This article introduces some of the myriad of reports and websites available for tracking expected prices. (I.e. forward prices and when to go to market).

Smart Power has registered financial advisors and are approved under the FMA to provide advice - however this article is intended only for generic market observation and we recommend no client acts on information provided without first speaking directly with their account manager.

The first to look at is the ASX. While the market is relatively light in trades (i.e. a small percentage of NZ's electricity contract market) it is the only open access freely tradable market providing quarterly price movements four years in to the future.

http://www.asx.com.au/prices/delayed_prices.htm

The website also graphically produces a summary of the current quarter's final closing price for each day it has been traded. I have chosen Auckland region for this example.

Market knowledge of current pricing and predictive prices has great value. This graph, in $/MW, demonstrates that had a consumer purchased power in Feb 2013 for the final quarter of this year the price (red line) would have been $110 MW (11 c/kWh) and had the consumer waited until now the price is currently $39 MW (3.9 c/kWh). The question about predicting prices is knowing what the key influences are and what their expected trends over 6 moths, 1 Year or even 5 years.

The bars tell us the most common trade-able price is around $60 MW (6 c/kWh). Any person tracking the spot price over the last 15 years will know an average spot price for the final quarter is just over $50 MW (5 c/kWh). So we can conclude that most people are prepared to pay approximately 20% premium for fixing prices. (Please see previous articles for comments regarding price volatility under different contracting scenarios).

The question then becomes, when or if to 'time the market'. By tracking the quarterly prices and producing 'strip prices' (a continuous contract period) we can track trends and advise on the expected market movements for differing contract terms. You can also, to some degree, use this tracking methodology to compare Retailer offers as to their competitiveness on price.

The graphs above provide a snap shot in time of how the markets (4 main generators who sell contracts versus several buyers on the ASX) feel future spot prices will trend. However, given 60-70% of NZ's generation is still hydro based, and with less than six months storage of water at any time in the year choosing contract term is fraught with risk and it is this reason why Smart Power contact every customer 6 months prior to their contract expiring so as to allow the optimal period to 'time the market' and for clients with over 50 GWH's pa we recommend a splitting the contract term (also referred to as book building).

We will go into more depth next time as to why the market is reducing in contract price as many clients have seen energy prices fall by 20-25% in the last six months and in some cases even more. However, in summary there are two main reasons for this (supply and demand). We are seeing the impact of NZ Geothermal generation increasing and replacing more expensive (marginal cost) NI thermal generation. (Excess supply as more generation comes on line displacing generation with higher marginal costs).

In addition a significant reduction in NZ demand, a combination of the impact of the Global Financial Crisis manufacturing, the Canterbury earth quake on manufacturing and the reduction in demand by NZ's two largest electricity users, Tiwai Smelter and Norske Pulp manufactured, the last two combined dropping 3% of NZ's demand (1,500,000,000 kWh's).

Smart Power monitors these trends every day for clients who are actively purchasing power. We also provide market reports for clients who have elected to secure contracts with some spot exposure so as to monitor expected costs. But for the majority of our clients we have secured fixed price variable volume contracts by 'timing' the market as to contract renewals and contract terms. We welcome any enquiries from clients as to the optimal purchasing strategy for your organisation. This can often be a simple review of the options available through to strategic recommendations and strategy documents covering purchasing trigger points and tracking volatility in energy costs.

If you would like to hear more about how Smart Power and Energy Select can assist you with any procurement or energy pricing analysis please give Shaun Hayward a call on 09 358 1259 or email shaun.hayward@energyselect.co.nz and he can provide you with more information.