Tag: Market Update February 2023

Market Update February 2023

The Wholesale Electricity Market

Spot prices in the wholesale electricity market increased markedly again in February. Average spot prices for the month ranged from $142.5 in the central North Island to $153 in the upper South Island. High upper North Island rainfall and very low South Island rainfall broke the typical pattern of lower prices in the lower SI and higher in the Upper NI.   

The following chart shows average weekly spot prices over the last 2 years. The rapid increase in prices over the last 2 months can be clearly seen. 

Electricity Demand

Electricity demand in February rose early on before falling away towards the end of the month. As noted for the last few months, demand levels have reduced to close to the lowest levels seen in the last few years. 

Electricity Generation Mix

Low SI hydro inflows meant that during February thermal generation remained at the higher levels seen towards the end of January as shown below.

HVDC Transfer

Power transfers on the HVDC link connecting the North and South Islands are important in showing relative hydro positions and 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 substantially reduced northward transfer and increased southward transfer throughout 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 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 decreased slightly during February. CY 2024 finished at $174 (-5%).  CY 2025 decreased, ending the month at $174.5/MWh – a 4% loss. CY 2026 prices also dropped 3% to $175. 

There were a few new supply announcements this month – mainly solar. Known new-generation projects are shown below (additions highlighted in bold).

Hydro Storage

Inflows remained well above average in the North Island during February particularly in the middle of the month when Cyclone Gabrielle rolled through. The South Island picked up a week of higher inflows before returning to the very low levels seen in recent months

Energy storage levels in New Zealand’s main hydro storage lakes increased in February. Storage ended the month at 3,590GWh or 81% full, up 194GWh over the month. The following chart shows the breakdown of storage across the main hydro catchments.

Security of supply risks has reduced slightly through February with some mixed inflows resulting in storage staying close to what we typically expect to see for this time of year.  We are still well above the risk zones, however, if storage returns to dropping at rates seen recently it will not take long to eliminate this buffer. This is shown in the following risk curves.

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 how snow pack in the important Waitaki catchment has fallen to below the 25th percentile for this time of year, meaning that there is not the same amount of water stored as snow pack as we would normally have in February.

Climate outlook overview (from the MetService)

Climate Drivers — La Niña is almost out the door, with climate models predicting neutral El Niño Southern Oscillation (ENSO) conditions through autumn. This means that local climate drivers close to New Zealand will be in charge of our weather maps in the coming months. The tropics remain active this week, with Tropical Cyclone Judy tracking southeast out of the tropics but staying well clear, to the northeast of New Zealand. Another tropical low also has a high chance of developing into a tropical cyclone from Friday 3 March. This system is expected to then follow a similar path to TC Judy. At the time of writing, neither system is expected to have significant impacts on New Zealand (but keep up to date at www.metservice.com/warnings/tropical-cyclone-activity). Instead, the major player for New Zealand for March will be the Southern Annular Mode (SAM), a measure of Southern Ocean storminess. The SAM is forecast to change to a negative phase for most of March, meaning a major regime shift to unsettled westerlies over the country. Sea surface temperatures remain well above average around the South Island but have yo-yoed in the vicinity of the North Island recently (from above average to below average and back again).

March 2023 Outlook — Southerlies prevail this week, with an unsettled westerly regime predicted for the 2nd and 3rd week of March. By the end of the month, we may see a High across New Zealand (lower confidence). The westerlies result in increased March rainfall across the west and south of the South Island (normal or above normal totals), with near-normal monthly totals predicted for western parts of the North Island. In contrast, below-normal March rainfall totals are forecast for northern and eastern areas of the North Island – welcome news for these saturated regions for the ongoing cleanup. Near normal monthly tallies are forecast for eastern Otago and Canterbury. Above-average March temperatures, overall, are forecast for all South Island regions – noting that this is the time of year when fogs and frosts make themselves felt. In contrast, North Island temperatures are forecast to end up slightly cooler than average (near average to below average). 

The Gas Market

Gas prices increased at the start of February, peaking at around $12.8/GJ before falling later in the month, closing at $10.1/GJ – 5% down on January close. Prices are currently about 19% lower than they were at the same time last year.

On the supply side Maui continued its strong level of production through February. Average output was 110TJ/day – up 10%, while it peaked at 130TJ on the 22nd. Pohokura had a period of reduced production at the start of the month before returning to around 95TJ/day – down 5% from average January levels. 

McKee / Mangahewa output increased to around 73TJ/day (up 11 from last month). Kupe maintained the higher levels seen towards the end of January – averaging 53TJ/day in February. 

Hopefully, we are now starting to see some of the benefits emerging from the drilling campaigns currently underway. Todd Energy is more than halfway through a drilling programme at Mangahewa, and once completed they plan to move the drilling rig to Kapuni in early 2023. OMV is also continuing its Maui drilling program, expected to continue into the second quarter of 2023. 

A big announcement at the end of February was that OMV is looking to divest its NZ assets. OMV currently owns 100% of Maui and 74% of Pohokura – the 2 biggest producing fields making up more than 50% of NZ’s current production. This raises concerns about who will buy them and what level of investment will be put into maintaining output into the future? If a buyer cannot be found how motivated will OMV be to maintain current investment levels?

The following graph shows production levels from major fields over the last 3 years.

On the demand side, Methanex Motonui’s usage once again dominated all other gas users. Consumption maintained the high levels seen since towards the end of November last year, averaging just under 180TJ/day. Huntly power station maintained the increased gas usage seen at the end of January, averaging 63TJ/day through February. 

The following graph shows trends in the major gas users over the last 3 years.

Global energy prices continued the falls we have seen in recent months, but continue to be at levels well above what we would have considered to be very high only 18 months ago. Lack of investment in new gas supply internationally over a number of years had already resulted in price increases, before the conflict in Europe accelerated those impacts. 

LNG netback prices continued to decline sharply in February, ending the month at $21.75/GJ – down 35% from last month. Forecast 2023 netback prices are $22.18 – down a further 14% on what the ACCC was forecasting last month. Forecast prices for 2024 are now sitting at $19.71 – down 13% compared to January.

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 Ukraine has driven energy prices, including coal, up. Prices continued recent falls during February ending the month at $US187/T, down over 20% and down more than 50% from what it was at the start of the year. 

These prices still remain well above what we expect to see as shown in the following graph of prices over the last 10 years.

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 a continuation of dry conditions in the hydro catchments.

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” 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 $70 and $30 respectively. Over the last few years, the Carbon Price through the ETS has climbed, though it has fallen back in recent months as shown in the following graph. In February prices decreased $6.75 to $65.75/t – slightly below 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 increased again in February to 91 Euro/tonne – up 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.

  • 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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