Genesis Energy's Huntly power station. Photo / File
Genesis Energy's Huntly power station. Photo / File
Genesis Energy's supply contracts with other power generators, known as "swaptions", are to be replaced with market security options (MSOs) when those contracts expire at the end of this year.
The majority Government-owned Genesis has the coal and gas-fired Huntly Power Station, which backs up the grid when renewable energysources such as hydro and wind become constrained by the weather.
The main power generators typically take out swaptions to ensure they have enough supply when their own renewable power sources fall short.
The move, announced today, allows outside parties to effectively hire thermal capacity at Huntly at their own cost to meet their obligations.
Genesis says the new regime will open Huntly to a more varied group of power users - including the second-tier power retail companies - who seek security of supply.
"We feel like it is a good opportunity for generators, power retailers and other energy users to secure supply and stable pricing when international coal prices are skyrocketing," Genesis' chief trading officer Pauline Martin told the Herald.
"This is a product that is reflective of the backup role that Huntly has always played," she said.
Based on Genesis' current forecast, its coal stockpile can cover average requirements until the end of 2024.
This coverage shortens dramatically if there is a long period of dry weather, when it would likely need to be replaced mid-next year.
At current prices, maintaining a stockpile to provide market security would cost $300m – $400m.
On top of high fuel prices, the cost of carbon is $85 per unit.
"Genesis is not in a position and cannot reasonably be expected to subsidise the market with backup generation," the company said.
The flow-on effects of the "new normal" in highly priced international fuel and energy markets would affect everyone "and it is reasonable to expect a collective market approach to ensure security of supply for New Zealand".
Martin said the strike price for the new-look options would be set at a point in time and reflect the cost of coal.
"At this stage we are asking parties to indicate what megawatt capacity they would like to reserve on a Rankine unit and the annual premium payable on that capacity.
"They can instruct us to go and purchase coal. We will need a three-month time period to import that coal."
Martin said generation orders from outside parties could be as low as one megawatt.
International coal prices were already rising steeply before the war in Ukraine started in February.
Since then the Indonesian benchmark coal price has increased from US$188 ($305) a tonne to US$322 compared to just US$49 a tonne in September 2020.
About 82 per cent of New Zealand's power supply comes from hydro, wind or geothermal, but the system relies on thermal backup.
Huntly Power Station backs up the grid when renewable energy sources such as hydro and wind become constrained by the weather. Photo / Brett Phibbs
Grant Swanepoel, director of equity research at Jarden, said today's move was not about Genesis trying to offset sharply rising coal costs.
As it stands, the system relies on Genesis and Contact Energy's thermal assets when renewables are in short supply.
"This is them more or less signalling to the market that 'guys, there is a product here that you can pay for. It's not my burden - you are going to have to take this on'.
"It says that it is unfair that they [Genesis] and Contact undertake the burden for this whole thing.
"The rest of the market can pretend that it is renewable but they are not. They need this.
"It's more than coal stockpiles and who pays for it," Swanepoel said.
Seven of the past nine years have been among New Zealand's warmest on record and in six of those seven years, Genesis swaptions were called on.
The level of renewable generation – solar, wind and geothermal - is set to increase over the next 10-15 years.
Genesis' analysis showed that New Zealand would have 96-98 per cent renewable generation by 2030 given sector commitments to renewable builds.
"Our analysis also shows we have reached the peak in using coal for generation and that it will decline steeply over the next few years, in normal market conditions."
That said, the highly renewable market would require "peaking" capacity and seasonal storage.
Huntly packs a punch.
The 1209 megawatt station has five thermal generating units, including three of the four original 250 MW Rankine units, a 400 MW combined cycle gas turbine and a 45 MW open cycle gas turbine.
