Forward price dip following new Tiwai smelter contracts

On 31 May 2024, three of New Zealand’s largest electricity generators (Meridian, Contact and Mercury) announced new contracts of up to 20 years with New Zealand Aluminium Smelter (NZAS). Shortly following this announcement there were changes to future electricity prices, as outlined below.

The forward price curve indicates the markets expectation of future average spot prices

In an earlier article, we looked at the forward electricity market and factors that influence price expectations in the electricity spot market. This article explains that the forward curve is the market’s expectation of future electricity spot prices, and how factors like hydro conditions, investments and future demand expectations can affect forward curves.

Since late winter 2023 the forward curve has shown a downward trend, indicating a long-term fall in the electricity spot price. Some of this drop in future spot prices is likely due to the current and anticipated investment in generation. The Electricity Authority has published a review of investment showing greatly increased plans to invest in generation. The prospect of future investment in generation can lower long dated futures and show a downward trend in the forward curve.

After the announcement of the 20-year Tiwai deal, forward prices dropped

The Tiwai aluminium smelter is located in Bluff and consumes roughly 13% of New Zealand’s total electricity output. In 2020, NZAS and Merdian Energy agreed to an electricity deal which lapses at the end of 2024.

After the May 2024 announcement regarding a long-term deal with NZAS, forward prices dropped, as seen in the chart below. This could be due to the long-term nature of the electricity agreements and the demand response as part of these agreements.