Market Update August 2022
The Wholesale Electricity Market
Spot prices in the wholesale electricity market dropped considerably once again in August. Average spot prices for the month ranged from $40 in the lower South Island ($98 in July), to $49 in the upper North Island ($107 in July).
The following chart shows average weekly spot prices over the last 2 years. The significant drop in prices in the last 2 months is clearly visible on the far right of the graph.
Electricity Demand
Electricity demand remained high in August as expected as we move through the winter period. It is at the high end of levels seen at the same time in the last three years.
Electricity Generation Mix
High inflows through August meant that hydro generation increased and allowed thermal generation to reduce even further than July levels as shown in the following graph.
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.
August saw high SI inflows and storage resulting in increased northward transfer and practically eliminating any southward transfers.
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 or declining through August, though there has been a sharp jump at the start of September. CY 2023 prices closed at $185 – a 2.5% decrease for the month. CY 2024 finished flat at $180. CY 2025 also decreased ending the month at $159/MWh – a 3% decrease. (Note – prices for CY 2023 and CY 2024 have both increased by $15 since the end of August)
All the major retailers announced their results in August including their plans for new generation. All talked about new wind and solar over the next few years but few hard dates were provided. Known projects are shown below.
Hydro Storage
Inflows remained very high in both islands during August. The NI maintained the 200% of average levels from the last couple of months while the SI inflows maintained the very high levels seen at the end of July.
As a result of these high inflows, energy storage levels in New Zealand’s main hydro storage lakes increased again through August. Storage ended the month at 4,163 GWh or 93% full, up 850 GWh over the month.
Security of supply risks eased further during August with the higher inflows and increased storage as shown in the following graph. There is now a high risk of spill over the coming, typically high SI inflow, months.
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 that snow pack has continued to increase over the last month. Storage is now at 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 Negative IOD important for NZ — For the first month of spring, the most important climate driver will continue to be a negative Indian Ocean Dipole (IOD) event, which favours a more active north Tasman Sea, and in turn more frequent northerly rain events of New Zealand. High-pressure anomalies to the south and east of the country could help shift more of these systems over the North Island. El Nino/South Oscillation conditions are currently neutral but are likely to tip into La Nina territory during September or October, heralding a “triple dip” event. Frequent weather systems have helped lower sea temperatures around the New Zealand coastline, with values hovering about 0.5C above average, but increasing temperatures are likely as we head towards the summer months.
September 2022 Outlook — The first week of September sees a notable rain event unfolding across West Coast of South Island and to a lesser extent further north as it spreads up the country while weakening. A subtropical low moves across the upper North Island early next week bringing a relatively brief bout of rain and warm north easterlies to already sodden regions early next week. The bigger weather story for next week is the significantly cooler temperatures expected across the country as an influx of drier sub-Antarctic air spreads up New Zealand. High pressure settles in and brings colder overnight low temperatures, with widespread frosts possible across South Island and even locations further north, though afternoon highs are likely to rebound quite nicely. The third week of September sees high pressure build over the South Island, bringing below-normal rainfall and chilly morning minima. This also allows systems forming across the north Tasman Sea to occasionally spread southwards onto the North Island, accompanied by warmer and muggier conditions. A more normal spring-time pattern could emerge in the last week of the month as high pressure slides east of the country. A mix of northern lows and Southern Ocean fronts could bring a more volatile weather pattern, especially across the South Island.
The Gas Market
Gas prices continued to reduce through August ending the month at $11.9/GJ – 13% down on July. Prices are now 18% lower than they were at the same time last year.
On the supply side Pohokura continued at the increased production levels seen last month. Output averaged over 100TJ per day well up on the 80TJ per day prior to the recent drilling program starting. Maui started the month producing close to 90TJ per day but reduced output to closer to 70TJ per day for most of August – probably reflecting reduced demand rather than any production issues.
McKee / Mangahewa maintained output – averaging around 70TJ/day. Kupe’s also maintained output at 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 on-going 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.
On the demand side, Methanex Motonui has been conducting maintenance work that is planned to extend through into September. Consumption averaged 65TJ/day for the first half of the month, then increased to close to 100TJ per day at the end of August, well down on the pre Maui shutdown level of 150TJ/day. Huntly’s gas usage increased during August. Its usage averaged 65TJ/day, up 7% on July. TCC only generated the first 2 days of the month. Methanex Waitara was consuming around 5TJ per day for the first half of August then shut down for the rest of the month. The following graph shows trends in the major gas users over the last 3 years.
Global energy prices remained high during August as on-going 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 the Ukraine and the potential for Russia to use critical gas supplies to Europe to apply economic pressure on Ukraine’s allies has added to the uncertainty and therefore further added to energy prices.
LNG netback prices increased again in August ending the month at $56.26/GJ – up 15% from last month. Expected prices for the rest of 2022 and 2023 have also increased. 2022 netback prices are now expected to average $46.74/GJ (a 9% increase on last month) while 2023 netback prices also increased 19% to $58.89/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 the Ukraine has driven energy prices, including coal, up. Prices hovered around the $US400/T all of the month, increasing at the end of the month, closing at $US435/T – up 7%.
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.
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 $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 August prices increased $10 to $90/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 increased to 90 Euro/tonne in August – up 15%. Prices remain more than 50% more than the same time a year ago as concerns remain 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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