highs.
These prices are well above anything 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 prices 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 February to $78.5/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 eased slightly in February. They are still about three times the price they were a year ago, as concerns about the amount of coal 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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