Gassed out: are renewables running gas out of the market?

Last week, the Australian Energy Market Operator (AEMO) released its ‘Quarterly Energy Dynamics’ (QED) report for Q4 2020. The report highlighted that operational demand has fallen to its lowest quarterly level since 2001; largely driven by mild weather and strong uptake of rooftop solar. Coupled with record high wind and solar production, this has caused significant reduction in fossil fuel generation and the lowest NEM emissions on record (QED). With increasing renewable energy penetration leading to lower prices, which is sometimes compounded by milder demand, what impact will this have on the commercial viability of fossil fuel generators in the long term?

In this ‘Chart of the week’, we examine the percentage of generation by fuel type and the average wholesale price for the first month of the year (January 2021) across all NEM states. Comparing with January of last year, we provide commentary on the drivers behind the low price trend and the impact this may have on fossil fuel generators.

Typically, in the month of January, we would see a spike in average wholesale price. However, as shown in Figure 1, the price continued to trend low in January 2021 across all states building on the December 2020 low price outcomes as discussed in Issue 66.

Comparing with last January, the largest decrease in monthly average price of $119.24 can be seen in Victoria. The high price from January last year is largely due to a separation event occurred at the end of the month.

At $23.73 in Jan 2021 for Victoria, it is in fact the lowest monthly average price since December 2012. Unsurprisingly, this drop in price had a large impact on more expensive natural gas generation in Victoria. The largest decrease in percentage for natural gas generation can be seen in Victoria, where the natural gas generation only accounted for 0.7% of the total generation in  January 2021. The brown coal generation in Victoria also saw a decrease in percentage share from 78.8% to 74.9%. On the flip side, solar PV generation has increased from 1.5% to 2.9% while wind generation increased from 11.2% to 16.3%.

As seen from the chart, it is the same story for other states, low average monthly price being driven by increased solar PV and wind generation. The consequence of which is a reduction in the share of fossil fuels in the generation mix.

As noted by the QED however, as the wholesale electricity price has fallen, out-of-market costs to keep the system secure have also increased, with SA particularly seeing a 91% increase in out-of-market costs when comparing 2020 with 2019. AEMO, however, expects this trend will be curbed by four upcoming synchronous condensers by middle of the year.

For more insights and our view on pricing through the energy transition, join us on our upcoming free webinar ‘Power price insights and trends’ this month. We will be discussing recent price outcomes, their drivers, and what to expect going forward.