Electricity reforms drive wholesale price spike

Electricity reforms drive wholesale price spike

By Pattrick Smellie

Dec. 15 (BusinessDesk) – The unprecedented pre-Christmas spike in wholesale electricity prices is down to generators pricing stored water for hydro-electricity more conservatively than in the past because they fear being required to pay customers to save power in the event of a power crisis.

Electricity market observers have previously warned that reforms implemented earlier this year would be likely to make generators more careful about how they managed hydro resources, with higher prices likely as a result.

“There’s no energy crisis at the moment and there’s a long way to go before there is one, but Meridian was criticised in 2008 for not managing more prudently during November and December 2007,” said Meridian Energy’s general manager of products and markets, Neal Barclay.

He told BusinessDesk the company had observed the “ninth driest sequence in 80 years” in the Waitaki catchment and the company was taking “a more conservative stance than in past”, especially as industry players will be forced under the new regime to pay customers for power savings if there is a repeat of winter hydro crises that either occurred or threatened four times in the last decade.

The country’s largest hydro generator, Meridian is particularly concerned at the relative lack of snow held in the Southern Alps for the time of year, with inflows to the Waitaki River hydro-electric system highly dependent on the annual spring and summer “snow melt”.

“We have around 1800 Gigawatt hours (of water stored) in the Waitaki catchment which is around 200GWh to 300GWh above average for this time of year, but snow pack is estimated at between 550GWh to 600GWh below average,” said Barclay.“Snow melt does not directly correlate with storage, but we can confidently say we have overall below average storage.”

The chief executive of MightyRiverPower, Doug Heffernan, told a similar story, saying there had been very low inflows into Lake Taupo in recent weeks, and the company was now running its Southdown co-generation plant, one of the most expensive thermal generation units in the country, at full capacity to preserve water.l

“In September, we couldn’t get rid of the water fast enough,” Heffernan told BusinessDesk. “From then until now, it’s been progressively tightening up.”

While the average price of wholesale electricity in 2010 has been around $55 per Megawatt hour, the spot price has risen to over $300 per MWh at times since Dec. 1, prompting a preliminary inquiry by the newly formed Electricity Authority.

The inquiry falls short of a full investigation, but is seen as an early test of the EA’s ability and willingness to take a more proactive approach to monitoring electricity market conditions than its predecessor, the Electricity Commission.

A preliminary report on its findings is due mid-week next week, said an EA spokesperson.

Rio Tinto, which runs the Bluff aluminium smelter using around one-seventh of all electricity generated in New Zealand, said today it was cutting production by 5% because of the wholesale price spike.

“The level and haste at which wholesale electricity prices have increased is very concerning, with prices at these levels experience during the 2008 winter crisis,” said the general manager at New Zealand Aluminium Smelters Ltd., Ryan Cavanagh.

The cutback would cost New Zealand $1 million a week in lost export earnings, said the executive director of the Major Electricity Users Group, Ralph Matthes.

“Current prices are an extreme outlier compared to the historic trend, even though storage is about average. This isn’t just a short term effect,” said Matthes. “The confidence of private investors has been shaken.”

(BusinessDesk)

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