It is old news that the NEM is undergoing transformational changes in its generation mix. These changes to the fuel mix are having significant commercial impacts in price outcomes observed in the market.
In the last few months, we have seen an unprecedented number of negative price intervals across the National Electricity Market (NEM). Of course, this is still only for a small portion of the time; however, given the pipeline of new variable renewable energy projects, this is a phenomenon that is likely to become more regular going forward. As such, this week, we take a closer look at price-setting dynamics of Q3 2019.
At a high level, there were significant shifts in price setting outcomes compared to Q3 2018. In Queensland and NSW, hydro set the price less often with black coal, gas and solar increasingly involved in price-setting at different periods in the day. In Victoria and South Australia (SA), a significant uplift was observed in the role of gas-powered generation (GPG) as the marginal price-setter. Across the quarter, GPG displaced coal by up to 12% in all periods compared to the same quarter last year.
For Q3 2019, negative priced intervals were observed 8% of the time in SA. Of greater significance, however, is the increased involvement of wind as the marginal generator predominantly over the middle of the day. Putting this in context, over the quarter, wind set the price ~13% of the time in the middle of the day. This is clear in Figure 1, which highlights the price-setting dynamics in SA and the growing influence of wind as a marginal generator in the region.
The drivers of this are the combination of lower operational grid demand (reflecting unprecedented levels of rooftop PV output) and high wind generation. While wind set the price more often (up to 8pp more often between 11AM and 3PM), these drivers were a continuation of the trend for SA.
Similar trends in variable renewables price-setting have been observed in other NEM regions albeit with solar as opposed to wind. With 400 MW of wind and solar projects committed in SA and much more proposed, the extent to which this phenomenon increases in the middle of the day – or perhaps even extends to other periods of the day –is left to be seen.
This raises questions about the implications this could have on commercial outcomes and retirement curves for coal plants – especially in a 5-minute market. The current settlement period (30-minute) allows for the averaging out of the actual instances of low to negative priced dispatch intervals (5-minute). However, with the alignment of settlement and dispatch intervals in a future 5-minute market, we expect many more instances of intermittent renewables price-setting; putting the commercial survival of assets directly in line with their flexibility.