“Electricity contract prices have risen and could rise further”
Electricity prices spot prices are high at present due to low inflows and, somewhat unusually, a prolonged gas shortage. Lake levels are improving, but full relief on the gas is months away. In the meantime, electricity contract prices have risen, and could rise further.
Each month we publish the electricty contract index, but I thought it instructive to delve deeper into the underlying contract data. The contract data is disclosed on the www.electricitycontracts.co.nz web site as contracts are traded between generators, retailers, financial intermediaries and consumers. There aren’t a lot of these larger contracts traded each month, so we use them all to put together our three indexes: one for fixed price variable volume contracts (FPVV), one for hedges (contracts for difference, CFDs) and one combined index for all FPVV and CFD contracts. We only use contracts that have a term of at least six months, and we adjust the prices to the Haywards node near Wellington.
But FPVV and CFD contracts are actually disclosed by grid zone, with the five zones shown in this map, sourced from www.electricitycontracts.co.nz.
So, I extracted the data for all contracts included in our indexes and plotted the CFD and FPVV volume-weighted averages by month, starting in January 2017.
The first chart is for Zone A, which is mainly Auckland.
Relative to January 2017, the latest prices increased by 70% for CFDs and 49% for FPVV back in March, although the FPVV average has come back to an increase of only 20% on 2017.
We have to be a little careful with these figures because these contracts all have different start dates, and those which start later in 2022 tend to have lower prices than those which start very soon. But one way or the other, the data shows substantial increases for anyone who has recontracted, or is about to recontract, relative to three or four years ago. The length of FPVV contract, which usually has a large electricity consumer as the buyer, is typically two to four years in length, so many consumers that contracted in 2017 or 2018 are getting “rate shocks” in 2021.
There’s a similar story in Zone B, shown below.
Zone C has larger increases, of 99% in February for CFDs and 55% for FPVV.
There is not much CFD trading going on in Zone D, but the FPVV prices peaked in February at 36% higher than early 2017.
In Zone E, the lower South Is, FPVV prices top out at around 27% up, but the CFD average hit $250 in April, which is 227% up on early 2017!
However, the Zone E CFD average is based on only one contract, running from April to September 2021, so it’s no wonder that it’s priced so high.
The overall trend, however, is that contract prices are well up on 2017 and 2018, even after dipping in 2020. The charts above suggest a trend toward softer prices, but I suspect this is the result of buyers contracting for longer than usual in order to achieve a lower price up-front, rather than any easing in the fundamentals of restricted gas supply, combined with below-average lake levels.