Publications

3 2 1… fight: VRE and price cannibalisation in NEM

In the last decade, the rapid decline in deployment cost of variable renewable energy (VRE) generation capacity has given renewables an advantage over fossil fuels for new builds as highlighted in ‘Renewable Power Generation Costs in 2020’ report from the International Renewable Energy Agency (IRENA). In the report, Australia has seen large falls in ‘Levelised cost of electricity’ (LCOE) over the past decade, especially in solar PV – including grid-scale, residential and commercial PV systems. As more VRE enters the market, price cannibalisation is inevitable as we transition from the fossil-based energy market.

This ‘Chart of the week’ examines the captured price band by the percentage of wind and solar generation volumes for the National Electricity Market (NEM) over the last four financial years. Comparing against increasing VRE capacities over the years, we provide commentary on the impact of VRE connection rate on the captured price trend.

As seen in Figure 1, VRE installed capacity has been growing steadily over the years. Between FY18 and FY21, grid-scale solar PV capacity grew from 274MW to 5,203MW (1800%), and wind capacity grew from 4,070MW to 8,815MW (116%). With the rapidly falling price for solar PV, Australia has been installing record rooftop solar PV year on year. Residential rooftop solar grew from 5,193MW to 11,692MW (125%) in four years.

The growth of VRE has had a significant impact on their captured price, as shown in Figure 1. In FY18 and FY19, 98% and 90.8% of the grid-scale solar generation volumes captured prices above $50/MWh, respectively. However, this quickly reduced to 41% and 12% for FY20 and FY21, respectively. This is further exacerbated by the fact that grid-scale solar generation coincides with rooftop solar generation. With rooftop capacity now more than double the capacity of grid-scale PV, this cannibalisation effect has been increased with impacts on both demand and supply during the day.

 

In FY20, 46% of wind generation volumes captured prices above $50/MWh, while in FY21, only 21% of wind generation volumes captured prices above $50/MWh. Despite wind capacity having more than 3,000MW capacity than grid-scale solar, wind is able to capture slightly more generation volume above $50/MWh. This is due to the wind’s ability to capture evening and morning peak period prices and the impact of rooftop generation on grid-scale PV generation.

Wind and solar generation volumes with negative captured prices have also increased over the years. Generation volumes in negative price bands have increased to ~5% in FY20 and ~10% in FY21 from virtually nothing just four years ago.

This trend of downward pressure on the price will likely continue with increasing new VRE capacity as their costs continue to fall. Exactly how retirements from coal plants will impact this trend is left to be seen. For more pricing insights and our view on captured pricing through the energy transition and what these trends mean for your project, feel free to contact us about our Energy Market Perspective at enquiries@cornwall-insight.com.au.