Chart of the Month: Spiking electricity prices a shock to the system

Electricity prices have spiked in recent months, with the cost of generating power pushed up by low hydro lake levels and decreased gas output.

Commercial electricity users have felt the spike in prices hardest, with Stats NZ reporting a rise of 17% in electricity industry output prices (corresponding with a jump of nearly 29% in input prices). Residential users (at least the majority that are not on spot-price contracts) have been insulated from the change so far.

As our Chart of the Month shows, the spike in energy prices is significant and sustained, with similar violent electricity price swings in 2001, 2003, 2008, and 2018. Average electricity spot prices in April 2021 at Haywards were sitting 494% higher than a year ago, at 26.32c/kWh. Average monthly prices since 1997 are 7.01c/kWh, according to Infometrics records.

The spike in wholesale electricity prices has implications for major energy users. Major energy users usually contract ahead of time for electricity – so commit to a certain level of energy use (and can on-sell their contracted energy volumes). Prices can also be locked in ahead of time (hedged), but at present hedged prices remain higher than many large users can afford over the medium term.

The Major Energy Users Group (MEUG) – a group of 16 large energy users – has warned that some businesses are operating at a loss, or operating at only half-capacity, due to the high prices. For example, the Tiwai aluminium smelter has voluntary reduced its output to limit its energy use. The MEUG has also warned of jobs losses if electricity prices remain high and business are forced to reduce their output on a sustained basis.

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