Author: magnum
Market update October 2020
The old saying ‘the more things change, the more they stay the same’ remains very true in the energy industry.
In July 2020, NZSA (i.e. Tiwai Point smelter) announced the closure of the smelter in August 2021. This was a big disruptor because Tiwai uses around 13% of New Zealand’s total electricity. A few weeks after this announcement, the ASX Futures (NZ electricity prices) fell significantly from Q3 2021 onwards, and we hoped that we were seeing an end to the volatile and high electricity prices experienced over the last two years.
However, since our last market update, persistent lobbying, which may or may not be connected to electioneering, led to speculation that the smelter could continue operations beyond August 2021. This market speculation was confirmed on 31 August 2020, which immediately resulted in New Zealand electricity prices on the ASX Futures climbing straight back to where they had been prior to the initial closure announcement. Based on these price movements, we calculate that the market is factoring in the cost of the smelter remaining at $800M per annum.
Weathering the weather factor
As if the smelter situation was not frustrating enough, the prevailing conditions which caused the volatility in pricing through 2020 and into 2021 continue. Generation options continue to be limited due to low rainfall, inconsistent wind patterns, and the continuing high price for natural gas for electricity generation.
If you have ever tried to wade through the subtle differences between retailer offers, or understand the range of offerings and which will benefit you the most, you’ll know it can be next to impossible to pin down savings with any confidence. Factoring in the Tiwai smelter situation, and the impact hydrology has on electricity pricing, only makes the decision even more opaque.
This is where Smart Power’s experience and industry relationships add value. We navigate and manage energy procurement for our clients, and make sure your supply arrangements match your operational requirements. Take the hassle out of energy procurement and leave your staff to focus on their core business. Contact Smart Power to find out about cost-effective energy procurement, and how we can help you add value to your business.
Stop Press: Will the Tiwai Point closure affect electricity prices?
We have spent years considering the most likely impact of the smelter’s closure, as it consumes around 15% of New Zealand’s electricity.
Here’s a high level view:
- Transmission pricing will change again.
- Transmission line development is 6-12 months away being able to redirect that much power northwards.
- Tiwai will provide at least 12 months’ wind down. This will be in managed increments that increase electricity supply to the market.
- Gas availability in the North Island should improve.
Some questions that may come into focus over the next year or two:
- Solar options – will they continue?
- Will Contact develop its geothermal field in Taupo, or will this resource be put on hold, or even cancelled?
- Will gas-fired generation in the North Island close earlier than expected, and will this affect the reliability of electricity supply?
- If North island gas-fired generation does decline, will this increase the volatility of spot prices (whilst we hope reducing the average cost)?
- Will the government step in at the 11th hour and save the day?
The Smart Power view.
While there are no guarantees, we expect a reserved initial market response. Then perhaps one retailer will blink and prices will fall, perhaps for 2021 and beyond, but most likely not for the remainder of 2020.
It will be in the retailers’ and generators’ interests to hold prices up. Right now, there is nothing that should affect short-term pricing, although in this market the tail can wag the dog, albeit usually upwards not down.
South Island pricing would logically be far more affected than North Island pricing. The question remains whether the closure will really happen or whether the Government will swoop in to save the day. It’s an election year, after all.
Another factor is transmission infrastructure. Will the works required to effectively and efficiently transport power northwards be accelerated or will a ‘wait and see’ stance be adopted?
Overall, we think that this is a major and quite unprecedented announcement. It must affect prices one way or another, but we don’t know when and by how much at this early stage.
As we hear and learn more, we’ll do our best to keep you updated.
How we helped Eden Park score a better deal.
New Zealand’s most iconic sporting facility is a big energy consumer, with catering companies and sports associations among the tenants it serves. And that’s before you even factor in the cost of switching on those massive floodlights.
Working with Energy Select (the procurement brand operating under the Smart Power umbrella), Eden Park Trust was able to restructure its electricity and gas contracts to control costs during a time of steeply rising energy prices. Here’s how.
Urgency plus complexity equals risk.
Eden Park Trust was already working with Smart Power to manage tenant billing. In late 2019, the Trust received notification from its energy supplier that the contract was due to renew. A new schedule of charges was attached.
The problem from the Trust’s point of view was that it was impossible to tell whether the deal was a good one. With a decision imminent, CFO Brett Winstanley asked us to take a closer look.
“Energy Select recommended a review of all the different types of contracts we had, to get a holistic view,” Brett says. “As well as separate gas and energy bills, we have contracts for Time Of Use (TOU) and Non Half Hour (NHH) connections. It’s a bit complicated, and that was the problem.”
We suggested putting all the contracts out for tender rather than simply rolling over the current arrangements. This made the business more attractive to energy suppliers. Energy Select managed the process and handled negotiations – but that was only half the job.
Competition and complication.
The Trust received 12 proposals from energy providers, each one offering a different combination of terms, rates, prices and options. In other words, it was impossible to compare apples with apples. Expert analysis was required.
“We got Energy Select to distil all the proposals into a report our team could use to make a decision,” says Brett Winstanley. “It’s an extremely complicated market, and companies need expert guidance to avoid expensive mistakes. We needed to understand what was going on in the market and which contracts would work best for all parts of our business.
“It was about translating all the data and relating it to a complex environment, so we could make the most informed decision.”
A win for Eden Park.
The comprehensive report we created enabled Eden Park Trust to confidently select three new energy suppliers.
One goal of the exercise was to ensure the Trust obtained the best terms for its electricity and gas connections, so it wouldn’t be blindsided if market conditions changed one or two years down the track. As Brett Winstanley says, price is only part of the story. You need to know whether you’ll be stuck with an unsuitable arrangement because of a lack of understanding when the contract was signed.
“We got an outcome that suited our circumstances and a deal we were comfortable with,” he says. “It gives you confidence to know that you’re dealing with people who understand why prices are where they are – and can explain the market forces driving them.”
Aiming for sustainability? We can help
As you know, measurement enables management. So if you want to start decarbonising your operations, the first step is to set up reports.
Smart Power has the emission factors as published by the Ministry of the Environment or Australian NGERS equivalent loaded into our system. So any utility recorded by us automatically has its greenhouse gas emission calculated.
For most clients, this will be electricity, gas and LPG on a monthly basis. Other utilities can also be loaded, such as petrol, flights, taxis, coal, wood, waste water, refrigerants. Some clients give us these annually and these are input so reports can be provided. Other utilities can be input monthly as well, depending on how regularly the client wishes to monitor total emissions.
As a Smart Power client, you can select which emission factors to use. This is most relevant for electricity, which changes considerably in New Zealand due to the amount of rain feeding into hydro lakes.
The MFE factors are often published several years behind. Thus for accuracy some clients prefer a quarterly factor.
The second area where Smart Power can assist is reporting the emissions on the basis of the MFE voluntary guidelines for business. These guidelines are based on ISO 140641.
This is more a more complex exercise as it requires the organisational boundaries to be agreed. A base year must be established with systems ensuring the accurate collection and accounting for all the emissions. A detailed report can then be provided with breakdowns of the emissions.
The key to success here is to improve the collection process so that the following year it is a much simpler piece of work.
Smart Power has two staff members who have been trained in assisting organisations to do this. Please contact us if you would like to know more.