ATS Short Circuit September 2013

Short Circuit SE P TE M BER / O C TO B ER 2 0 1 3

Advice to members

HYDRO SITUATION

Tracey Gordon, ATS Energy Account Manager

25%

50%

75%

100%

25%

50%

75%

100%

0%

The biggest energy news this month is the partial float of Meridian Energy, the second under the Government’s mixed-ownership model for state-owned businesses.

Investors will have the chance to buy up to 49% of Meridian Energy in early November.

STORAGE (% OF MAXIMUM)

1 DEC 1 JAN 1 FEB

Tracey Gordon

Meridian Energy is the country’s biggest renewable generator, operating seven hydro projects in the South Island and four wind farms in the North and South Islands. At June 30 it had total assets of $7.74 Billion, funded with $4.69 Billion of equity.

Also in the news, a number of the larger generators in New Zealand have stated they are not seeing any signs of demand recovery in the retail electricity market, and are unlikely to proceed with any major developments in the next three to five years.

Contact Energy stated it is unlikely to complete a $50 million refurbishment of its Taranaki Combined Cycle plant, and has abandoned its 504 MW Hauauru ma raki wind project south of Raglan citing the subdued demand outlook.

Is this something consumers need to do? Insure their own supply by looking at photovoltaic, wind energy or other alternatives? As new technology advances and the ability to store generation at a lower cost evolves, it may become an option to seriously consider in the future.

Irrigation Season With irrigation season looming, now is the time to start thinking about your electricity and ensuring that you have everything in place before you start.

•

Changeover dates for the ATS Summer/Winter Irrigation contracts are 1st September and 31st March; this is for the EA Networks area. Often the changeover account can have rates pro-rated until the full summer month is billed.

•

Using the differential Day/Night pricing option is often seen as a logical step in reducing the cost of electricity—but it’s not always the best option for everyone. Now is the opportune time to look at your plan and rates to ensure that you are maximising the best option for your business.

With equipment sitting idle over the winter period it is essential to ensure you check the equipment before you use it. Also check for any electricity lines that have slumped or fallen over the winter, making sure that these are taken care of before you start using your irrigators.

Check your pump sheds to ensure that any nests have been removed from around your meter boards and electrical equipment as these will become a hazard.

ATS Energy can help you with any of your electricity checks or issues so call Tracey today on 0800 BUY ATS (289 287).

If you have any topics that you would like to see covered in this forum please let me know either by calling me on 03 307 5107 or e-mailing me at tracey.gordon@ats.co.nz.

SHORT CIRCUIT | SEPTEMBER / OCTOBER 2013

1 APR 1 MAY 1 JUN 1 JUL 1 AUG

0%

Meridian Energy’s CEO Mark Binns has also made similar statements. This poses some questions for the future of the market and pricing for the end user. As demand increases, how will these generators cope with increased demand with these generation builds taking years to complete?

1 MAR

Information taken from NZX Energy DISCLAIMER: The purpose of this information is to outline historic data and is intended for general reference only

Electricity futures a big call for farm users

By Richard Rennie

A ministerial review back in 2010 seeking greater clarity and more concise pricing signals in the electricity market endorsed promotion and support for the electricity futures market, started only a year earlier.

The market trades off the Australian Securities Exchange (ASX) and is monitored by the Electricity Authority.

Clearer signals to generators and buyers of electricity through a futures market were regarded as necessary to try and provide a means for parties to manage volatility. The Electricity Authority is charged with developing and strengthening the market, publishing regular updates on contract sales in its weekly market update brief.

Today a total of 3000GWh have been traded, the target set by the Electricity Authority, with the main players being the four key “market makers” consisting of the four big generation companies buying and selling their electricity. Electricity retailers are now also involved in the trading.

A futures contract involves taking on a contract based on an agreement on a price today, for settlement of that contract on a daily basis. In the case of the electricity futures market as an example, this may involve purchasing a load of 1MW in the first quarter, for supply in the third quarter.

New Zealand experiences seasonal volatility in electricity pricing due to hydro supply being influenced by rainfall levels. If the year develops as a dry one, the contract holder can stand to make money as the futures price goes up, ultimately matching the higher spot price by the third quarter.

Other commonly used hedges are CFDs, or contracts for differences that operate in a similar way to bank interest rate swaps, where a variable charge on electricity rates is swapped with a fixed rate charge.

Dunedin based company Energy Link is New Zealand’s longest standing electricity futures broker, authorised by the Securities Commission to assist and advise with electricity hedging arrangements.

Managing Director Greg Sise cautions the electricity futures market is not for the faint hearted, nor for smaller users, with minimum load amounts of 1MW as a trading unit.

2

For larger rural users he suggests a buyer group could be an option when considering futures trading, but even then this comes with considerable cautions around it. “A user would generally only be interested in a hedge if they were buying electricity on the spot market, which is not how most farm businesses would be operating.”

Even larger industrial users will generally avoid futures type contracts for electricity supply, and Greg cautions the regulatory and capital demands for trading electricity futures are significant. “They tend to involve very high leverage, and they can fall against you the wrong way very quickly.”

The earlier example where a futures contract sees money made on that contract as conditions dry out is a case in point. The return looks good, until it rains near the close of the contract, and prices drop quickly.

All electricity markets globally are regarded as risky because electricity cannot be stored. Hydro storage in NZ helps remove daily spikes, but the market can exhibit seasonal volatility, depending on weather conditions.

Futures contracts can also bring cash flow demands that do not meet business cash flows, and require significant up front security to cover the maximum daily change in value. “In some trades this can be up to $40,000 a day.”

Other complexities with hedging can include not understanding how to adjust hedge cover for price differences across the grid, and not knowing how to evaluate the price of an offered hedge.

Given the NZ power supply market is increasingly competitive, thanks to flat demand and new generating sources coming on stream, Greg believes farm businesses would be better to focus on getting the best possible fixed price for their electricity. Very large electricity users are securing prices as low as the mid-7c/kWh, and he expects to see even lower deals in the current environment.

“So apart from being energy efficient, the first thing to pay attention to is purchasing power as well as you can.”

He advises farmers to review their FPVV (fixed price variable volume) contracts which may have looked good two years ago, but may be over priced today.

ATS Energy manager Tracey Gordon agrees that most farm businesses seek certainty through their pricing, and while futures would not be their first choice, ATS Energy can help review pricing structures for member’s farm businesses.

SHORT CIRCUIT | SEPTEMBER / OCTOBER 2013