Kia ora Flick whānau, and welcome to the very first market update for 2021!
While for many of us the last few weeks have gone hand-in-hand with eating far too much, embracing sand in unmentionable places and feeling super grateful to be here in Aotearoa, there’s been lots happening in the complicated world of electricity. So, what’s the news?
We were flickin’ pleased to see the Electricity Authority’s (EA) announcement at the end of December that confirmed Meridian spilled more water from its dams than it needed to, during the period 3-27 December 2019. This followed on from the Undesirable Trading Situation (UTS) Claim that was made in 2019 by us, along with Haast Energy Trading, Ecotricity, Electric Kiwi, Vocus, Oji Fibre, and Pulse Energy Alliance, which stated that we believed Meridian’s actions led to higher wholesale market prices and the unnecessary use of coal and gas, resulting in needless carbon emissions.
The decision is great news, for sure. But the problem runs deep and in reality can only be fixed by code change and market reform, which is what we’ll be continuing to push for. The EA has advised it’ll consult on actions in February to correct the market (aka the spot price we paid for power at that time) for the period of the UTS. But with the UTS not actually assigning blame for this behaviour, we’ll be looking out for the findings of the EA’s parallel investigations into High Standards Of Trading Conduct Provisions, due out early this year, to see if anyone is held to account for breaches of the Code.
In New Zealand, demand usually drops to its lowest levels over the Christmas and New Year period (big shout out to holiday sleep-ins and BBQ weather!), and aside from the demand changes during lockdown, this trend continued for late 2020, with demand dropping to a low of 85.9 GWh on Boxing Day. This low also corresponded with South Island rainfall which saw a big decline in irrigation in regions such as Canterbury.
How’s the hydro?
You might remember from our last update that NIWA has predicted La Niña conditions for the next few months, and this typically means less rainfall in the South Island hydro lake catchment areas. That’s what we’re currently seeing, with below average storage levels down south, sitting at 83% of average for this time of year, while North Island storage is at 126% of average for the time of year. Overall, that puts national hydro storage below average for this time of year at 84%, (68% of total full).
Because of the lower lake levels down South, we’re also seeing an increase in power flows across the HVDC cable (which transfers electricity across the Cook Strait) from the North Island down to the South Island. Usually, more power is transferred the other way, from the South Island to the North Island.
Spot prices higher
Spot prices on the wholesale market have felt the impact of lower South Island hydro storage, and over the last 4 weeks (from 23 December to 19 January) have averaged 11.6 c/kWh.
Less gas… more coal?
Gas supply remains an issue, with production at NZ’s largest gas field, Pohokura, continuing to decline. Combine this with lower-than-average South Island hydro levels and it’s looking likely that coal will play a bigger back-up role in our electricity generation this year. While the numbers aren’t yet in for 2020, the data shows that our electricity generation burned 43% more coal in 2019 than in 2018. It’s thought that 2021 will be higher still, with Genesis importing higher-than-normal amounts of Indonesian coal to stockpile for winter this year.
At a time where decarbonisation is urgent, using coal - and increasing amounts of it - is far from ideal. So, what’s the answer? MBIE is currently looking into a number of schemes to provide electricity storage options for dry years that would minimise our need to use coal and gas. In particular they’re looking at Lake Onslow pumped hydro, as well as other, smaller pumped hydro schemes, biomass (decomposing organic matter from landfills, wastewater treatment plants and food manufacturing to create biomethane, a possible replacement for natural gas), batteries and green hydrogen.
Tiwai to stay open until 2024
Good news for Southland - Tiwai Point Aluminium Smelter will keep its doors open for a while longer yet, with an extension in place until the end of 2024. With around 1000 staff at the smelter and a further 1600 staff throughout Southland, it’s hoped this 4-year agreement will give the Government, stakeholders and the local community time to plan ahead for the transition and eventual closure of the Tiwai Smelter, which is currently NZ’s largest user of electricity. Potential future uses of the site are being investigated including a Southland data centre (IT infrastructure) and a large-scale hydrogen project to help provide generation cover in dry years.
The not-so-good news? Following the above announcement we saw an almost immediate increase in future prices on the wholesale market (where retailers purchase their electricity in advance - also known as hedging). Here at Flick, we’re well hedged so our customers won’t feel the effects of this higher pricing at the moment, but it’s likely to be a long-term issue for independent retailers if the futures price stays high. What does that mean? In short, Kiwis will end up paying more money for power to cover Meridian’s deal with Rio Tinto to keep the smelter running. Not so cool in our opinion, and just another example of why the electricity market needs to be rebuilt.
La Niña is set to continue according to NIWA, with western areas of South Island facing drier conditions and rainfall at near or below-normal levels. That’s likely to mean less rain in the larger southern catchment areas for the hydro lakes. Although there seem to be a few anomalies from the typical La Niña (for example, the current dry conditions in Northland and Waikato - where it was meant to be wet!), lake levels remain low in the South Island, and signs are pointing to a year of lower-than-usual hydro generation.
That’s all for now, Flicksters!