Market Update August 2023
The Wholesale Electricity Market
Spot prices in the wholesale electricity market increased again through August. Average spot prices ranged from $131 in the lower South Island (up from $108 in July), up to $149 in the upper North Island (up from $120).
The following chart shows average weekly spot prices over the last 2 years. The gradual increase through August can be clearly seen.
Electricity demand in August was higher than it has been in recent years as shown in the graph below.
Electricity Generation Mix
Higher demand led to increased hydro generation in August while thermal generation maintained the higher output observed in July.
Power transfers on the HVDC link connecting the North and South Islands are important both in showing relative hydro positions and 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 maintained at similar levels to July with a small amount of southward transfer also occurring.
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 2023, 2024, 2025 and 2026 at Otahuhu (Auckland) for the last 2 years.
Note that $100/MWh equates to 10c/kWh.
Future prices for all years were up during August but particularly CY 2024 which finished at $168.5 (+10%). CY 2025 was at $164/MWh (+1%) while CY 2026 prices was up 3% at $165.
All the big generators presented their annual reports in August at which they discussed their plans for new generation. A number were already known about while others are yet to have firm commitments. Known new generation projects are shown below (additions / removals highlighted in bold).
Inflows were below average in the South Island through August. Transpower has not updated NI inflows since the last market report in July, however we can assume by the rate that Taupo storage has fallen that inflows are well below average for the time of year.
Energy storage levels in New Zealand’s main hydro storage lakes continued the sharp fall that we have observed since the middle of June. Storage in August has dropped quickly, ending the month at 2,468GWh or 55% full, down 727GWh. The following chart shows the latest breakdown of storage across the main hydro catchments.
Security of supply risks increased in August with storage levels falling quickly. We are now below the level we would typically expect to see for this time of year; however, we remain well above the risk zones. This is shown in the following risk curves. Note that the risk curves for next year are much higher than they are this year. There are a number of factors that would have contributed to this change, but one is likely to be the retirement of TCC gas fired generation due early next year, while another could be the unplanned outage at Huntly unit 5, with repairs not expected to be completed until May 2024. Increasing winter demand may also be contributing.
Snowpack 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 the snowpack in the important Waitaki catchment is currently close to mean levels seen in the last 30 years for this time of year. Note this has not been updated since the middle of August.
Climate outlook overview (from the MetService)
Climate Drivers — The United States weather agency NOAA declared the start of El Niño conditions with the potential for a significant event by summer, while their Australian counterpart BoM is likely to confirm onset over the coming weeks. Despite this discrepancy, New Zealand is likely to see continuing El Niño-related impacts over the coming months, which include a more active and volatile westerly flow. This may be bolstered by a Positive Indian Ocean Dipole event, which is now looking likely to develop this spring which would enhance the westerly flow of weather across the country.
September 2023 Outlook — Spring begins with a subtropical low driving southwards across the upper North Island, with heavy easterly rain likely for those regions. Meanwhile, high pressure reigns supreme further south with below average rainfall likely over the South Island. Temperatures should trend well above average in the north, while southern regions see cold and frosty mornings followed by pleasant afternoons under largely blue skies. The second week of September sees high pressure depart eastwards, which allows a build-up of westerly fronts to sweep across the country. These features will generally be quick-moving, with most regions seeing near-average rainfall and temperatures. However, the southern part of the South Island may trend slightly drier (and warmer) as weak ridging attempts to build in-between the fronts. A weak low pressure anomaly returns across the South Island and part of the North Island during the third week of the month, indicating a slightly more active southwesterly weather pattern. An uptick in quick-moving fronts bringing bursts of heavy rain, wind and potentially late-season snow about higher-levels is possible, along with temperatures trending a bit below average with a possible cold snap. This anomaly moves offshore during the final week of the month, with New Zealand likely to see a mix of weak westerly fronts and drier weather. Cool mornings are likely to persist as the month of September comes to an end.
The Gas Market
Gas prices increased 20% in August closing at $10.6/GJ. Prices are still currently about 11% lower than they were at the same time last year.
On the supply side, Maui output was down – averaging just under 100 TJ/day (down 10%). This included a 2-day total shutdown in the middle of the month. Offsetting some of that loss, McKee / Mangahewa was up at around 77TJ/day in August (+7% from July levels).
Pohokura’s output was flat, averaging 80TJ/day while Kupe maintained its July output of around 53TJ/day.
The following graph shows production levels from major fields over the last 3 years.
On the demand side, Methanex Motonui’s usage remained lower than usual with the gas swap agreement they have with Genesis (owner of Huntly) over winter reducing the amount of gas it has available to produce methanol. Consumption was steady in August averaging 94TJ/day – slightly more than half of June usage. Huntly power station gas use averaged 72TJ/day, slightly down from 76TJ/day used in July. TCC continued to be used but at slightly reduced levels through August, averaging 34.5TJ/day, down from about 40TJ/day in July.
The following graph shows trends in the major gas users over the last 3 years.
After their recent falls, global energy prices reversed the trend and increased slightly in August. They continue to be at levels above what we would have considered to be high only 2 years ago. Lack of investment in new gas supply internationally over several years had already resulted in price increases before the conflict in Europe accelerated those impacts.
Australian LNG netback prices ended the month at $13.93GJ – down 5% from last month. Forecast 2023 netback prices are $20.17 – up 4% on what the ACCC was forecasting in July. Forecast prices for 2024 are now sitting at $23.67 – up 17% compared to July.
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.
The Coal Market
The global energy crisis has been as much about coal as it has gas. The war in the Ukraine has driven energy prices, including coal, up. Prices in August drifted higher, ending the month at US$156/T – a 15% increase on the July close. These prices, though well below the highs of the last 12 months, remain above what we expect to see as shown in the following graph of prices over the last 10 years, though the gap is closing.
Like gas, the price of coal can flow through and have an impact on the electricity market. However, coal stockpiles at Huntly are at the highest they have been for many years helping to assure the market that there is plenty of fuel available in the event of dry conditions in the hydro catchments.
NZ has had an Emissions Trading Scheme (ETS) in place since 2008. It has been subsequently reviewed by several 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 minimum and maximum prices. Currently these are set at $82 and $33 respectively however they are going to increase in December after the Government recently accepted the Climate Change Commission’s recommendations to tighten the auction scheme. Carbon prices continued to climb through August reaching $70.85 – up a further 24% over the month.
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 $50/t is estimated to currently add about $25/MWh (or ~2.5c/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 decreased in August to 85 Euro/tonne – down 4%.
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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