The shutdowns raise several important questions about our electricity market and economy: What went wrong, and will it evolve naturally in our economy, or can it be avoided? And what does this mean for our trade with the rest of the world?
Pricing is not an issue this year
Industrial fuel consumers who are closing shop don’t usually close due to high electricity prices this winter.
Large electricity consumers buy most of their electricity wholesale. They also tend to buy most of their load in the futures market. This means buying the right to use electricity at a future date, usually a year or more in advance. They may enter into other agreements with large energy companies to maintain any “peaks” above and beyond their basic electricity consumption. They try to hedge against the threat of abnormally high electricity costs, protecting themselves against the threat of abnormally high peaks.
Margaret Cooney, chief operating officer of renewable energy company Octopus Energy, said: Harold This caused industrial users to close shop due to electricity futures.
“Typically if you’re a smart trader you’re buying most of your load a year in advance,” Cooney said, adding that the current futures price for a megawatt hour (MWh) of electricity in Q3 next year is about $288, falling to $141 in the summer.
Average futures prices have risen sharply since 2018, the year a ban on offshore oil and gas exploration was imposed, according to data kept by the regulator, the Electricity Authority.
Data for 2009 show fairly stable or declining prices for electricity futures. In mid-2009, the forward price curve, showing the price of electricity delivered a year or more out, cost about $79/MWh. Prices remained low and stable for the next 10 years; The average futures price never broke $92/MWh and fell below $71/MWh.
Industrial electricity consumers are receiving real-terms price reductions as inflation slowly erodes the real price of their futures contracts. Things started to change in September 2018, when prices began to rise slowly, seemingly. Within a year they cracked $100/MWh, by 2021 they hit $130/MWh and earlier this year they hit $208/MWh, with some futures prices settling even higher.
Unsurprisingly, industrial firms that had projected business to be able to purchase electricity at $70-$90/MWh would not be viable when prices rise to $200/MWh. When wholesale peak prices reach $800/MWh, many large and well-hedged industrial businesses will be able to sustain peak price increases, as we saw in August, although they may not sustain those prices year-over-year and the electricity futures market suggests. That’s exactly what they’re in for: a future of very high electricity costs.
Data from MBIE, the Ministry of Business, Innovation and Employment on total electricity costs for industrial consumers shows that those costs have increased by 25% in real terms since 2010.
Cooney worries that high electricity futures prices will drive many businesses away.
“We have no business left in New Zealand,” she said of futures with prices reflecting the current futures price.
Cooney said it would be wrong to describe prices as a “short-term problem … it’s really a systemic economic problem.”
Energy Collective CEO Hua Burt also placed much of the blame for the industrial shutdowns on futures prices.
“Based on the ASX forward electricity price curve, which is based on industrial and commercial electricity contract prices, businesses that typically contract anywhere between one-three years are experiencing a 30%-40% increase in total cost when re-contracting,” Burt said. .
She said this is making many businesses “hesitate to re-contract for longer periods, leading some to opt for three- to six-month contracts, which is risky considering that electricity price forecasting is not (and should not be) their core business”.
Where did all the energy go?
New Zealand is not producing significantly more electricity now than it was 15 years ago.
Electricity demand has flatlined since the global financial crisis, when New Zealand’s population grew significantly, while households bought larger televisions, computer equipment and electric cars.
Households account for more than a third of New Zealand’s electricity consumption. Household appliances, especially fridges, have become so efficient that the country will not need to invest in significant new generation, despite a population increase of around 800,000.
In fact, overall generation capacity has declined over the years as older fossil fuel plants retire and are not replaced by equivalent new renewable generation. Between 2014 and 2017 thermal power generation decreased in total gigawatts (about 10% of generation during that time).
This is a logical response. Gentiles fear that if the impressive pace of new-generation construction seen in the 1990s and 2000s continues, they could flood the market with cheap electricity — a boon for homes and businesses, but not for power companies. ‘ Bottom line.
Seen in that light, the last 10 years have been something of an anomaly, in which unexpected technological efficiency helped industrial producers maintain a decade of unnaturally low, stable prices. If that’s the case, that raises another difficult question: Is it possible to sustain those low prices over the long term, or do they need to rise to a “new normal.”
Phil Gibson, general manager of Mercury Energy said Harold The 2010s were an “oversupplied market”.
“There’s a lot of construction in the early 2000s…demand is basically flat from 2006 to 2023,” Gibson said.
He said that not much electricity is needed and some of the projects built are renewable projects designed to squeeze retired thermal generation.
“You have an oversupplied market for a decade,” he said.
Gibson said futures prices reflect the long-run marginal cost (LRMC) of the next most competitive new power project in the market. In New Zealand, most of the electricity generation is generated by renewables. The next most available “unit” of generation tends to be fossil fuel generation, which is fired to maintain peaks. The cost of bringing this generation online determines the price of electricity.
Since 2018, the forward price curve has actually been higher than the LRMC, Gibson said. The reason for that is “a lack of certainty about the reliability of the assets in the market” – mainly the lack of reliable gas and heat generation.
Part of the solution to the crisis, Gibson said, is for the country to accept that “gas is a good thing, not a bad thing, for decarbonisation.”
“We need to increase our gas production footprint to enable us to affordably and reliably increase demand and undertake renewable growth,” he said.
Gibson said the 2018 ban on new offshore oil and gas exploration didn’t help the electricity market, but there were other problems.
“There is gas in the ground. There are things to collect, but for some reason we have failed on all fronts in the last six years. You can make your own decision on whether it can be attributed to politics or not, but we have to sort it out,” he said.
A regular, reliable and affordable gas supply will help stabilize the price of electricity, however, affordable and reliable gas is hard to come by – at least in the short term.
Recent modeling by MBIE concluded that lifting the offshore oil and gas exploration ban would mean more investment in existing gas fields and lead to the discovery of new offshore fields, giving the country more gas reserves in the event of a crisis.
However, existing fields are unlikely to significantly increase production in the short term and new fields are unlikely to come online before 2035, it said. In any event, officials believe that gas prices will rise “into the import price range”. LNG” (Liquefied Natural Gas).
Can Big Industry Survive With Grid Greening?
One of the big questions facing electricity in New Zealand is whether affordable electricity in the quantities needed by industrial producers can coexist with the drive to bring more renewable energy online.
Gibson cited recent innovations, such as a new deal with the Tiwai Point smelter, which means power lines will shut down when there is a generation shortage, allowing the grid to act as a giant battery that can be tapped during a crisis.
“Tiwai is a great flex provider… I think they’re a help, not a pain, they’re making things better,” he said.
This may be an area where New Zealand’s interest as an exporting country conflicts with the interests of power companies. While negotiating more flexible deals with large industrial consumers is good for the long-term certainty of electricity supply, periodically shutting down generating businesses is not ideal for New Zealand as a country, especially when we already run a significant trade deficit, meaning we export. Much less goods than we import.
Octopus Energy’s Cooney thinks bringing new, affordable, renewable energy is possible, but it will require changes. Currently, there are no proper incentives to bring in large amounts of renewable generation. She said many other markets around the world had handled the decommissioning of fossil fuel plants better than New Zealand, with sufficient supply available before those plants were decommissioned.
There is always the fear that companies will spend a lot of money building a large amount of renewable product, which will not recoup the construction costs.
“For example, in New South Wales, they’ve set up a New South Wales Energy Company, which is owned by the government and has this consumer trustee function, and they’re issuing options to the public to ensure they have enough returns. They’re investing ahead of the curve,” Cooney said.
She said the United Kingdom used CFD (contract for difference) mechanisms, which encouraged the development of renewable generation by guaranteeing a minimum price.
“It’s a simple approach where you have a government saying, ‘We’ll put an option to develop several gigawatts of new power to guarantee the price over a 10-year period,'” Cooney said.
says Burt of The Energy Collective Harold Regulatory reform is needed, including operational unbundling of large, majority state-owned gentailers.
“We are of the view that the regulatory reforms proposed by us and others regarding the segregation of duties of gentilers and the enforcement of non-discriminatory rules will bring immediate relief in terms of fair pricing in the contract markets,” she said.
This will soon “flow into greater investment and competition on both the supply and demand side of the electricity market,” Burt said.
It is “straightforward to implement, low-cost and proven to work in telco markets: it requires the electricity authority to move it from a “backstop” option to an immediate one”.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. worked for Harold Since 2021 and working in Press Gallery since 2018.
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