Market Update July 2023

August 3, 2023
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Market Update

The Wholesale Electricity Market

Spot prices in the wholesale electricity market increased significantly in the last 2 months. Average spot prices for July ranged from $108 in the lower South Island (up from $54 in May), up to $120 in the upper North Island (up from $65).

The following chart shows average weekly spot prices over the last 2 years. The big price drop through May can be clearly seen, with prices recovering since then.

Electricity Demand

Electricity demand in June and July remained in line with recent years – at expected winter levels.

Electricity Generation Mix

Increasing demand in June was initially largely picked up by more hydro generation as inflows and storage remained high, however later in the month and through July hydro started to reduce, with thermal generation picking up to meet demand.

HVDC Transfer

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.

June saw increasing northward transfer at the start of the month, however this dropped away steeply at the end of June and into July, with a small amount of southward transfer also occurring in July. This reflects reduced SI inflows and lower storage resulting in less SI hydro generation.

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 flat during June / July. CY 2024 finished at $153 (+0.5%). CY 2025 was flat at $162/MWh (0%). CY 2026 prices were also flat at $160.

Known new generation projects are shown below (additions / removals highlighted in bold).

Hydro Storage

Inflows were high in both the North and South Islands at the start of June but fell to close to expected levels in the North Island for the rest of June and through July. The South Island followed a similar pattern but dropped to below average levels later in June and in July.

Energy storage levels in New Zealand’s main hydro storage lakes increased at the start of June, briefly going above the nominal full level across all catchments. From there storage has dropped quickly, ending July at 3,195GWh or 70% full, down 1,297GWh over the 2 months. The following chart shows the latest breakdown of storage across the main hydro catchments.

Security of supply risks increased in June / July with storage levels falling quickly but remaining above what we typically expect to see for this time of year. We remain well above the risk zones. This is shown in the following risk curves.

Snow Pack

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, with some unseasonably warm weather, the snowpack levelled off during June / early July before increasing again in the middle of July. Snowpack in the important Waitaki catchment is currently close to mean levels seen in the last 30 years for this time of year.

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 months. Despite this discrepancy, New Zealand is likely to see El Niño-related impacts over the coming months, which include a more active and volatile westerly flow. This may be exacerbated by a developing Positive Indian Ocean Dipole, which also promotes a westerly flavour across the country.

August 2023 Outlook — August starts with a bang (as July did), with yet another cold southwesterly outbreak over the next couple of days. Generally stormy and wintry weather with severe westerly winds are possible for many regions of the country, and snow to low levels for the bottom of the South Island. Cold southwesterlies should slowly ease during the second half of this week as a large high pressure system builds across the country from the west. Chilly mornings are in store for many places, as this high locks in the cold through much of next week too, and settled conditions dominate for an extended period. However, just how strong this high pressure holds will determine how dry it remains around the upper North Island, as some models hint at a wetter interlude around the 10th and 11th of this month due to a north Tasman Sea low. If this low ends up closer to our shores, that could result in a nearer normal rainfall for the upper North Island. This large, slow-moving high could start to move away to the east around mid-month, opening the door to Tasman Sea and Southern Ocean weather makers again. These westerly features should favour the South Island West Coast in terms of active weather, weakening as they move northwards across New Zealand with rainfall returning to near-normal conditions for much of New Zealand for this time of the year. A few cold outbreaks remain possible during the last couple of weeks of August as well, with late season snow a distinct possibility.

The Gas Market

Gas prices decreased 6% in June and were flat through July, the 30-day rolling average price closing at $8.9/GJ. Prices are still currently about 35% lower than they were at the same time last year.

On the supply side, Maui output maintained close to 110TJ/day for most of June and July just dropping off to around 100TJ/day late in July. McKee / Mangahewa averaged around 72TJ/day in July (down 15% from May levels).

Pohokura’s output was flat, averaging 79TJ/day while Kupe bounced back from lower June levels back to around 53TJ/day for most of July.

We are now starting to see the benefits from recent and on-going drilling campaigns. Todd Energy has completed the drilling programme at Mangahewa and has now moved the drilling rig to Kapuni. OMV is also continuing its Maui drilling program, expected to continue until the end of the second quarter of 2023. Beach Energy plans further drilling at Kupe starting in the September quarter of this year.

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 was steady in June averaging 174TJ/day, however a planned shutdown reduced consumption to less than 100TJ/day in July. Huntly power station gas use picked up over the 2 months from less than 40TJ/day at the start of June, up to close to 90TJ/day at the end of July. TCC was also used in anger for the first time in almost a year – averaging 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 flattened out somewhat in June and July but 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.

LNG netback prices increased in July for the first time in several months. They ended the month at $14.71GJ – up 22% from last month. Forecast 2023 netback prices are $19.33 – up 3% on what the ACCC was forecasting in May. Forecast prices for 2024 are now sitting at $20.22 – up 19% compared to May.

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 June and July stayed in a narrow band of US$125/T to $140/T. They ended the month at US$135/T – a 4% increase on the May 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.

Carbon Pricing

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.

After earlier rejecting them, in late July the Government accepted the Climate Change Commission’s recommendations to tighten the auction scheme. They have reduced the number of units available at auction annually from 23 million this year to 12.3 million in 2028. The guardrails have also been increased from $33 to $60 for the lower level, and the upper guardrail is split into 2 tiers – the first trigger is set at $173 (up from $82) and the new tier 2 level at $216. The new prices come into effect in December this year with the triggers rising each year. Before the announcement carbon prices had dropped to $35/t, immediately after they increased to $65 before falling back to $57/t as shown below.

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 increased in June to 88 Euro/tonne – up 9% and was flat in July.

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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