Yesterday we released our latest quarterly Price Path, a long term forecast of spot prices, to our subscribers.  It was an uneventful quarter since publishing our last Price Path update in July, but this update included some significant revisions of probabilities on extreme scenarios, and a large section on the viability of the thermal fleet.

By Greg Sise, 21 September 2016

2016 is a year that will go down as being pretty quiet in the electricity market, or at least it will so far.  A combination of lower irrigation demand in summer, and record warm weather in autumn and winter, have contributed to lower than expected demand, despite strong growth in population and housing numbers.

On the supply side, hydro storage was at record or near record levels for most of the winter.  As a result, spot prices have been low for most of the year, apart from a few notable hours when prices spiked into the $1,000s of dollars (dollars per kWh).

The chart shows the monthly average spot price at Haywards (in Upper Hutt) from 2008 and the trend since 2013 has been one of overall lowering of spot prices and falling volatility, which for the uninitiated or inexperienced, creates the impression of spot prices and spot price risk being low.

But take away the risk-mitigating factors such as unusually high temperatures and inflows, and our forecasts show an underlying upward pressure on prices due to growing demand, a reduction in supply due to the closure of two large gas-fired stations in Auckland late last year, and the upward fuel cost pressure created by changes to the Emissions Trading Scheme which take effect from January 2017.

In our latest Price Path, despite little new information coming to light since the July update, we have rebalanced the probability of some of the more extreme scenarios, leading to an overall slightly lower price path to 2032, but with prices still rising strongly to 2022.  We have also included an extensive section on the future of the fleet of coal and gas-fired thermal power stations which are required in the long term to make-up for renewable generation during dry periods, or when there is a short term “supply squeeze”.

The issue of the viability of the thermal power stations is one that is starting to get more attention, with some observers even questioning whether the energy-only market that we have at present can survive in the long term.  The issue here is that if the cost of fuel continues to climb, pushed upward by falling gas reserves and the rising cost of carbon, and the cost of renewable generation follows its present price path (or goes lower), then more renewable generation might be built than actually required to meet demand under the majority of hydrological scenarios, making thermal stations financially marginal.  If this forces thermal stations to close down, then the country might not have enough generation available to cover prolonged dry periods.

With the two thermal power stations closing last year, and off-market contracts to cover fixed costs becoming more common (e.g. the contracts between Meridian Energy and Genesis Energy which help to retain the ageing Huntly steam turbine generating units), we may be seeing early signs of a move away from an energy-only market.  This latest Price Path explores this issue in some depth.