Market Update January 2023

February 8, 2023
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Market Update

The Wholesale Electricity Market

Spot prices in the wholesale electricity market increased markedly in January. Average spot prices for the month ranged from $109 in the central North Island to $122 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 month can be clearly seen. 

Electricity Demand

As people returned from summer holidays, electricity demand in January started to increase. As noted last couple of months, demand levels have reduced to close to the lowest levels seen in the last few years.

Electricity Generation Mix

The increase in demand, low SI hydro inflows and poor wind all contributed to increased levels of thermal generation being needed through January as shown below.

HVDC Transfer

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 substantially reduced northward transfers and even some southward transfers at the end of 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 January. CY 2024 finished at $183 (-5%).  CY 2025 decreased, ending the month at $182/MWh – a 2.5% loss. CY 2026 prices also dropped 1.3% to $180.6. 

There were no new supply announcements this month, but there were stories of problems with getting new projects up and running, with either budget blow-outs or delays, or both.  Known new-generation projects are shown below.

Hydro Storage

Inflows remained well above average in the North Island during January, however South Island inflows plummeted to very low levels – less than 50% of average for this time of the year at the end of the month. 

Energy storage levels in New Zealand’s main hydro storage lakes decreased again in January. Storage ended the month at 3,559GWh or 81% full, down 439GWh over the month. The following chart shows the breakdown of storage across the main hydro catchments.

Security of supply risks has increased through January with very low SI inflows resulting in storage falling to close to what we typically expect to see for this time of year.  We are still well above the risk zones, however if storage continues to drop at current rates 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 January. 

Climate outlook overview (from the MetService)

Climate Drivers —  Sea surface temperatures in the central Pacific Ocean continue to gradually warm, and expectations are that the El Niño Southern Oscillation (ENSO) will finally move into neutral territory during February with the current La Niña event drawing to a close. However, the atmosphere typically has a lagged response to the oceans, so we will still see the fingerprints of La Niña on our weather maps into Autumn, with more north-easterly winds than normal the most obvious signature of this. The Southern Annular Mode (SAM) remained strongly positive last month, but signs that we may be headed towards some more variability through February with negative phases signalled. This gives us a good chance of seeing an uptick in rainfall across South Island, much of which has been running dry for several months under persistent belts of high pressure.

February 2023 Outlook —  Tropical moisture streams across the country from the north for the start of February, with the South Island getting involved in the heavy rainfall action for the first time in some while. Indeed, the West Coast may well see impacts from heavy and thundery rain through the end of this week, whilst useful rainfall will spread across and east of The Divide at times too for the thirsty soils here. The final front in this barrage crosses North Island on Monday, flushing away the tropical moisture to the east and heralding a much cooler, less humid and drier week for both islands next week. However, this more settled spell won’t last for long, and the back half of February looks rather volatile with systems approaching the country from both the sub-tropics and the Southern Ocean. Expect both islands to pick up rainfall with prolonged settled spells at a premium. The upper and central North Island remain most at risk of seeing further bursts of very heavy rainfall too, recalling we are still well within the tropical cyclone season. 

The Gas Market

Gas prices decreased through much of January before rebounding at the end of the month, closing at $10.7/GJ – 1% up on December close. Prices are currently about 7% lower than they were at the same time last year.

On the supply side Pohokura continued at the increased production levels seen over the last few months – consistently producing just under 100TJ per day. Maui production increased significantly – averaging just under $100TJ/day – up from 68TJ/day last month, and peaking at 115TJ/day at the end of the month.

McKee / Mangahewa output reduced to around 62TJ/day (down 8 from last month). Kupe decreased production for the first half of the month to 40- 50TJ per day before increasing to about 56TJ/day at the end of January. 

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. 

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 towards the end of November, averaging 180TJ/day. Huntly power station increased gas usage through the month rising to over 70TJ/day towards the end of the month. Stratford Peaker also started up in the middle of the month, at times using more than 30TJ/day.

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 12 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 reversed the price increases of last month, decreasing in January, ending the month at $33.42/GJ – down 19% from last. Forecast 2023 netback prices are $25.76 – down 25% on what the ACCC was forecasting last month. Forecast prices for 2024 are now sitting at $22.61 – down 27% compared to December. 

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 dropped considerably during January ending the month at $US236/T, down over 40%. 

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.  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 as shown in the following graph. In January prices decreased $2.25 to $72.5/t – still 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 increased again in January to 87.76 Euro/tonne – up 5%. 

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/

Disclaimer

This document has been prepared for information and explanatory purposes only and is not intended to be relied upon by any person. This document does not form part of any existing or future contract or agreement between us. We make no representation, assurance, or guarantee as to the accuracy of the information provided. To the maximum extent permitted by law, none of Smart Power Ltd, its related companies, directors, employees or agents accepts any liability for any loss arising from the use of this document or its contents or otherwise arising out or, or in connection with it. You must not provide this document or any information contained in it to any third party without our prior consent.

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