Stable power prices expected

HAMISH RUTHERFORD
Last updated 05:00 11/01/2012
THE SOURCE: ASX futures are based on price measurements  from several sites, including the  Benmore dam.
Fairfax NZ
THE SOURCE: ASX futures are based on price measurements from several sites, including the Benmore dam.

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Electricity prices are expected to remain stable over the next few years due to an oversupply of generation and power companies competing for customers.

Figures from the ASX futures market – the market on which generators lock in long-term supply deals with rivals – suggest wholesale prices will have below inflation increases until at least 2015.

Forward prices for summer, when prices are at their lowest, are forecast to be lower in 2015 than this year, but about 10 per cent higher in winter.

The futures curve is based on prices at reference points of Otahuhu, in Auckland, and Benmore, part of the Waitaki hydroelectricity system in the South Island, and the point from which electricity is exported to the North Island. Both Otahuhu and Benmore futures are showing similar forecast patterns.

Prices are expected to stay flat because generation capacity has been added to the national grid while demand has stayed flat because of weak growth in industrial demand, and efficiency improvements.

Economic growth is expected to remain sluggish in the medium term, limiting demand growth.

Powershop, a retailing subsidiary of state-owned Meridian, put the oversupply at more than 1000 gigawatt-hours per year for the next five years, enough to supply 125,000 households.

Chief executive Ari Sargent said that assuming average rainfall, "this excess of supply is likely to mean downward pressure will remain on retail electricity prices for a number of years".

Matt Henry, energy analyst at Goldman Sachs in Auckland, said whether a market was oversupplied was subjective, but New Zealand had clearly seen an increase in generation relative to demand in recent years.

"There's been effectively no demand growth since 2006, and in that time we've had a lot of capacity additions" with Mighty River Power, Contact Energy and Meridian all adding significantly to their generation portfolio.

The new supply should mean wholesale prices would remain "broadly flat" in the medium term, Henry said, which would encourage companies to fight harder to increase their retail base.

Several of New Zealand's major electricity companies, including state-owned Genesis, have signalled that unless the outlook for electricity prices improves, they are unlikely to build new generation.

Carl Hansen, chief executive of the Electricity Authority, said the forward curve, which should influence retail tariffs, was pointing to a slight rise in peak costs during winter, while the troughs of summer were declining.

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"If it is an accurate representation of the overall forward market, then that's quite a healthy signal," Hansen said, adding that the cost of significant lines upgrade work planned by both local network companies and national grid owner Transpower would be passed on to consumers.

Powershop said its rivals were attempting to lock in customers to fixed-price tariffs. Sargent said consumers should ensure these covered possible lines charges increases.

- Wellington

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