Futures point to lower NZ power prices, but there’s a catch

Meridian Energy will soon start construction on the Harapaki Wind Farm, about 35km northwest of Napier Airport. It is one of a number of new renewable energy projects coming on stream in the next few years. Photo / NZME

Futures market pricing indicates New Zealand wholesale power prices will fall over the next few years as a raft of new renewable energy projects come on stream.

Even so, ASX futures – where the big bets are made – show that prices will nevertheless be elevated, relative to history, reflecting the likelihood of less gas being available for power generation, Meridian chief financial officer Mike Roan said.

While it’s not the most visible of markets, ASX futures plays a crucial role in how generators and big industrial users manage their risk.

“It’s massively meaningful – that’s the key point,” Roan said.

“The reason is that it is the market’s best view today of what wholesale electricity prices are going to be over any period,” he told the Herald.

Futures prices change incrementally as events unfold.

“People are literally trying to access what electricity prices might be for the rest of 2024, then 25, 26 and 27.”

The futures market is distinct from the NZX-run wholesale market, which sees prices change on the half hour, and which can see huge fluctuations over the course of a day, depending on how full the hydro lakes are, or whether there is a cold snap.

The local spot market is based purely on supply and demand, where physical consumers and physical suppliers make offers and bids to determine the price of electricity in close to real-time.

In contrast, the futures market is unlimited. It’s open to anyone, including speculators, who want to trade an electricity contract.

Roan said the key thing for futures is liquidity.

When enough parties participate in the market, that provides “tension” in the price formation process, Roan says.

In the year to February, contracts were traded representing 90 terawatt hours – about double the country’s annual consumption – illustrating that the ASX has sufficient depth.

“There are lots of parties who trade ASX futures, so they don’t consume energy in New Zealand and they may not even be Kiwis, but they help that price formation process on the ASX, which is trying to assess what electricity prices will be in the spot market over this period.”

As it stands, futures market pricing at the Otahuhu reference point has power trading at $234 per megawatt hour for 2024.

Roan said that’s quite high, reflecting the unexpected cold snaps earlier this month that had Transpower calling for consumer restraint.

Further out, futures trading puts power at $201 per MWh over 2025, $173 per MWh in 2026 and $158 per MWh in 2027.

Mike Roan, chief financial officer at Meridian Energy, says the key thing for futures market pricing is liquidity.

Roan said the declines over the next few years can be put down to the “massive” investment in new supply coming on board.

Of the $3 billion of renewable projects currently under way, Meridian is responsible for about half of that.

Meridian’s $448 million Harapaki wind farm in Hawke’s Bay is due to open ahead of schedule in late July, in time for the second half of winter.

Roan said the cost of electricity is forecast to come down materially over the next four years.

“The reason for that is the investment in new renewable that’s going on right now.”'

But while the direction of travel is down, prices – as indicated by the ASX – are elevated relative to history.

“The $150 per MWh indicated for 2027 reflects investment in renewables, which means that we won’t need as much gas or thermal generation, which is expensive.

“It is saying though that $150 is still a reasonably high price, by historical standards, driven by concerns over things like gas.”

In 2018, just before the availability of gas started to become an issue, electricity traded at about $80 to $100 per MWh.

While most of New Zealand’s power comes from hydro and wind, gas and coal back up the system when the weather is not playing the game.

Meridian has in the past used “swaption” contracts to ensure security of supply when the country experiences drought conditions in the hydro lakes.

Roan said it’s difficult to get anyone to take up a contract.

“So far we have not had anyone take us up, which worries us a bit.”

While there has been a wall of investment in renewables, there were nagging douts about gas.

“We have got [renewable] projects that we are pushing as hard and as fast as we can, but alongside that you still need a little bit of gas, and that’s why people are worried.

“We want to get ahead of the demand that we can see,” he said.

“But we are hopeful that the New Zealand gas industry is going to reinvest.”

The news from competing power generator Genesis this week that its KS-9 well in the Kupe field had come up short was a disappointment for the energy market.

Greg Sise, managing director of Energy Link, a consultancy, said it was the second blow for the sector.

The first was Pohokura, for which the latest development well delivered some new gas, but immediately went into decline.

Operator OMV says it will drill another sidetrack well from onshore to tap into another pocket of gas.

“So (a) it hasn’t helped the market get more confidence around gas supply and (b) it serves to emphasise the importance of restoring confidence so the upstream producers will continue to invest in tapping into reserves, or perhaps finding some reserves in a new field,” Sise said.

Brokers Forsyth Barr, in a research note, said Genesis Energy’s worst fears about Kupe have been realised with the KS-9 well proving to be a dud.

“Production issues have not been resolved and so future Kupe production and earnings will be correspondingly lower than previously expected,” the broker said.

“In addition to the earnings impact on Kupe, there is an indirect impact on the energy business, with less gas available to run its gas-fired Unit 5 plant,” it said.

Genesis Energy’s Unit 5 at Huntly is an important asset for the grid, providing a significant amount of baseload, or continuous power.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.