Stress test scenarios
The current stress tests are made up of three scenarios.
One test measures exposure to energy shortage events (sustained high spot prices).
The second test simulates conditions possible during a relatively brief (eight hours) but unexpected shortfall in generation capacity during a time of relatively high demand. The third test is a variation on the second test. The difference is that the third test has high North Island prices and average South Island prices.
The stress tests and associated base case scenarios are set out in Table 1 and 2.
Table 1: Energy shortage stress tests
|Test scenario||Base case|
|Nature of event||Sustained national drought (no public conservation campaign)||Base case for energy tests|
|Key features of scenario||Average spot prices are $250/MWh for the coming quarter (time weighted average basis at Otahuhu)||'Average' conditions apply|
|Average level of prices||$250/MWh (time weighted average at Otahuhu)||$100/MWh (time weighted average at Otahuhu)|
Table 2: Capacity shortage stress tests
|Test scenarios||Base case|
|Nature of event||Unexpected short-term capacity shortage at time of high demand||Unexpected short-term capacity shortage affecting North Island only||Base case for capacity tests|
|Key features of scenario||Spot prices are $10,000/MWh across 8 peak hours of day, for 1 day||
North Island spot prices are $10,000/MWh across 8 peak hours of day, for 1 day
South Island spot prices are unchanged from the base case
|'Average' conditions apply|
|Average level of prices||$10,000/MWh (time weighted average at Otahuhu)||North Island only: $10,000/MWh (time weighted average at Otahuhu)||$100/MWh (time weighted average at Otahuhu)|
Participants should note that these scenarios have been prepared solely for the purposes of the stress testing regime. The scenarios are completely hypothetical - spot prices could be higher or lower than those set out in these tests - even if events similar to the stress tests occurred.
Test scenario C2 applied to Q1 of 2020 only, and doesn’t need to be submitted for any other quarters.
Despite the introduction of the stress testing regime, participants remain entirely responsible for decisions to manage their level of exposure to spot prices.
Application of stress tests
As much as practicable, the stress testing regime is intended to fit in with the arrangements that industry participants already have in place for monitoring their exposure to spot price risk.
In particular, we've limited the level of prescription in the stress testing arrangements, while still ensuring that resulting disclosure is robust.
The application notes are in three broad categories:
- quantitative assumptions - where we specify matters that must be followed. These relate primarily to the average price projections to be used in base case and stress test scenarios
- methodological direction - where we set out a methodology that it expects participants to follow, for example for locational price adjustments. In this category, we publish summarised quantitative information, but participants may generate their own adjustment factors provided they remain consistent with the broad approach specified by us
- qualitative direction - where we provide direction of a non-quantitative nature. Participants must compile bona fide estimates consistent with this direction.