In this issue:
- Spot Market Overview
- Wind – The Growing Energy Source
- Not all Energy Contracts are the Same
- Mighty River Power Starts Construction at Southdown
Spot Market Overview
Winter 2006 was one of extremes, with snowstorms in the South Island and flooding and landslips in the lower North Island, wrecking havoc in some communities. These weather patterns resulted in strong North Island hydro inflows, however the South Island lakes suffered for the majority of the quarter. The national peak demand record set on the 29th of June was followed by peak demand records for the South Island (2252MW) and Wellington (646MW) on the 5th of July. A warmer August and September has seen demand fall again, and as a result we have witnessed consistent spot pricing across the country in the July–September period.
National Storage
Hydro storage levels for the country have fallen by 2% in the third quarter of 2006, rebounding strongly in September after significant rainfall at the end of August. A 10% increase in North Island storage has been countered by an overall 8% fall in South Island lakes. However, the warmer weather and resulting lower demand, coupled with an anticipated snowmelt over summer, have helped to keep spot prices steady.
Average Daily Prices
Prices for the period have averaged 6.64c/kWh at the Haywards node, significantly below the 9.5c/kWh average for the second quarter, and below the 7.4c/kWh of the same period in 2005. Electricity pricing for the period has ranged from a low of
5.6c/kWh to a high of 8.8c/kWh.
The prospect of continued consistent pricing is strong, as the warmer weather is forecast to continue, and lengthening days will result in reducing demand. Any heavy rainfalls in the South Island catchments will help to direct the snowmelt into hydro catchments. This will reduce the amount of southward flow on the HVDC that has characterised the last two quarters.
Wind – The Growing Energy Source
New Zealand has long been recognised as providing the ideal wind profile for the production of electricity. Our wind is abundant and constant, and can generate electricity at a price that is competitive with other sources.
The number of wind farms in New Zealand has been growing over the last five years. New Zealand has four working wind farms, the two largest based in the Tararua Ranges.
In total these produce electricity to power 75,000 households from an installed capacity of 170MW. Resource consents have been applied for, or granted for, a further 1000MW of wind capacity, and another 1000MW or more is currently under investigation. The total world wind-generated electricity is sufficient for 35 million people. It is growing at a rate greater than any other energy source and is projected to increase five-fold by the year 2020.
Wind farms use turbines, which consist of a tower, a nacelle (containing drive-shaft, gearbox and generator), blades and a hub, to generate electricity. Their height can vary – in New Zealand they consist of 30–80 metre towers with
27–90 metre diameter rotors. Turbine ratings vary from 225kW at Brooklyn to 3MW each at Tararua stage three, which is currently in construction. At each wind farm the combined generation is fed into step-up transformers before being fed to the local or national electricity network. The overall size, shape and capacity of a wind farm is dictated by a number of factors, including available wind resource and suitability of the site for turbine placement, as well as proximity and constraints in transmission to the national grid.
Wind farms provide a perfect complement to hydro generation, as when the wind is blowing hydro generation can be reduced and storage retained for times when the wind is not so prevalent. This is why many of the leading wind farm owners around the world are also major hydro generators. Adding wind to a generation portfolio promotes the efficient use of New Zealand’s renewable energy resources.
Not all Energy Contracts are the Same
Depending on your organisation’s energy requirements, there are a variety of contracts in the market to suit your needs.
Fixed Price Variable Volume (FPVV) and Split Cover contracts have different characteristics and profiles and should be matched to your company’s risk profile and strategic horizons.
An FPVV contract will give you a fixed price for energy, regardless of where the market should go and is therefore considered a premium low-risk product. An alternative is a Split Cover contract which is primarily FPVV pricing with a small amount of spot market exposure (15% or more of profile). The related risk of spot exposure can work well if you can reduce your load at appropriate times. However, it is considered a higher risk product than a FPVV contract.
Both contract types can work well in the right conditions with an appropriate level of management. Below is an example of a flat profile customer with around 1,000,000kWh of annual usage. It shows the comparable performance of an FPVV contract against a Split Cover contract with 15% exposed to the spot market. The end result is traded against the average spot price and results in a net annual spend difference of $6,790.76, in favour of the FPVV contract.
Contract Clauses
With a variety of contracts and clauses available it is important to know that the associated terms that are offered are just as important as the contract choice. It is important to be informed of the impacts that some of these special terms can have on your organisation.
Recently we have noticed a number of non-mainstream clauses in contracts offered by other retailers. Below is an explanation of some of these terms and the potential impact on your business.
MAQ – Maximum Annual Quantities
Effectively this is a clause that allows a review of your pricing by a retailer, if they feel you are consuming higher than was expected on your FPVV contract. The potential impact could be a large price increase if your consumption goes up and is counter intuitive to a Fixed Price Variable Volume contract.
Right of Renewal
If the contract has this term when you get to the end of the specified time, the retailer could choose not to renew for the optional term. The impact on your organisation includes being faced with having to be on the spot market at unfavourable times and no continuity of contractual supply.
Matching Rights
This term indicates that your present energy retailer has to be given the last opportunity to match any new contract offer at the expiry of the present contract. This practice is questionable as energy retailers, like all businesses, should always put their best pricing forward based on their business model and the value of the customer.
FPVV Versus Split Cover
Click to view larger image
Mighty River Power Starts Construction at Southdown
Mighty River Power has started construction of a new 45MW gas-fired turbine generator at its Southdown electricity generation plant in Penrose.
Mighty River Power Chief Executive, Doug Heffernan, said the gas-fired generator would be capable of operating during periods of high demand or when hydro inflows were low.
The generator, which was shipped from Houston to Auckland, arrived in August and once installed will lift the site’s total generation capacity from the current 125MW to 170MW, enough to supply energy for 20,000 homes during peak demand. Installation is planned to be completed in early December.
Mr Heffernan said the new turbine is part of the Company’s ongoing investment in new generation capacity to help meet the country’s growing energy requirements, and is further evidence of an improvement in energy supply security over the next 12 months.
“Transmission capacity is now the key issue for the industry. Building new energy generation capacity closer to areas of high demand, such as Auckland, and managing demand are part of the solution. However, upgrading the transmission system into and around Auckland is still a priority requirement because of the existing scale and future growth rate of the region,” he said.
Mr Heffernan said in addition to creating extra capacity at Southdown, Mighty River Power is investigating a variety of other generation opportunities including geothermal, wind, thermal, gas and small hydro, and recently received resource consents to build a 70–80MW geothermal power station at Kawerau.
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