What's behind current forward prices?

Recent media commentary questioned why forward prices are so high. In this commentary, we explain what’s contributing to these high prices to support improved understanding of all the factors impacting on electricity prices right now.

A mixture of factors is pushing up prices….

The market remains sensitive to high coal prices, high carbon prices, a prolonged trend of low hydro inflows, skewed North and South Island hydro storage, generation outages and gas outages, as well La Nina. Collectively, forward prices are reflecting all these factors as participants factor in cost and risk.

La Nina

Niwa is forecasting La Nina conditions leading into winter, and with two months still to go until winter properly sets in, hydro generators have advised they are being cautious with their storage. Hydro offer prices are set on expectations, so if generators are expecting low inflows going into winter, they will set higher offer prices now to conserve storage for later.

High thermal prices

High thermal fuel and carbon prices have pushed up the opportunity cost of thermal generation, increasing spot prices whenever a high amount of thermal generation is required.

Key points:

• Monthly market price of Indonesian coal as of 28 March 2022 was US$203.69 (~NZD$293.16) pushing up the coal rich SRMC of Huntly Rankines to around ~$230/MWh.
• Gas spot prices are relatively high when compared to historical averages. The average gas spot price in the past month have fallen between $11/GJ and $47/GJ.
• In the last ETS auction 10.518 million carbon units were sold at cap for $70 each with almost all the extra cost containment reserve units bought. Only 1.3 million units of the 11.825 million available were unsold. Spot carbon units have been trading at between $70-75/tonne on the secondary market since. Carbon unit prices on the secondary market closed at $76/tonne on 28 March 2022. 40-60 per cent of this flows into gas rich Rankine SRMC and 100 per cent of this flows into coal rich Rankine SRMC.

Low hydro storage

Hydro storage has been trending downwards from 13 February 2022 with all major lake levels decreasing. This extended trend of decreasing storage has been due to historically low inflows and has increased the opportunity cost of hydro generation as a result with generators likely wanting to conserve water in the lead up to winter and the upcoming major Maui outage. Additionally, there is a large imbalance in storage between lakes.

Key points:

• Historically hydro inflows from 1 March to 27 March averaged 1,839 GWh. For the same period this year hydro inflows have totalled 1,051 GWh. Almost a ~50 per cent difference.
• Total controlled national hydro storage (3,244 GWh) is 266 GWh below historic mean (3,510 GWh) as of 27 March 2022.
• Lake Manapōuri and Te Anau have been operating below their low operating range for almost all of March.

Gas outages

As is the case with any gas field outage, upcoming gas outages carry the risk of extending or returning at less than full capacity – in turn creating the risk of reduced thermal generation capacity right before peak winter demand. Forward prices have been taking this risk into account and increasing as a result.

Key points:

• McKee/Mangahewa gas field has just undergone a planned production outage from 21 March 2022 to 26 March 2022 reducing by 23/TJ day. Despite returning from outage as scheduled production has remained low highlighting how production won’t necessarily return straight to full capacity following an outage.
• Maui is scheduled for an extended outage divided into two parts from 7 May 2022 to 6 June 2022. From 7 May to 13 May production will reduce by 20 TJ/day, from 14 May to 6 June there will be a full field outage.
• Ahuroa Gas Storage has also been underperforming follow pressure problems with an unexpected 3-day outage occurring just after a two-week inspection recently, resulting in less available gas come winter than previously expected.

Monitoring the market

This note on forward prices is part of the Authority’s ongoing work to monitor the different electricity markets.

We also make sure pricing and participant offer behaviour is in line with trading conduct rules.

Read more about how we monitor the electricity market.