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Hydro lakes, dry summer risk and spot electricity prices

Source: Electricity Authority - Market Commentary

In New Zealand most electricity is generated by hydro dams, with the majority of these located in the South Island. Many dams have storage reservoirs which hold water for future use. Storage in each hydro lake depends on the difference between inflows - either rain and snowmelt - and outflows – the water used in generating electricity. If a hydro dam consumes more water from the reservoir than is refilled by inflows, hydro storage decreases. While New Zealand’s hydro lakes are large enough to see from space, their hydro reservoir capacity is surprisingly small - since there are limits on minimum lake levels.

When all hydro reservoirs are full, the stored energy amounts to approximately five weeks of electricity generation over winter. This makes managing hydro storage critical to the electricity sector.

New Zealand had its wettest winter on record in 2022[2], resulting in above average hydro storage. In spring, however, inflows at many lakes were below average. These low inflows, coupled with high hydroelectricity generation, caused hydro storage to fall across all the major lakes. The outlook for summer 22/23 is for La Niña conditions, similar to the previous two summers. During La Niña, New Zealand tends to experience warm and wet conditions in the North and dry conditions in the South. Anticipating another La Niña summer, many generators began to conserve water in early September. This was achieved by placing more hydroelectricity in higher cost offer tranches in the wholesale electricity market. This manifested in higher average spot prices in September and October.

During the first week of November, there was heavy rain and large hydro inflows for lakes in the South Island. Weekly average spot prices decreased to $16.7/MWh. Near-term forward electricity prices are also sensitive to storage levels, as rain events provide confidence for higher storage for the near future. The first week in November was no exception, with near-term forward prices falling by around $15/MWh.

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