Big electricity users fear ‘repeat of last year’ as wholesale prices climb

Tuesday, 25 January 2022

Transpower was reporting that, as of January 16, hydro lake levels were 112 per cent of average for the time of year, but wholesale prices have nevertheless been on the move.

The Major Electricity Users Group is concerned industrial power users may be in for another year of high electricity prices and job losses, with wholesale prices rising again after a respite in spring.

Energy Minister Megan Woods said the Electricity Authority was keeping a close eye on the market situation.

Spot electricity prices have climbed above $200 a megawatt-hour in the past week – which is more than double government officials’ estimate of the cost of generating power from hydro, wind and solar sources – and have spiked above $300/MWh.

Prices have risen despite national grid operator Transpower reporting that lake levels in both the North and South Island are above average for this time of year.

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Niwa has forecast most parts of the country are likely to see less rainfall than normal over the next three months because of excessive humidity and hot temperatures caused by La Nina.

But Major Electricity Users Group (MEUG) chairman John Harbord said it was “a bit early” to be worrying about power shortages.

NIWA's Nava Fedaeff presents the kind of weather forecast to be expected on a February day in the year 2050. (First published in September 2019.)

“I think what we're seeing is the generators being conservative around how much they are generating now, to try and preserve as much of their generation ability for, say, the middle of the year.”

The Electricity Retailers’ Association, whose members include the major generators, said it was currently unable to comment.

Woods said the close of 2021 and the opening weeks of this year had seen “large swings in prices from very low, to very high” and the Electricity Authority was talking to generators and Transpower.

Energy Minister Megan Woods said “some conservation of water” ahead of a possible ‘dry year’ was among the explanations for recent volatility in wholesale electricity prices.

“Early explanations include transmission constraints caused by planned line work, increased demand due to higher temperatures, and some conservation of water ahead of a possible dry year,” she said.

“The latest advice I have received on the potential for a dry year is that the risk is reduced, with security of supply expected to be tight but manageable this year, and not as tight as it got last year. This is backed up by Niwa’s December to February seasonal climate outlook.”

Harbord believed conditions in the wholesale market might be playing out similarly to last year, when factories had to cut back production in response to rising wholesale prices despite the worst fears of dry weather and low lake levels not actually eventuating.

NZ Steel was one of the major employers that scaled back production last year in response to soaring electricity costs.

“We seem to be in a situation – as with last year – where very early in the calendar year, we get very worried about a potential ‘dry year’ and burn a lot of coal.

“The fear we've got is a repeat of last year, where we had extremely high wholesale prices from January into May, and it's only really almost when winter is on us that everyone goes, ‘actually, there's little to no risk of a dry winter’ and prices start tracking down again.”

Harbord said businesses would be really hurting when they had to pay more than $300/MWh for power.

While critics might say major industrial users should be largely or fully hedged against high spot market prices, if all power users fully hedged then higher spot-market prices would not do their job of curbing electricity use, he said.

“There's something fundamentally wrong with the wholesale electricity market when, on the one hand, you can't afford to be exposed to it, and the flip-side of that is if no-one's exposed to it, then there's no price signal.

“The fear we had last year around job losses – some of which actually happened with businesses closing; that hasn’t gone away.”

Luke Blincoe, chief executive of power retailer Electric Kiwi, said futures prices suggested the spot price of electricity was likely to sit above $200/MWh until at least the end of September.

It “didn’t seem to take a lot” to make generators conservative in their power offers, he said.

Electric Kiwi was again taking on new customers after managing to source some electricity on the futures market at lower prices towards the end of last year, Blincoe said.

“We managed to get some cover for a little bit of growth.”

But the subsequent rise in wholesale prices meant it would not be able to grow more than those purchases allowed, meaning less competition in the market, he said.

Electric Kiwi was keen to keep its brand relevant “because we'd like to think one day, the market will be resolved”, he said.

He forecast that in the interim large generators would continue to make large profits.