New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Electricity Sector<br>2025 ASX Futures Preview</h2>
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<p>Ordinarily the fact that 2025 ASX futures contracts begin trading this&nbsp;Friday, 1 October, would be&nbsp;of no great importance, but this is no ordinary year. The Electricity Authority's wholesale electricity market review means there is increased focus on wholesale electricity market outcomes. With current&nbsp;Otahuhu&nbsp;(OTA) 2024 ASX futures prices trading at NZ$122/MWh, well above the cost of building new generation, the regulator will be wanting to see a material drop in the 2025 futures price, matching&nbsp;sector expectations. We estimate the OTA&nbsp;2025 ASX futures price will trade between NZ$90/MWh&nbsp;and NZ$105/MWh, with a point estimate of NZ$97/MWh, a reasonable step down and trending towards&nbsp;our long-run wholesale electricity price expectation of ~NZ$90/MWh.</p>
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<h3>2025 ASX futures price significance&nbsp;— more important than usual</h3>
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<p>The 2025 ASX futures price is important for two reasons. First, it will impact earnings, directly setting the sales price for most commercial &amp; industrial customers, and indirectly having a bearing on residential prices. Second, it is an important signal to regulators and politicians alike that the wholesale electricity market is delivering appropriate outcomes. The recent elevated wholesale electricity prices (which began in 2018 and has impacted 2022 to 2024 ASX futures prices) has raised questions and heightened regulatory and political risks, discussed in detail in our note "Between a Regulatory Rock and a Political Hard Place —&nbsp;Wholesale Price Pressure". A substantial fall in the 2025 ASX futures price will help ease those risks.</p>
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<h3>Our ~NZ$97/MWh&nbsp;estimate is still higher than long-run marginal cost of new generation, but is moving in the right direction</h3>
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<p>Our analysis suggests the OTA 2025 ASX futures price should fall ~-NZ$25/MWh&nbsp;from NZ$122/MWh&nbsp;in 2024 to ~NZ$97/MWh. Putting a range around that estimate, we expect the 2025 futures price will settle between NZ$90/MWh&nbsp;and NZ$105/MWh. If anything we suspect there is more upside risk to our estimate than downside risk. Our estimate assumes normalised hydrology and we&nbsp;expect the&nbsp;cost of dry year reserve generation (i.e. coal generation) will continue&nbsp;to increase due to rising carbon prices. If we are right&nbsp;that should help ease wholesale electricity market concerns and validate our current long-term wholesale electricity price assumption.</p>
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<h3>Thermal generation volume is a function of new electricity supply and electricity demand&nbsp;— NZAS being a key unknown</h3>
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<p>The key driver of the expected decline in the ASX future price is new renewable generation, which in turn reduces the need for thermal generation. Including new 2021 generation, in the 2021 to 2024&nbsp;period we expect ~4.700GWh of renewable generation to reduce normalised hydro year thermal generation ~-4,000GWh to ~2,000GWh in 2025. There are several uncertainties, the most material being whether NZAS remains open in 2025. Whilst NZAS currently has no electricity contract for 2025 and beyond&nbsp;we assume NZAS remains open, and the continued strength of the aluminium market and trend towards decarbonising aluminium production supports that view.&nbsp;In addition, the amount of new generation (with ~28% of the ~4,700GWh of new generation not yet committed) and the increase in electricity demand are also uncertain and these factors will also influence the futures price.</p>
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<h3>Thermal costs less important over time as thermal generation volumes diminish</h3>
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<p>Thermal fuel costs (including carbon) has been the main driver of the increase in wholesale electricity futures price. Whilst still important, as the need for thermal generation diminishes&nbsp;the importance of fuel costs and carbon costs also diminishes. That said, the expected decline in gas prices has a greater effect on gas-fired generation operating costs than the likely increase in carbon prices.</p>
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Electricity Sector 2025 ASX Futures Preview


Ordinarily the fact that 2025 ASX futures contracts begin trading this&nbsp;Friday, 1 October, would be&nbsp;of no great importance, but this is no ordinary year. The Electricity Authority's wholesale electricity market review means there is increased focus on wholesale electricity market outcomes. With current&nbsp;Otahuhu&nbsp;(OTA) 2024 ASX futures prices trading at NZ$122/MWh, well above the cost of building new generation, the regulator will be wanting to see a material drop in the 2025 futures price, matching&nbsp;sector expectations. We estimate the OTA&nbsp;2025 ASX futures price will trade between NZ$90/MWh&nbsp;and NZ$105/MWh, with a point estimate of NZ$97/MWh, a reasonable step down and trending towards&nbsp;our long-run wholesale electricity price expectation of ~NZ$90/MWh.


2025 ASX futures price significance&nbsp;— more important than usual


The 2025 ASX futures price is important for two reasons. First, it will impact earnings, directly setting the sales price for most commercial &amp; industrial customers, and indirectly having a bearing on residential prices. Second, it is an important signal to regulators and politicians alike that the wholesale electricity market is delivering appropriate outcomes. The recent elevated wholesale electricity prices (which began in 2018 and has impacted 2022 to 2024 ASX futures prices) has raised questions and heightened regulatory and political risks, discussed in detail in our note "Between a Regulatory Rock and a Political Hard Place —&nbsp;Wholesale Price Pressure". A substantial fall in the 2025 ASX futures price will help ease those risks.


Our ~NZ$97/MWh&nbsp;estimate is still higher than long-run marginal cost of new generation, but is moving in the right direction


Our analysis suggests the OTA 2025 ASX futures price should fall ~-NZ$25/MWh&nbsp;from NZ$122/MWh&nbsp;in 2024 to ~NZ$97/MWh. Putting a range around that estimate, we expect the 2025 futures price will settle between NZ$90/MWh&nbsp;and NZ$105/MWh. If anything we suspect there is more upside risk to our estimate than downside risk. Our estimate assumes normalised hydrology and we&nbsp;expect the&nbsp;cost of dry year reserve generation (i.e. coal generation) will continue&nbsp;to increase due to rising carbon prices. If we are right&nbsp;that should help ease wholesale electricity market concerns and validate our current long-term wholesale electricity price assumption.


Thermal generation volume is a function of new electricity supply and electricity demand&nbsp;— NZAS being a key unknown


The key driver of the expected decline in the ASX future price is new renewable generation, which in turn reduces the need for thermal generation. Including new 2021 generation, in the 2021 to 2024&nbsp;period we expect ~4.700GWh of renewable generation to reduce normalised hydro year thermal generation ~-4,000GWh to ~2,000GWh in 2025. There are several uncertainties, the most material being whether NZAS remains open in 2025. Whilst NZAS currently has no electricity contract for 2025 and beyond&nbsp;we assume NZAS remains open, and the continued strength of the aluminium market and trend towards decarbonising aluminium production supports that view.&nbsp;In addition, the amount of new generation (with ~28% of the ~4,700GWh of new generation not yet committed) and the increase in electricity demand are also uncertain and these factors will also influence the futures price.


Thermal costs less important over time as thermal generation volumes diminish


Thermal fuel costs (including carbon) has been the main driver of the increase in wholesale electricity futures price. Whilst still important, as the need for thermal generation diminishes&nbsp;the importance of fuel costs and carbon costs also diminishes. That said, the expected decline in gas prices has a greater effect on gas-fired generation operating costs than the likely increase in carbon prices.


Electricity Sector: 2025 ASX Futures Preview

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Electricity Sector: 2025 ASX Futures Preview