Winter 2008 – a Meridian Perspective

Aug 2009

Winter 2008 – What Happened?

• Winter 2008 was another stressful supply-side period for the NZ electricity industry, primarily driven by very low inflows over the Nov-07 to Jun-08 period:

– NZ received 80% of average inflows (a ‘loss’ of 3,700GWh) over an 8 month period.

• Following on from the events of winter 2008 and in particular in the wake of the EC’s Winter Review there has been a great deal of public scrutiny and associated commentary as to what occurred and why.

• However the general quality of the debate has been poor, often contradictory, and largely anecdotal in nature:

– Market prices should have been higher

– Reservoirs were mismanaged

– Commercial objectives were pursued ahead of national interests

– Costs were unfairly avoided by generators and passed-on to consumers

• But as long as the debate and associated policy deliberations are conducted in an informed and impartial manner Meridian encourages a quality public discussion in answering:

“Is the electricity market delivering a fair deal for NZ?”

1

Winter 2008 – A Hind-casting Exercise

• What is an appropriate metric to use in measuring the actions of the market?– This metric should judge behaviour from the perspective of what is best for NZ.

• To examine the events of winter 2008 we use the Spectra model configured to reflect the fundamental costs underlying electricity supply and demand in NZ:

– Spectra is a SDDP model that balances the costs of excess thermal fuel burn against the costs of excess shortage in the face of uncertain hydro inflows to minimise the overall (supply) cost to NZ.

– This approach is consistent with the short-run marginal cost (SRMC) of the system.– This is NOT a re-litigation of Meridian’s operational decisions on the day – rather we are

using Spectra in the role of a proxy ‘regulatory benchmark’.• We update the model for events that characterise the Jul2007-Dec2008 period:

– Start storage conditions as at Jul2007– Inflows and wind– Geothermal and co-generation output– Thermal outages (POCP)– NI and SI demand– Link configuration

• All the model is now solving for is unknown future hydrology

• Beginning in Jul2007:– First: optimise the use of water in storage in the face of the historical hydrological

uncertainty – ie all weekly flows over the 1931-2008 period.– Second: run the model to simulate the 19 month Jul-2007 to Jan-2009 period for all

hydrological sequences.– Thirdly: examine the inflow ‘sequence’ that corresponds to the Jul07-Dec08 period.

• Now examine how the modelled benchmark results compare to market outcomes.

2

Winter 2008 – A Comparison of Storage Levels

Pukaki & Tekapo Hydro Storage:Hindcasting versus Actual

-

500

1,000

1,500

2,000

2,500

Jun0

7

Jul0

7

Aug

07

Sep

07

Oct

07

Nov

07

Dec

07

Jan0

8

Feb

08

Mar

08

Apr

08

May

08

Jun0

8

Jul0

8

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

Jan0

9

week

Wai

taki

sto

rag

e [G

Wh

]

0

500

1,000

1,500

2,000

2,500

sto

rag

e [G

Wh

]

PKI+TEK Historical Average PKI+TEK Hindcast PKI+TEK actual

Lowest inflows on record over Nov07-Jun08:- 80% (3,500GWh) below average NZ inflows

- 77% (2,200GWh) below average MEL inflows

Lowest inflows on record over Nov07-Jun08:-20% (3,500GWh) below average NZ inflows-23% (2,200GWh) below average MEL inflows

3

Winter 2008 – A Comparison of Market Prices

Wholesale Market Prices:Hindcasting versus Actual

$-

$50

$100

$150

$200

$250

$300

$350

$400

Jun0

7

Jul0

7

Aug

07

Sep

07

Oct

07

Nov

07

Dec

07

Jan0

8

Feb

08

Mar

08

Apr

08

May

08

Jun0

8

Jul0

8

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

Jan0

9

week

bas

elo

ad p

rice

[$/

MW

h]

$-

$50

$100

$150

$200

$250

$300

$350

$400

NI Hindcast SI Hindcast HLY2201 actual BEN2201 actual

4

Winter 2008 – Comparison of Market Outcomes• Market outcomes over the Jul-2007 to Jan-2009

period are very similar to those suggested by the model:

– Market prices, generation, DC transfers, demand response, reservoir spill, and reservoir management all track very closely with what actually occurred.

• Answering some specific questions:– Should market prices have been higher?

• Marginally perhaps but in general no.– Did Meridian draw down its reservoirs to protect its

own commercial position?• No – lake levels largely followed inflows.

– Did the thermals behave themselves?• In aggregate yes.

– Was security of supply threatened?• No – or no more than it would have been under ECNZ.

– Did Meridian ‘pass on’ high prices to consumers?• No – MEL lost $125M over the winter 2008 period.

• Market outcomes in winter 2008 were determined almost entirely by environmental factors and NOT by undesirable behaviours.

– It’s all about the inflows!– The market was a pretty good (but not perfect)

reflection of a centrally controlled benchmark• While we can successfully explain (and defend)

what happened in winter 2008 this does not answer the bigger question of whether or not this is an outcome that NZ is happy with in the future.

SPECTRA HindcastJul2007 to Jan2009

Spectra Market DiffPrices SI 99.5$ 99.4$ 0.1-$

NI 83.7$ 86.1$ 2.4$ Generation Waitaki 10,905 10,586 319-

Manapouri 7,720 7,536 184- MEL Wind 798 791 7- Taupo 6,702 6,652 50- Clutha 5,368 5,519 151 Geothermal 5,497 5,476 21- Co-Gen 2,400 2,387 13- Huntly 7,533 6,162 1,371- CCGTs 12,108 13,455 1,347 OCGTs 282 580 298

TOTAL Hydro 30,695 30,293 402- TOTAL Thermal 19,923 20,197 274

Dem Res NI 63 210 147 SI 194 183 11-

HVDC S->N 2,876 2,426 451- N->S 1,376- 1,250- 127

Spill Waitaki 402 337 64- Clutha 10 - 10- Taupo - - -

Storage Waitaki Min 526 469 57- Waitaki Avg 1,262 1,221 41- Hawea Min 83 5 78- Hawea Avg 143 107 36- Taupo Min 78 78 1 Taupo Avg 330 349 20

Fuel Burn Thermals 925.6$ 994.0$ 68.4$

5

2000-2008 The Wolak Years

2000-2008 Hindcasting: A Comparison of Waitaki Storage

Pukaki & Tekapo Hydro Storage:Hindcasting versus Actual

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500

1,000

1,500

2,000

2,500

Jun00 Dec00 Jun01 Dec01 Jun02 Dec02 Jun03 Dec03 Jun04 Dec04 Jun05 Dec05 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08

sto

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GW

h]

0

500

1,000

1,500

2,000

2,500

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GW

h]

PKI+TEK Hindcast PKI+TEK actual PKI+TEK Historical Average

Hyd Seq Beginning: 2000-2001

6

2000-2008 Hindcasting: A Comparison of Market Prices

Wholesale Market Prices:Hindcasting versus Actual

$-

$50

$100

$150

$200

$250

$300

$350

$400

Jun00 Dec00 Jun01 Dec01 Jun02 Dec02 Jun03 Dec03 Jun04 Dec04 Jun05 Dec05 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08

week

bas

elo

ad p

rice

[$/

MW

h]

$-

$50

$100

$150

$200

$250

$300

$350

$400

NI Hindcast SI Hindcast HLY2201 actual BEN2201 actual

Hyd Seq Beginning: 2000-2001

7

SRMC Sensitivity Results• The definition of thermal SRMC makes a

large difference to the conclusion that market prices have prevailingly been higher than they should have been.

• An alternative thermal SRMC definition can lead to entirely the opposite conclusion.

• The definition of hydro SRMC makes a lesser but still significant difference to the conclusion that market prices have prevailingly been higher than they should.

• Physical storage outcomes are robust to any reasonable definition of hydro and thermal SRMC.

• The lack of internal consistency in regards physical and pricing outcomes can be seen in Wolak’s approach when security of supply is severally compromised.

• These sensitivities should not be interpreted as “Wolak may be right” rather they should be seen as:

– A demonstration of “garbage in garbage out”.

– A demonstration of the inherent noise in the estimation of fair market outcomes.

Pukaki & Tekapo Hydro Storage: Hindcasting versus Actual

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1,000

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Jan07 Jul07 Jan08 Jul08 Jan09

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Market Hindcast NPL Offer MWHindcast Naïve SRMCNaïve SRMC, NO VoLL Hindcast Coal StockpileNaïve SRMC Coal Stockpile Naïve SRMC Full Thermal Storage

Excess Market Rentals:Jan2001 to Jul2007

-$6,000

-$4,000

-$2,000

$-

$2,000

$4,000

$6,000

Wolak Hindcast HindcastNPL Offer

MW

HindcastCoal

Stockpile

NaïveSRMC

NaïveSRMCCoal

Stockpile

NaïveSRMC

FullThermalStorage

NaïveSRMC +No Voll

thermal fuel representation

ren

tal [

$M

]

Voll@5K Voll @10K Voll @20K

8

Additional Winter 2008 Material

Winter 2008 – Some Sensitivities• We examine a range of “what-if’ outcomes over the 19 month period via

sensitivities to the baseline hind-casting assumptions.

• Leaving aside issues related to the pricing of SI reserves, the HVDC has only mild impacts:

– Storage trajectories over 2007-2008 are largely unaffected by changes in either assumed link size or additional water in storage at the start of the period leading up to the HVDC decommissioning in Spring 2007.

– However a larger link would have driven lower market prices and reduced levels of spill in early 2009.

• National shortage costs can have large impacts on all aspects of system operation:– 2008 appeared to operate to somewhere between a $2,500 and $5,000/MWh VoLL.– A higher VoLL could have significantly increased minimum reservoir levels (by up to

500GWh) BUT at the expensive of an enormous increase in marginal market prices as well as large increases in reservoir spill.

– Given that no actual shortage occurred in 2008 it is questionable whether these additional costs are in NZ’s best interests.

• Thermal behaviours have large pricing impacts:– More benevolent thermal behaviour over the 2007-2008 period would not have significantly

changed any of the physical outcomes, but could have made the delivery of the same physical outcome significantly cheaper.

• Dry inflow assumptions mimic higher VoLL assumptions:– Always assuming drier operating conditions for reservoir management has clear impacts for

2007-2008 and would have raised minimum reservoir levels.– However taken to extremes, while large increases in storage levels could be achieved this

comes at the expense of enormous increases in marginal market prices and levels of reservoir spill.

9

Change in Hindcast Market Prices

-$50

-$40

-$30

-$20

-$10

$-

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$20

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Big

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00S

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.

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$/M

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Prices SI

Prices NI

Jul2007 to Jan2009SI: $104/MWh

NI: $86/MWh

Change in Hindcast Minimum Storage Levels

-200

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100

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500

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700

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0,00

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No

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O

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in s

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[GW

h]

Waitaki Min

Taupo Min

Jul2007 to Jan2009

Waitaki Min: 628GWh

Taupo Min: 77GWh

Change in Hindcast Hydro Spill

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-200

-

200

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600

800

Big

Lin

k (5

00S

N, 1

000N

S)

+200

GW

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Vol

l $2,

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Vol

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Vol

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0,00

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ve S

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W N

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.

No

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rmal

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Neg

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O

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ry O

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sensitivity

ch

an

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in s

pill

[G

Wh

]

Waitaki

Clutha

Taupo

Jul2007 to Jan2009

Waitaki: 487GWh

Clutha: 8GWh

Taupo: 0GWh

Change in Hindcast Thermal/Hydro Generation

-1,000

-800

-600

-400

-200

-

200

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600

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Big

Lin

k (5

00S

N, 1

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S)

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h E

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GW

h E

xtra

Sta

rt S

tora

ge

Vol

l $2,

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Vol

l $10

,000

Vol

l $20

,000

Vol

l $10

0,00

0

Naï

ve S

RM

C

300M

W N

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P.S

.

No

The

rmal

Out

ages

Neg

ativ

e IP

O

Pla

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ch

an

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in g

en

era

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GW

h]

-$75

-$55

-$35

-$15

$5

$25

$45

ch

an

ge

in f

ue

l-b

urn

[$

M]

TOTAL Hydro

TOTAL Thermal

Thermals

Jul2007 to Jan2009

TOTAL Hydro: 30,604GWh

TOTAL Thermal: 19,977GWh

Thermals: $929M

10