GNE - Genesis Energy

[Snoopy]

The most economic solution for NZ INC is to reduce the gas flow into the pipelines and back off thermal plant to allow hydro to go harder, but because there is not a true gas market that cannot happen.

How would one go about getting a 'true gas market' in NZ? I ask this knowing that 'take or pay' contracts are likely going to always be a reality in NZ

SNOOPY

[Jantar]

How would one go about getting a 'true gas market' in NZ? I ask this knowing that 'take or pay' contracts are likely going to always be a reality in NZ

SNOOPY

There are now enough gas suppliers to enable such a market to happen, but as you say, I don't think it ever will.
The way would be for companies to nominate daily gas takes as they do now, but do it via bids for quantity and price. Gas suppliers would offer their gas into the market at a quntity and price, and the match of quantity would set the daily price. One supply would be the marginal supplier and could charge a fee for varying their output to maintain gas pipeline pressure, just as the electricity market has a frequency keeper to maintain grid frequency.
Longe term hedge contracts could be used to supplement or replace take or pay type contracts.

[Snoopy]

Long term hedge contracts could be used to supplement or replace take or pay type contracts.

But isn't the development cost of a field a given? How could anyone be brought in to take the other side of long term hedge contract, effectively betting against the fixed costs of developing a field?

SNOOPY

[Jantar]

But isn't the development cost of a field a given? How could anyone be brought in to take the other side of long term hedge contract, effectively betting against the fixed costs of developing a field?

SNOOPY

True, but lets look at that same argument from the point of view of a geothermal power station in the electricity market.

"But isn't the development cost of a steam field a given? How could anyone be brought in to take the other side of long term hedge contract, effectively betting against the fixed costs of developing a steam field?"

[Snoopy]

True, but lets look at that same argument from the point of view of a geothermal power station in the electricity market.

"But isn't the development cost of a steam field a given? How could anyone be brought in to take the other side of long term hedge contract, effectively betting against the fixed costs of developing a steam field?"

I don't think the analogy quite holds.

Look at the real virtual asset swap (VAS) made in 2010 between Meridian and Mighty River Power at the Whakamaru node. The Whakmaru node is a hydro dam. But this dam is only part of the Mighty River Power portfolio that includes various geothermal stations and the other hydro stations along the Waikato River. The price at the Whakamaru node is influenced by the way Mighty River power runs their whole power portfolio.

While I take your point about the fixed cost of developing a steam field, the VAS was not made at a steam field. Perhaps for the very reason you have outlined?

Returning to the subject of having a wholesale hedge on the gas market, different wells will have different production rates and different field lives. But Kupe supplies a very significant proportion of NZ gas, as Maui did when that field was in its prime. So you can't ignore the fact that Kupe is 'take or pay' as perhaps you might in a larger market in some other country where you had hundreds of gas fields supplying the one market. That means that in New Zealand, there may not be a workable substitute for 'take or pay'?

SNOOPY

[Jantar]

I don't think the analogy quite holds.

......
So you can't ignore the fact that Kupe is 'take or pay' as perhaps you might in a larger market in some other country where you had hundreds of gas fields supplying the one market. That means that in New Zealand, there may not be a workable substitute for 'take or pay'?

SNOOPY

Unfortunately, your claim is prevalent. That is why I cannot see NZ ever having a true gas market. It is also why we are seeing gas fired thermal stations running while hydro dams spilling water. It is also one of the reasons why further wind generation in NZ is unlikely to be profitable unless we have a storage system such as PSH.

However Gas market discussions are moving away from gas usage and profitability of thermal plant. Thermal plant can still be profitable by burning gas at $70 per MWh and selling the energy at $20 per MWh. It may seem counter-intuitive, but if GNE can burn some gas at a high price anddrop the nationwide wholesale price while they run short on their retail book, then they can buy the remainder of their retail demand at a low price and re-sell at the fixed retail margins. Hence they make more money than simply selling thermal genrtaion at a nominal profit.

[Snoopy]

Thermal plant can still be profitable by burning gas at $70 per MWh and selling the energy at $20 per MWh. It may seem counter-intuitive, but if GNE can burn some gas at a high price and drop the nationwide wholesale price while they run short on their retail book, then they can buy the remainder of their retail demand at a low price and re-sell at the fixed retail margins. Hence they make more money than simply selling thermal genrtaion at a nominal profit.

This has to be the most extraordinary post on the Genesis thread to date. The power market is bid in half hour segments at the different nodes, correct? In this case we are talking abpout the Huntly node, which happens to be the site of the Genesis owned Huntly power station. It is also the North Island node where Meridian has its virtual power station, courtesy of the virtual asset swap that Meridian has done with Genesis.

I can understand that power prices depend on expectation. When lake levels are down, and it seems water flow into those lakes will be below average, then we have the fear of running out of hydro power. With NZs volatile weather, this kind of worry can turn around quickly. But fear that was unjustified with the benefit of hindsight can lead to very high power prices for some time in the interim. Now here is the bit I don't understand.

Where is the potential 'fear' at the Huntly node? All the gentailers know that Huntly has a 'take or pay' contract with Kupe, and other 'take or pay' contracts from other gas fields should the supply from Kupe be temporarily interrupted. All Gentailers know that parts of Huntly at least (the remaining Rankine Units and Unit 6) can be ramped up and down relatively quickly. That means the generation potential at Huntly is known all year round. Do you not need an unknown to really shift a power node price? (Remember there is also Contact Energy's Otahuhu B just up the road that ensures plenty of gas powered generating capacity is available in the vicinity.)

Furthermore if Genesis can indirectly influence the power price at other nodes, don't they have to keep doing it every half hour? How can a pushing down of the price in a short period have a longer term effect that lowers other power prices for long enough to benefit Genesis?

SNOOPY

[Jantar]

There a couple of points you raise that need clarification.

First is that the New Zealand electricity system is a national grid, and unless there are line outages or constraints then then the price at one node is not too disimilar to the price at any other node. Every single circuit in the country has a characteristic that is described by a constraint equation that simulates the losses on that circuit, and the price at each node is calculated from the assumed loss of moving energy over that circuit. Prices are not calculated at each node in isolation, but are on a nation wide wide basis with the small nodal variations allowing for line losses. There are only two nodes that are used for the initial nation wide calculation, Haywards for the North Island and Benmore for the South Island.

The wholesale price is determined by building a stack of all offered generation, with the offer prices adjusted to reference the nodal price at either Haywards (HAY) or Benmore (BEN), then the demand is overlaid onto this stack. Any price difference between HAY and BEN is used to set the HVDC flow between the islands, and a national stack is then built. Where the demand line cuts the supply stack, the price is set, and all offered generation below that price is dispatched, and all generation above that price is not dispatched. This is done for every half hour of the day.

The important point is the the Huntly (HLY) node is not treated in isolation, and if additional generation is offered at HLY at a low price then that drops the wholesale price for the entire country, not just the HLY node.

Second point is that power prices do not depend on expectation, other than climate forecasts to help determine what the inflows are likely to do in next season. This summer inflows were down, and storage was low, but there no fear of shortages as long as resources were managed, which they were. Prices were being set by Contact having problems at Otahuhu (OTC) and running the Stratford (SFD) peakers much harder. They are more expensive to run so there was less low cost generation in the stack. Fear did not enter into the price, only availability of water and gas.

The only unknown that affects wholesale prices is wind generation. Under our market rules wind is always offered into the market at $0.01 and with around 600 MW of installed wind generation that is one hell of a big unknown that can ramp on or off without warning at any time. It is easy to show that when the wind is blowing wholesale prices are low, and when the wind isn't blowing prices are high.

[Jantar]

My previous post didn't answer your question

.... How can a pushing down of the price in a short period have a longer term effect that lowers other power prices for long enough to benefit Genesis?

SNOOPY

For this discussion I shall ignore line losses, but in practice that does add about 4% to the amount of generation required.

lets imagine that GNE have a customer demand of 700 MW (350 MWh) in a single half hour. Under the NZEM system they must buy those 700 MW from the market at what ever the wholesale price is for that half hour. Normally, a generator will endeavor to generate that 700 MW by offering that quantity into the market at SRMC or less, so they are neutral on their portfolio, and offer excess generation into the market at higher prices. If the amount of generation dispatched exactly matches their customer demand then they are neutral as far as wholesale price is concerned and their revenue will be constant. E.g Generate 700 MW at SRMC of $70 ($49,000 per hour), and buy 700 MW at $70 ($49,000) is the same net result as generating 700 MW at $100 and buying 700 MW at $100. The amount being charged to the customers is fixed so they are indifferent to wholesale prices.

Take a situation where the wholesale price is considerably less than their SRMC, say $40, so that that they are only being dispatched 400 MW. Their wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000. But they are still selling 700 MW to their retail customers at $70 so earning an extra $37,000 ($49,000 - $12,000).

GNE's trader looks at the offer stack and sees that if another 50 MW is offered at a low price then the wholesale price could drop to $30. That generation will be gas fired and will cost him $70 per MW to generate, so will increase his costs by $1500 per hour. BUT:

GNE are buying 700 at $30 ($21,000), and are now being dispatched 450 MW of generation ($13,500), so a wholesale loss of $7,500 and an extra $1,500 in gas, so a total loss of only $9,000. They are still selling to their retail customers at $70 so their net income is now $40,000. Generating that last 50MW at a loss has actually made an additional profit of $3,000.

It is these situations where we traders earn our salary.

[fish]

An interesting situation has developed today that shows the issue of trying to determine gas price for profitability.

The Wholesale electricity price has dropped to between $10 and $15 per MWh. At those low levels none of the thermal plant can be making any profit when looked at in isolation. But right now Huntly's E3P plant is on minimum load, MRP are still running a Southdown unit and CEN have one of their peakers at almost full load. Meanwhile in the South Island Hydro plant are being backed off and spilling water.

This pervers situation occurs because of Gas take or pay arrangements. The gas producers are still producing gas and feeding it into the pipelines. Pipeline pressure is climbing, and if the thermal plant doesn't burn it then they will be penalised for not taking their nominated take or pay quantities. So the overall most economic solution for the generators is to burn gas and spill hydro. The most economic solution for NZ INC is to reduce the gas flow into the pipelines and back off thermal plant to allow hydro to go harder, but because there is not a true gas market that cannot happen.

It certainly is a very perverse situation that proves we have a system that promotes absolutely wasteful burning of gas.
why would contact not store their gas?Why have a thermal plant at almost full load whilst spilling water ?