Price cannibalisation in the NEM: dawn of new era?

Price outcomes in the NEM in recent weeks have left many wondering if the market is entering a new era of increased risk and volatility in prices even before 5-min settlement (5MS) kicks in. At certain settlement periods, prices across all eastern states averaged zero or less with some states sustaining very low prices across several periods.

Queensland, a state which rarely sees sub-zero prices historically, saw prices fall to zero or less 62 times across all settlement periods for the month of August. For the same month last year, the state did not record any period with zero (or sub-zero) prices. Tellingly, prices in the state in August settled above $200/MWh 21 times more than they did in the same period in 2018 – suggesting increased volatility. In an energy-only market such as the NEM, this increased volatility might be an early signal for flexible technology pre-5MS.

Queensland’s daily average prices for last August compared to the same month last year (see Fig.) tell a compelling story with differences as high as $58/MWh. Unpacking this, we compare the daily average output of low-cost renewables
(incl. rooftop solar) for August 2018 and 2019. Across August, daily average intermittent output was significantly greater in 2019 for almost all days; with differences up to 641 MW (with no such corresponding delta in average demand).

Notably, for the single day last August with a lower intermittent average output, the daily price still ended lower than the preceding year; suggesting a change in bidding strategies from thermal plants reflecting new market conditions.

Between the 19th and 23rd of last August, renewable generation averaged over 1GW daily in the state. This time window also accounted for over 40 percent of sub-zero prices observed across all settlement periods in the state during the month. This suggests that whilst historically strong prices may have incentivised new developments, these developments may as well be cannibalising their own future opportunity; especially for projects with high merchant exposures.

With Queensland’s first wind farms in Coopers Gap and Mount Emerald now in operation, and a few more solar and wind projects in the pipeline under the Renewables 400 Initiative, it is left to be seen if this cannibalisation effect marks the start of a new normal in the state. Encouragingly, 8 of the 10 projects shortlisted under this initiative are integrated with storage facilities; providing much needed flexibility.

Other states in the NEM witnessed similar price outcomes albeit not entirely rare outcomes in the southern states. Perhaps unsurprisingly, South Australia saw the highest instances of sub-zero prices with prices falling to zero or less 148 times across all settlement periods last August. In New South Wales, 5 instances of (sub-) zero pricing were recorded compared to 27 and 92 observed in Victoria and Tasmania respectively.

With many projects already in the pipeline across all regions, the resilience and risk appetite of existing and potential investors will surely be put to test if this is any signal of things to come.