Submitted on February 5, 2017

Over the last 20 years, spot prices in the electricity market were highly volatile.  But 2016 will be remembered as one of the least volatile years on record.

By Greg Sise, Managing Director

Volatility can be tricky to define, depending on how you view the importance of the many aspects of the wider electricity market – spot prices, contract prices, price differences across the grid, reserves prices, the number of customers that switched retailer, and so on.  But we’ll just look at monthly average prices at three key nodes across the country:  Benmore (BEN) in the centre of the South Island, Haywards (HAY) just north of Wellington, and Otahuhu (OTA) in Auckland.

A measure of volatility in monthly average prices in each year is to take the standard deviation (spread) of prices in the 12 months, then divide by the average price for the year, thus allowing us to compare relative volatility across all 20 years.  On this basis 2016 was the least volatile at BEN and the second least volatile at OTA and HAY.

Volatility of mnnthly prices

We can also calculate the spread of prices across the three nodes in each month by taking the square root of the sum of the squares of the differences between monthly prices, then dividing by the average prices:  using this measure 2016 ranks as the fourth least volatile.

Adding the rankings for the four measures together shows that 2016 was the least volatile year on record.

Why so benign?  One clue is that in December 2015 Energy Link forecast the annual average price at BEN to be $75, with national storage sitting at about average, but it actually turned out to be $50.49, 33% lower than forecast.  Futures prices for BEN at the same time averaged $76.24 for the 2016 calendar year.  At OTA Energy Link forecast $79 and futures prices sat at $80.38, but prices actually turned out to be $60.41.

When prices turn out to be so much lower than forecast, it is a sure-fire bet that inflows were higher than expected, and so they were in 2016.  In fact, national hydro storage was above average in all but two weeks of the year.  The westerly winds that bring rain to the big hydro storage lakes usually ease off early to mid-January but this year they continue unabated as this post “goes to air”:  many people have remarked how unusually cold and windy this summer has been so far.

But compounding the benign storage situation was unusually low demand, a function of record high temperatures in winter, and much lower demand relating to farm irrigation than is typical nowadays. 

2016 was rather unspectacular in terms of pricing action, but there were some other highlights.  Another three retailers joined the already active retail market.  Flick Electric continued to exceed all expectations with their spot-based pricing plans as they surpassed 15,000 ICPs (doubling their ICPs for the year).  The National Market for Instantaneous Reserves was introduced in November, massively increasing the amount of reserves that can be shared between the islands across the HVDC link.

All of this activity has tended to mask the underlying potential for price volatility.  In 2015 two large thermal stations were closed down permanently, which reduced the gap between supply and demand.  High inflows and low demand ensured the gap stayed wider for most of the year, but during the odd period when the gap reduced, for whatever reason, we saw some of the old volatility creep back into prices, a warning for the unwary.