Submitted on December 22, 2016

This week we released our latest quarterly Price Path, a long term forecast of spot prices, to our subscribers.  2016 has indeed been an uneventful year on the spot market, a function of a warm winter and lots of rain for generation and for pastures.  However, the last quarter delivered up some very significant news on the gas front.

By Greg Sise, Managing Director

For some time now we’ve highlighted the divergence between the price at which renewable generation can be built versus the tightening gas supply which will put pressure on gas-fired thermal generators who need higher prices when they run so as to remain viable:  and we need this plant around for the foreseeable future to cover periods when the wind isn’t blowing, the sun isn’t shining or the hydro lakes are low.

Stratford Peaking Plant

All the fundamentals point to gas prices rising in the medium to long term:  no new fields are being found, and exploration has fallen away to nothing.  But in the last three years they have actually fallen due primarily to shorter term factors concerning legacy gas contracts.

That may be the case, but while the fundamentals still point to tightening supply and rising prices, we have to assume that market participants will be working to keep their costs under control.  So in our last Price Path, we rebalanced the probability of some of the more extreme scenarios, leading to an overall lower price path to 2032, but with prices still rising strongly to 2022.  

And then in the middle of November Genesis Energy announced that it has agreed to buy the 15% share in the Kupe gas field that is currently held by New Zealand Oil and Gas, bringing its share to 46% along with Origin Energy at 50% and Mitsui E&P 4%.

This transaction is all about getting control of gas costs for future generation, and as a result we revised our Price Path assumptions for the price that Genesis pays for gas, leading to a flatter gas price curve for Genesis and a lower Price Path after 2022.

In other developments, we are incorporating demographic data from the last census into our model of electricity consumer behaviour, so that we can dynamically model numerous effects on electricity demand such as income versus electricity prices, uptake of solar, uptake of electric vehicles, the impact of climate, and so on.

We are also developing our very long term model of the electricity market which aims to determine if it is possible for the market to operate efficiently and effectively as the percentage of renewable generation approaches 100%.