High hydro levels and wholesale prices

New Zealand produces over half of its electricity by hydro-electric dams. Upstream of these dams, lakes preserve water from rain and snow for later electricity generation.

Stored water has an intrinsic value. If storage is low due to recent low inflows, that water has a higher ‘value’ as it’s scarce. However, when the water level is high and rises above the full supply level, spilling out of the dam, the water has a value close to zero as it can’t be held onto for a better time. When dams are close to full or spilling, electricity generation from hydro is sold at very low prices into the wholesale market. So as more wind and solar capacity is installed in New Zealand, it is likely that energy will be spilled resulting in low prices more often. This may be from hydro-electric dams, but also from wind and solar when there is enough energy to meet demand.

In May 2023, national hydro storage increased by 838 GWh¹ – an increase of almost 20% in one month. Some lakes, like Te Anau and Manapōuri, went above consented levels and began to spill water. This resulted in low wholesale prices during periods of the day when demand could be met with a high proportion of hydro and other renewable generation (like wind). Figure 1 shows that as hydro storage levels passed and stayed above 90% of total hydro capacity, the rolling average of wholesale prices slid to very low levels.