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A look under the hood: Q1 actuals vs BPC forecast

After last week’s Chart of the Week, we received interest from some readers on the topic of price variability beyond the average profiles we showed. As we mentioned last week, the average prices (and average profiles) are just one facet that can inform the commercial viability of assets going forward. However, when looking at average prices it is important to remember that there may be events behind the data resulting in a distribution that is heavily skewed by extreme events.

In Q1 2020, volatility in 18 trading intervals (0.4% of quarter intervals) had a significant impact on average price outcomes particularly for average prices in peak periods (as we highlighted last week). Incorporating peak pricing into price forecasts is a necessity given they are high impact events; however, they are also typically short-lived. Therefore, it is important to accurately capture the underlying price trends as well.

In this week’s Chart of the Week, we have plotted the average daily spread of electricity price outcomes for Q1 for the last five years and included the outcomes from our in-house Benchmark  power curve (BPC) price forecast (December Update). The coloured box areas represent the average 10th, 50th and 90th percentile price for the day, averaged across the quarter. This metric shows the variability of daily price outcomes including the underlying distribution. When we control for those transient price spikes, we can view the quarter through a different lens.

Despite a comparatively lower priced Q1 2020, there is still the signal for flexible operations to utilise surplus supply (such as in the middle of the day) for monetisation during peak periods. The average daily P10 price was around $30/MWh. This is different to the distribution in Q1 2019 where the lowest price point in the day was still around $70/MWh. In comparison to Q1 2020 actuals, our BPC captured the lower end of price outcomes; however slightly overstated peak pricing as a result of milder weather conditions in the second half of the quarter and the material shift in offers from black coal and hydro to lower price points particularly during peak periods. Regardless, the spread in the BPC price outcomes closely resembled that of the actuals.

As the NEM continues to incorporate increased levels of renewable energy and traditional generators retire, price dynamics will continue to evolve. As mentioned, signals for flexible operation are clear. However, not all technologies can capitalise explicitly on these price dynamics. For some the focus is on targeted dispatch during peak intervals while others are more incentivised to get energy out the door to meet contracted positions. Whatever the focus may be, average price forecasts may not necessarily reflect actual captured prices for different technologies/ assets (e.g. coal captured prices vs solar and wind). Making the most informed decisions require access to granular information to feed into financial models or project evaluations.

We will be providing regular updates on these trends and what they mean for project due diligence across the NEM regions in our Australian Energy Market Investment Forum for banks and financiers. To find out more about the Benchmark Power Curve, the 30-min forecast price data/ how you can subscribe, please contact enquiries@cornwall-insight.com.au

We will also be talking more about the signals for flexible operation in our Webinar next week, click the advert below  for more information or to book.