Market Update July 2022
The Wholesale Electricity Market
Spot prices in the wholesale electricity market dropped considerably in July. Average spot prices for the month ranged from $98 in the lower South Island ($153 in June), to $107 in the upper North Island ($177 in June).
The following chart shows average weekly spot prices over the last 2 years. The significant drop in prices in the last month is clearly visible on the far right of the graph.
Electricity demand remained high in July as expected as we move through the winter period. It is in line with levels seen at the same time in the last three years.
Electricity Generation Mix
High inflows through July meant that hydro generation increased and allowed thermal generation to reduce at the back end of the 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.
July saw reduced northward transfer early in the month as high North Island inflows depressed the need to use SI storage. High SI inflows in the middle of the month saw increased northward transfer later in the month. Southward transfer picked up early in the month but backed off in the middle of the month before picking up again later in the month.
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) for the last 2 years.
Note that $100/MWh equates to 10c/kWh.
Future prices remained relatively flat through July with a small drop in CY 2023, offset by small rises in both CY 24 and 25. CY 2023 prices closed at $190 – a 2% decrease for the month. CY 2024 increased finishing at $180 – a 2% increase. CY 2025 also increased ending the month at $164/MWh – a 6% increase. Prices for all years have increased by almost 50% since the start of the 2022!
With new generation there were a few announcements during the month about potential solar projects, but nothing that provided a firm timeframe for completion. Known projects are shown below.
On the demand side, NZAS advised that it had started discussions with generators for supply to the Tiwai aluminium smelter post-2024. A number of distribution companies also noted that they had increased interest in changes to connection points due to efforts being made by industry to decarbonise. Eventually, these will flow through to increased demand as electricity replaces thermal fuels.
Inflows remained very high in the North Island during July, maintaining the 200% of average levels we observed last month. SI inflows were around expected levels for most of the month but picked up to about 400% of average later in July.
As a result of these high inflows, energy storage levels in New Zealand’s main hydro storage lakes increased through the month – particularly in the North Island where Lake Taupo is currently over 83% full. Storage ended the month at 3,313 GWh or 74% full, up 495 GWh over the month.
Security of supply risks eased further during July with the higher inflows and increased storage as shown in the following graph.
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 increased significantly over the last month. Storage is now approaching the maximum levels seen in the last 30 years 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)
Climate Drivers — For late winter and early spring, the most important climate driver will be a negative Indian Ocean Dipole (IOD), which favours a more ‘active’ north Tasman Sea, and in turn more frequent northerly rain events over New Zealand. The 2021-2022 La Nina ended earlier this winter, but most climate models forecast a return to La Nina conditions around late spring; a so-called “triple dip” event. Sea temperatures around the New Zealand coastline have eased back towards average over winter, and are currently sitting around 0.5C above normal.
August 2022 Outlook — The first half of August is predicted to continue rather “stormy” for many regions. Expect active north-westerly fronts this week, then an unusually cold week next week under an unsettled south-easterly regime (with further lows). Another decent snow event is signalled next week, this time potentially affecting the higher ground of both Islands. The third week of August should see a slight ‘easing’ in the overall volatility of the weather patterns – with a brief High predicted to lie over the South Island. While this High is expected to bring a welcome break from mobile weather systems, and some drier weather, for the South Island, it is also likely to produce inland frosts and fogs there. In contrast, a wetter easterly regime is signalled for the northeast of the North Island. Looking further ahead in the ensemble models, the last week of August should see a return to relatively mild northerly winds and rain bands across NZ, as the High starts to shuffle away to the east of the country.
The Gas Market
Gas prices continued to reduce through July ending the month at $13.7/GJ – 26% down on June. Prices are now 34% lower than they were at the same time last year.
On the supply side, finally, we had some good news, with the drilling program currently underway at Pohokura providing some increased production after the last 2 years of falling output. Production increased to 116TJ on the 24th of July before dropping back to a steadier 90TJ per day – a significant increase from the 80TJ per day being produced last month, but still well below the 200+TJ per day produced in the middle of 2019.
Maui increased production in July back to close to 90TJ per day – significantly more than in June after its return from the planned shutdown, but still below the pre-shutdown level of over 100TJ per day.
McKee / Mangahewa maintained output – averaging around 70TJ/day. Kupe’s output reduced by 9% to around 60TJ/day.
Hopefully, we are now starting to see some of the benefits emerging from the drilling campaigns currently underway. Apart from Pohokura, drilling programs are also currently ongoing at Maui and Kapuni, which will hopefully increase supply further in the next few months.
The following graph shows production levels from major fields over the last 3 years.
Huntly’s gas usage increased during July. Its usage averaged 61TJ/day, up 11% in June. TCC increased usage again to 37TJ/day –up a further 64% on June consumption on top of a 50% increase the month before. Methanex Motonui has been conducting maintenance work that is planned to extend through to late August. Consumption averaged 73TJ/day, well down on the pre Maui shutdown level of 150TJ/day. Methanex Waitara was shut down for all of July. The following graph shows trends in the major gas users over the last 3 years.
Global energy prices remained high during July 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 Russia to use critical gas supplies to Europe to apply economic pressure on Ukraine’s allies have added to the uncertainty and therefore further added to energy prices.
LNG netback prices increased sharply in July ending the month at $48.91/GJ – up 75% from last month. Expected prices for the rest of 2022 and 2023 have also increased. 2022 netback prices are now expected to average $43.01/GJ (a 5% increase on last month) while 2023 netback prices also increased 34% to $49.30/GJ – well above historical levels.
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 had been planning on increasing production in NZ this year, however, in July it announced that it expected to produce only 1.3 million tonnes of methanol – on a par with last year, due to decreased gas supplies. In January they had forecast 1.5 million tonnes for the year.
The Coal Market
The global energy crisis has been as much about coal as it has gas. The war in Ukraine has driven energy prices, including coal, up. Prices hovered around the $US400/T all of the month, closing at $US408/T – up 6%.
These prices remain 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.
Genesis announced in July that it has coal stock at 8-year highs, sheltering it to some extent from high international coal 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 guard-rails” 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. In July prices increased to $80/t – well above the $70 upper guard rail 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.
EU Carbon Permits reduced to 78 Euro/tonne in July – down 8%. They are still almost twice the price they were a year ago, as concerns are raised about the amount of coal that may be burnt in Europe if Russian gas is sanctioned or reduced in any other way.
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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