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Lower prices but a similar story for those setting the price

2020 was one for the books with plenty of interesting events happening worldwide and also in the energy markets. For the NEM specifically, it was a time of significant changes in price outcomes compared to the previous years of comparatively higher prices. However, now comes the question of whether NEM prices continue to follow the trend of 2020 or whether the market slowly adjusts to the higher priced environment pre-pandemic?

With this question in mind, we wanted to look at how (if at all) price setting dynamics changed last year. It is of particular interest as prices in the NEM are set by the marginal price – the offer price of the last MW needed to meet demand. Price outcomes in all NEM regions were lower than in 2019 due in part to more variable renewable energy (VRE) entering the supply stack (from 10% to 12%) and spot gas prices dropping significantly to make the marginal cost of gas generation comparatively cheaper year-on-year.

Figure 1 shows the price setting by different fuel types in 2020 compared to 2019 with average price outcomes also shown to highlight the difference year-on-year.

It is important to caveat that when it comes to price setters, the data captures those units who were the last marginal MW in the dispatch process. All units play some role in the price setting formulation as a function of their offers however in terms of the settled price the fuel types shown in the chart set the price most often.

At a high level, the fuel types and units involved in price setting were comparatively similar to those in 2019, however peaking units like gas and hydro set the price less often with more dispatch intervals having coal as the marginal unit. This was predominantly the case in Victoria and South Australia where price setting by gas and hydro units fell from ~63% of the time in 2019 to ~48% of the time in 2020. This is particularly interesting as it highlights that price setting dynamics are on the verge of systemic change as more VRE supply enters the supply stack at lower marginal cost and displaces comparatively expensive offers leading to VRE potentially setting the price as the marginal unit in a higher number of intervals.

It will be interesting to see whether the market corrects or remains steady after 2020. Price outcomes are likely to be increasingly dependent on VRE availability and weather with lower prices when VRE is plentiful and higher when peak generation from gas and hydro is needed to meet demand.

Our view of the future NEM, through our Benchmark Power Curve, projects NEM prices on average continuing the trend of 2020 with intraday variability continuing to offer opportunities for technologies capable of being flexible with their output. Recent announcements have shown a sizeable pipeline of storage technologies are set to enter the market to capture this flexibility and as the growth in VRE continues, there is likely to be additional commercial pressure on coal plants to satisfy minimum returns.

One thing is for certain – it is a matter of when, not if, the energy transition currently underway in the NEM has a significant shift in market dynamics and 2021 is likely to give us some of those answers.